Ohio enacts budget with many individual and business tax changes

TAX ALERT  |  July 08, 2021

On June 30, 2021, Ohio Gov. Mike DeWine partially approved House Bill 110, the state’s operating budget for fiscal years 2022 and 2023, including several key, tax-focused provisions. The legislation offers clarification, new exemptions, reduced rates and expanded incentives. A high-level summary of some of the changes are below.

Sales and use taxes: Employment services and other exemptions

Estimated to reduce employers’ sales tax burden more than $300M over the next two years, House Bill 110 classifies employment services and employment placement services as exempt from sales tax. An employment service included providing or supplying personnel, on a temporary or long-term basis, to perform work under the supervision of another. Employment placement services included locating or finding employment for a person or to fill an available position. Both exemptions are effective Oct. 1, 2021. Taxpayers providing or purchasing employment services, either independently or under an agreement, should verify tax is no longer charged once the exemptions become effective. 

House Bill 110 also provides an exemption for the sale or use of investment bullion and coins, previously repealed, effective Oct. 1, 2021. 

Personal income tax: Brackets, rates and capital gain deductions

Effective for tax years beginning in 2021, House Bill 110 implements a 3% income tax rate reduction across all brackets as well as reduces the total number of brackets. Taxpayers generating less than $25,000 of income are no longer subject to the income tax. Furthermore, the top bracket, which currently applies to taxpayers with taxable income exceeding $221,300, is eliminated. The new highest bracket begins for incomes in excess of $110,650 at a tax rate of 3.99%. Annual inflationary adjustments are suspended for 2021, as are adjustments to the personal exemption amount for 2021 and 2022. 

Additionally, the legislation establishes two new deductions intended to drive investment in Ohio’s infrastructure and incentivizing taxpayers to remain Ohio residents. Beginning in 2026, taxpayers generating capital gains through sale of their ownership interest in an Ohio-based business may deduct the gain in determining taxable income. The bill also enacts a deduction for a fraction or the entirety of capital gains realized by all investors in state-certified venture capital entities headquartered in Ohio.

Commercial Activity Tax: BWC dividends and minimum tax determination 

Throughout the pandemic, the Ohio Bureau of Worker’s Compensation (BWC) issued three rounds of dividends, exceeding $8 billion, to aide businesses experiencing financial hardship. House Bill 110 codifies a Commercial Activity Tax (CAT) exemption for dividends paid by the Ohio BWC. Previously, only dividends paid in 2020 and 2021 received exclusion from the CAT taxable receipts base.

House Bill 110 also changes the determination of annual minimum tax from the current year to the preceding year.  

Municipal tax withholding under Gov. DeWine’s COVID-19 emergency order

House Bill 197, enacted in March 2020, allowed employers to continue withholding at the employee’s primary work location during the pandemic. The legislation now clarifies, for tax year 2021, that remote workers may seek refunds for municipal tax withholding when duties were not performed within the employer’s primary work location due to the pandemic. This change pertains exclusively to tax year 2021 for purposes of determining the employee’s municipal income tax liability. Considering the volume of refund claims anticipated, applicants should expect processing delays and potential follow-up inquiries from the various tax agencies.  

Furthermore, the legislation includes a provision allowing, but not mandating, employers to continue withholding tax in their principal location through the end of 2021, extending relief originally set to expire with the conclusion of Gov. DeWine’s emergency order. Employers should consider preparing for an eventual expansion of their payroll withholding and filling requirements if they intend to continue permitting (or encouraging) employees to work remotely.

Credits and incentives: Megaprojects and other incentives 

House Bill 110 includes a new CAT credit for operators and suppliers of certain development projects with investments exceeding $1 billion and generating greater than $75 million of Ohio payroll, or so-called ‘megaprojects.’ Megaproject suppliers may exclude gross receipts generated from certain transactions with a megaproject operator. Additionally, the number of years a Job Retention Tax Credit (JRTC) can be awarded is doubled to 30 for megaproject suppliers and operators.  

House Bill 110 also provides modifications to the JRTC. Specifically, any employer that receives the JRTC can include work-from-home employees when computing the employer’s credit amount and when verifying its compliance with the JRTC agreement. Additionally, priority is given to JRTC applications meeting certain criteria. 

Takeaways 

Through enactment of House Bill 110, Ohio has provided incentives to promote economic growth and investment as Ohio continues to emerge from the pandemic and look towards a prosperous future. The budget bill addresses several concerns emanating from Gov. DeWine’s original emergency order, while also promoting the Governor and legislative’s intent to create a more taxpayer-friendly environment. Ohio taxpayers with questions about the budget bill should reach out to their state and local tax advisers.