House Bill 5, comprehensive municipal tax reform, passed the
Ohio House of Representatives in November of 2013. Since then, the bill has
been lingering in the Ohio Senate without any legislative hearings. The Ohio Senate Finance Committee finally held
a proponent hearing on the bill.
House Bill 5 is a top legislative priority for NFIB/Ohio for
several reasons. Ohio is the only state in the nation that permits its municipalities
to create a varying set of rules for how they tax their businesses, employees
working within their jurisdiction and their residents. This creates a patchwork
of rules that make it confusing, time-consuming and costly to comply. For those
businesses and individuals working in multiple jurisdictions, cost of
compliance many times far exceeds the liability. Establishing uniformity
ensures a business and individual are operating by the same set of rules
regardless of where they may be located. NFIB/Ohio, on behalf of our 25,000
members, is interested in the following provisions of HB 5 and Chris Ferruso,
NFIB/Ohio legislative director, offered testimony on June 3 on their behalf.
NFIB believes the occasional entrant rule, or 12 day/20 day
rule, is a crucial component of the bill.
Currently, there is no clear-cut direction on what constitutes a “day”
within a municipality. HB 5 addresses
this issue by limiting an employee to one
municipality per calendar day for purposes of tracking and
HB 5 further updates the casual entrant rule by increasing
from 12 to 20 the number of days an employee/individual has to work in a
municipality before withholding liability occurs. Under current law, once day 13 is reached the
withholding obligation reverts back to day one. This change will help reduce the number of
filings some employees currently experience and pare back on the tracking done
by employers to comply with the current system, reducing cost of compliance and
An additional component of the occasional entrant rule is a
small-employer exemption. Small employers,
defined as those with less than $500,000 in gross receipts, need only withhold
tax at their fixed location.
Another key provision is the uniform, five-year net
operating loss carry forward (NOL). HB 5
permits a uniform, five-year NOL that will fully phase in over six years. The bill stipulates that 50 percent of the
NOL may be utilized for the first five years.
In the sixth year, 100 percent of the NOL may be utilized. Further, the bill delays the beginning of the
phase-in until calendar year 2017.
The bill also creates a committee comprised of legislators,
municipal representatives and taxpayer representatives. This committee is charged with studying real
data from municipalities to come to a better understanding of what impact the
NOL provision actually has.
Not every business recognizes a steady profit stream. An example would be a snow removal company. A
few years ago, central Ohio in particular saw very little snow and had warmer
than normal temperatures. This business
may have incurred significant expense to keep operations functional and when
the weather did not turn, it generated a loss.
We believe it is appropriate to allow that business to carry forward
that loss to offset future income. Remember the company maintained its
operations and continued to remit withholding on behalf of employees.
Through Entity and Offset Treatment
Most of the business members of NFIB are formed as
pass-through entities (PTE), which include sole proprietors, S corporations,
partnerships, and limited liability corporations (LLCs). For federal and state tax purposes, the
income of a PTE is generally taxed only at the owner level. However in Ohio, under current practice two
types of municipal income taxes are generally imposed on a PTE, a tax on the
business with respect to the net profits of the business, and a tax on the
owner with respect to the income of the business.
HB 5 goes a long way to simplify this very complicated portion
of Ohio’s municipal tax system. First,
it provides for substantially uniform treatment of PTEs across all of Ohio by
defining their tax treatment. Second, it
provides for PTE owners to be treated uniformly in their city of residence by
establishing a single uniform treatment of business gains and losses. Third, it greatly simplifies the
recordkeeping necessary for tracking the carryover of NOLs generated by PTEs by
permitting NOL carryovers to reduce profit before the profit is apportionment
to each city—benefiting both taxpayers and cities.
Some cities argue that allowing a current year offset and
permitting the carryover of NOLs will result in double use of business
losses. This is not accurate. The offset provision only applies to the tax
imposed at the individual owner level by the resident city. The NOL carryover provision only applies to
the tax imposed at the PTE level by any city.
The bill only permits business income to be offset by real
economic losses, not by paper losses.
However, under current practice, most cities that permit some form of
offset do permit paper losses to be utilized against business income. As a result, the Bill’s limitation is a
revenue enhancement for most cities.
NFIB/Ohio is supportive of simplifying and creating
uniformity in the municipal tax system in Ohio. We believe that Amended
Substitute House Bill 5 improves upon our existing system. Municipal tax reform is a top priority of
NFIB/Ohio this General Assembly.