Overview of the Commercial Activity Tax (CAT)

Sarah E. O’Leary, Administrator, Commercial Activity Tax Division

Ohio Department of Taxation

Hudson, Ohio

November 14, 2009

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Agenda

Brief Overview of the CAT Auditing and Compliance Filing Tips CAT Statistics Recent Court Cases List of Information Releases and Rules

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Commercial Activity Tax:A few things to keep in mind…

A broad-based, low rate tax (0.26%) on gross receipts from business activity in Ohio

Generally, taxpayers with less than $150,000 in taxable gross receipts are not subject to the CAT

Rate structure of the tax:– Pay $150 minimum tax on first $1 million in

taxable gross receipts– Receipts above $1 million, pay $150 plus 0.26%

on amount in excess of $1 million

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Nature of the CATR.C. 5751.02

Tax is imposed annually for the privilege of doing business in Ohio

– “Doing business” means any activity for gain, profit, or income (legal or illegal)

Not a transactional tax (important for Ohio’s Constitution)

Not a tax on or measured by income – P.L. 86-272 Tax may not be billed or invoiced to another

– Tax may be passed on as part of price

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CAT TaxpayersR.C. 5751.01(D)

Taxpayers are all persons or groups of persons required to file returns or to pay the tax– “Person” includes corporations, pass-through entities,

individuals, joint ventures, clubs, trusts, and disregarded entities

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Excluded PersonsR.C. 5751.01(E)

“Excluded persons” include the following entities:– Public utilities, dealers in intangibles, financial

institutions and insurance companies that are subject to other taxes imposed by the state

– Certain subsidiaries of entities listed above– Certain irrevocable trusts created pre-1972 (before

Ohio’s income tax)– Nonprofit organizations – Most governmental agencies– Persons with receipts <$150,000

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Mandatory Combined Reporting

Groups of persons meeting certain ownership thresholds must file as a group

Two options:– Consolidated Elected Taxpayer Group – An election– Combined Taxpayer Group – Mandatory if no election

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Commercial Activity Tax (CAT)

Consolidated Elected Taxpayer

– At least 50% or 80% common ownership

– Option to include or exclude non-US entities

– Must include all entities regardless of nexus in Ohio

– Gross receipts between members are excluded

Combined Taxpayer– More than 50% common

ownership– Combined only required to

include entities with nexus in Ohio

– Gross receipts resulting from payments between members are subject to the CAT

Consolidated Elected vs. Combined Taxpayer

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Common Ownership

Value of ownership is owned or controlled, directly or constructively through related interests, by common owners

It is for all or any portion of a tax period ODT has issued rule to further clarify common

ownership:– Rule uses a “vertical control” test focused on voting rights– Family attribution rules do not apply (e.g., IRC provisions

addressing owners of S corporations)

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“Bright-line Presence”R.C. 5751.01(I)

MTC Factor Presence Nexus Used: Person has “bright-line presence” for quarter and remainder

of year if any of the following applies:– Property of at least $50,000 within state– Payroll of at least $50,000 within state– Annual taxable gross receipts of at least $500,000– At least 25% of total property, payroll, or gross receipts in this state– Is domiciled in this state (commercially or legally)

Economic presence standard to fairly apply the tax to both instate and out-of-state businesses that benefit from receiving gross receipts from purchasers located in Ohio

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Gross Receipts Definition– Broad Gross Receipts Base– Exclusions

e.g., interest, capital gains, wages (received), bad debt, cash discounts

Situsing Rules – i.e., Taxable Gross Receipts Limited Credits Applicable to CAT

What is Subject to the CAT?

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– Gross receipts from the sale of services are sitused to Ohio in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

– The physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be taken into consideration when determining the proportion of the benefit

– Reasonable test can be used – must be applied in uniform and consistent manner

What is Subject to the CAT? Situsing Rule - Services

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What is Subject to the CAT?Situsing Rule – Everything else

TPP: Ultimate delivery location Rents/royalties from real property: Property location Rents/royalties from TPP: Location/Use of TPP Electricity/Electric transmission distribution: Miles Sale of real property: Property location Sale/exchange/distribution/use of IP (e.g., trade names):

– Amount of use: Apportion to state(s) of use– Right to use: Apportion to state(s) where right to use

Transportation: Miles Dividends/interest/financial income: R.C. 5733.056(F)

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Tax Returns

Filing a tax return:

– Taxpayers with taxable (Ohio) gross receipts in excess of $150,000, but less than $1 million pay an annual flat tax of $150 (May. 10th each year)

– Taxpayers with taxable (Ohio) gross receipts in excess of $1 million pay $150 on the first $1 million ($250K per quarter) and remit the tax on the remainder quarterly

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Tax Returns

Example – 1st QTR 2010 Return

$ 150 payment of 2010 tax minimum due May 10, 2010

First Quarter Tax Calculation$ 1,500,000 in taxable (Ohio) gross receipts$ - 250,000 exclusion amount for 4th quarter$ 1,250,000 x .0026 = $3,250

Total payment of $3,400 Due May 10, 2010

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Tax Returns

Deadlines for filing a quarterly return:

– 4th Qtr 2009: February 10, 2010– 1st Qtr 2010 & Annual Return: May 10, 2010– 2nd Qtr 2010: August 10, 2010– 3rd Qtr 2010: November 10, 2010– 4th Qtr 2010: February 10, 2011

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Commercial Activity Tax (CAT)

Statute provides three rate adjustments so that the tax does not generate too much revenue– The 2007 and 2009 measurement periods did not

trigger a rate adjustment There is one additional rate adjustment –

after FY 2011 These adjustments are made by the Tax

Commissioner using a prescribed formula

Auditing and Compliance

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Auditing

ODT established an audit team to develop audit procedures and an audit manual. This is an ongoing process as additional audits are completed.

Part of the process included Voluntary Compliance Reviews (VCRs)

– No penalties imposed– ODT conducted 10 VCRs

ODT is now conducting normal audits which will, if applicable, include penalties

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Identifying Potential Taxpayers

New Nexus Unit Ohio Department of Taxation is looking for

leads from the following:– Other taxes

- Over 400,000 notices sent

– Leads from audits of other taxpayers- Approximately 750 notices sent

– Third party information to locate out-of-state businesses

– 90,000 mailings made thus far

– Various other sources

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Compliance

ODT has issued estimated assessments against entities with apparent bright-line presence. These assessments include:

– 10% of tax late filing penalty– 15% of tax late payment penalty– 35% of tax failure to register penalty

– (Total potential penalty of 60%)– $100/month, maximum $1,000, penalty for failure to

register

Assessments will continue to be issued as additional information is received.

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Voluntary Disclosure Agreements (VDAs)

Information Release CAT 2008-01 – Revised May 2009

Allows VDA for CAT– Interest only – no penalties (as long as taxpayer

never contacted via audit or compliance program) Steps for VDA:

– Send request for VDA in writing to CAT Division– ODT sends letter, contract, and returns/regis.– Register, file returns, pay tax– ODT bills for interest

Commercial Activity Tax

Filing Tips

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Tips for Successful Filing

Identify all documents with account # Do not copy forms and reuse Only primary entity is required to file Quarterly taxpayers must file regardless of

taxable gross receipts Reporting multiple periods on one return

– New taxpayer– Delinquent taxpayer

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Tips for Successful Filing

Estimated Returns– Check the proper estimation box on return/OBG

Rule estimate must file reconciliation quarterly Statutory must file reconciliation yearly

– Cannot file an estimate after billing received for that period

– No estimates in first Qtr 2007, 2009 or 2011

If filing estimate returns, taxpayer must reconcile

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Tips for Successful Filing

Amended Returns– Include total TGR for the reporting period, not just

difference from original filing

Payments– Identify with CAT account # and period-end date– Mail separately to each tax division– Watch for payment from checking

If electronic, determine why account blocked

Commercial Activity Tax

Statistics*

*Information as of November 2, 2009

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Commercial Activity Tax (CAT)

Types of filers:– Approximately 118,676 taxpayers pay only the

$150 annual minimum tax

– Another 59,880 taxpayers pay $150 annual minimum tax, plus the quarterly tax on their taxable gross receipts in excess of $1 million

– CAT is expected to raise at least $1.3 billion by FY 2010 (with no rate adjustments)

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Taxpayer Registration Types

Active Taxpayers: 178,551 Single Entity: 154,600 Combined Taxpayer Groups: 6,010

– Largest Group: 500 Members– Average Group: 3 Members

Consolidated Elected Taxpayer Group: 17,836– Largest Group: 3,020 Members– Average Group: 6 Members

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CAT Revenue

Actual Collections – 1st Measurement Period:– FY 2006: $273.4M– FY 2007: $594.9M

Total: $868.3M (Target: $815M [+ 6.5%])

Actual Collections – 2nd Measurement Period:– FY 2009: $1.18B (Target: $1.19B [-1%])

Next measurement period: July 1, 2010 - June 30, 2010– Trigger: $1.61B

ODT projects collections will be far short of estimate

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CAT Taxpayer Base by Industry

30%

20% 12%

38%

Manufacturers Retailers Wholesalers Other

Case Law Update

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Case Law Update

Ohio Grocers Assn. v. Wilkins– Decision by Ohio Supreme Court issued

September 17, 2009– 28 amici groups supported position (7 briefs)

Beaver Excavating v. Levin– Status Conf. Scheduled later in November Re:

Grocers’ decision Ohio Farmers Foodservice v. Wilkins

– September 29, 2009 case dismissed Overstock.com v. Levin

– Motion to Dismiss – Granted August 31, 2009 (Franklin Co.)

Administrative Rules and Information Releases

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Administrative Rules and Information Releases

CAT 2005-02: CAT Nexus Standards CAT 2005-03: Excluded Person

– Adm. Rule 5703-29-04 CAT 2005-04: Electronic Filing

– Adm. Rule 5703-29-05 CAT 2005-05: “Common Owners and Joint Ventures

– Adm. Rule 5703-29-02 CAT 2005-06: Situsing of Services

– Adm. Rule 5703-29-17 CAT 2005-07: Transfers of Property Into the State

– Adm. Rule 5703-29-06

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Administrative Rules and Information Releases (Continued)

CAT 2005-08: I.R.C. Section 1221 and 1231 Assets Excluded from Gross Receipts

CAT 2005-09: Sampling– Adm. Rule 5703-29-03

CAT 2005-12: Request to File Separately– Adm. Rule 5703-29-08

CAT 2005-13: Estimated Payments for Quarterly Taxpayers– Adm. Rule 5703-29-09

CAT 2005-14: Nonprofit Organizations– Adm. Rule 5703-29-10

CAT 2005-18: Temporary Motor Fuel Exemptions– Adm. Rule 5703-29-12

CAT 2006-01: Applicable Excise Tax Rates for Purposes of the CAT

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Administrative Rules and Information Releases (Continued)

CAT 2006-03: Agency, Defined– Adm. Rule 5703-29-13

CAT 2006-04: Cash Discounts, Defined– Adm. Rule 5703-29-14

CAT 2006-05: Highway Transportation Services: Bright-Line Presence and Situsing

– Adm. Rule 5703-29-15 CAT 2006-07: Qualified Distribution Center

– Adm. Rule 5703-29-16 CAT 2006-08: Situsing Receipts from Periodic Payment for Mobile

Property– Adm. Rule 5703-29-20

CAT 2006-09: CAT Records Retention Requirements– Adm. Rule 5703-29-18

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Administrative Rules and Information Releases (Continued)

CAT 2006-10: CAT Changes in Ownership– Adm. Rule 5703-29-17

CAT 2007-01: Rule Estimation and Statutory Estimation Procedures, Compared

CAT 2007-02: Pre-Income Tax Trusts, Explained With Revocation Procedures

– Adm. Rule 5703-29-21 CAT 2007-03: Commercial Activity Tax Credits, Explained

– Adm. Rule 5703-29-22 CAT 2008-01: Commercial Activity Tax: Voluntary Disclosure

Agreements CAT 2008-02: Commercial Activity Tax: Business as usual after Ohio

Supreme Court decision in Ohio Grocers Association v. Levin CAT 2009-01: Commercial Activity Tax: Change in Due Dates for the

Annual Minimum Tax, Annual Returns, Quarterly Returns and Deadline for Cancellations of Accounts

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Important CAT Contact Numbers Phone: 888-722-8829

Fax: 614-644-9641

Website: tax.ohio.gov

Address: Commercial Activity Tax Division

P.O. Box 16158

Columbus, OH 43216-6158

CAT E-mail: CAT@tax.state.oh.us

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