Ohio Enacts Beneficial Changes to its Commercial Activity Tax and Resident Other State Tax Credit

By: Jeff Glickman, SALT Partner

At a glance:

• The main takeaway: Ohio’s new budget bill includes two major changes to the state tax code that will impact both businesses and individual taxpayers.
• Impact on your business: The bill includes an increase in the Commercial Activity Tax exclusion amount, plus a provision expanding the state’s resident “other state tax credit” to include pass-through entity taxes.
• Next steps: Contact Aprio’s State and Local Tax (SALT) team to find out if these changes may affect you.

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The full story:

On July 4, 2023, Ohio Governor Mike DeWine signed the state Biennial Budget Bill, H.B. 33, subject to many line-item vetoes.¹ That legislation made several changes to Ohio’s tax code; two notable changes are summarized below.

Increase in the Commercial Activity Tax exclusion amount

Ohio imposes a gross receipts tax, known as the Commercial Activity Tax (CAT), on taxpayers who have nexus and at least $150,000 of taxable gross receipts (i.e., gross receipts sourced to Ohio). The tax calculation consists of two parts. First, an annual minimum tax is determined based on taxable gross receipts from the prior calendar year as follows:

Taxable Gross Receipts – Prior Calendar Year	Annual Minimum Tax
$1 million or less	$150
More than $1 million but not more than $2 million	$800
More than $2 million but not more than $4 million	$2,100
More than $4 million	$2,600

Second, in addition to the minimum tax, taxpayers paid a tax based on current year taxable gross receipts that exceeded $1 million (the exclusion amount) at the rate of 0.26%.

The legislation makes two major changes to the CAT.  First, it eliminates the annual minimum tax for tax years beginning on or after January 1, 2024. Note that since this change is effective beginning in 2024, if a taxpayer who is subject to the CAT has at least $150,000 of taxable gross receipts in 2023, it will still be required to pay the annual minimum tax on its first CAT return required to be filed in 2024.

The second change increases the annual exclusion amount in 2024 from $1 million to $3 million, and again in 2025 from $3 million to $6 million. Thus, according to Ohio’s Commercial Activity Tax – Information Release CAT 2023-01, taxpayers who anticipate having less than $3 million in taxable gross receipts should cancel their CAT accounts effective as of December 31, 2023. However, they will still be required to file and pay the appropriate annual minimum tax on their final 2024 return.²

Please review the Information Release linked above with your tax advisor or reach out to a member of Aprio’s SALT team for assistance.

Pass-through entity tax eligible for other state tax credit

Like other states, Ohio provides its residents with a credit against their Ohio personal income tax liability for taxes they pay on income taxed in other states, known as the “other state tax credit” (OSTC). This credit provides some relief against double taxation on personal income since a state is generally entitled to tax its residents on all income earned, regardless of the source.

As states began enacting pass-through entity (PTE) taxes as a workaround to the federal $10,000 itemized deduction limitation for state taxes, many state OSTC provisions were not drafted in a way that applied to these taxes. Thus, if you were an owner of a PTE that elected to pay the PTE tax in a state in which you were not a resident, your resident state OSTC may not have applied to that tax since it is not a tax that you paid; rather it is a liability that is imposed on and paid by the PTE. As a result, you were effectively taxed on that income twice.

The legislation adds a provision to Ohio’s OSTC statute that allows Ohio residents to take into account PTE taxes paid to other states by a PTE in which they are a member when calculating their Ohio OSTC.  While the provision is effective for tax years beginning on or after January 1, 2023, the legislation allows taxpayers to apply this change for taxable years beginning on or after January 1, 2022.

Thus, if you already filed your Ohio resident personal income tax return and did not account for other state PTE taxes in calculating your Ohio OSTC, you may file an amended return to claim a refund.

Aprio’s SALT team can help you determine the impact of these tax changes and any actions that you should take. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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¹ You can review the Governor’s veto items here.  H.B. 33 linked above does not show the final language after taking into account the veto items, so both must be read together to identify the bill’s final language.

² Beginning in 2024, taxpayers who are still required to pay the CAT based on 2024 taxable gross receipts will no longer be permitted to file annually; all taxpayers will file quarterly.