On December 19, 2014, House Bill 5 (HB 5) was signed by Governor Kasich thereby imposing new limits and procedures on the municipal income tax laws.1 Although HB 5 became effective on March 23, 2015, its application to municipalities will not begin until January 1, 2016.2 If a municipal corporation already levies income tax as of January 1, 2015, HB 5 requires the municipal corporation to amend its existing tax ordinances to comply with the new regulations imposed by January 1, 2016. R.C. 718.04. If an ordinance is not amended or re-enacted by that date, it will be repealed as of January 1, 2016. R.C. 718.01.
Municipal income taxes are currently codified under Chapter 718 of the Ohio Revised Code. Some of the key changes under HB 5 include the following:
Under current R.C. 718.011, a municipal corporation could not require an employer to tax a nonresident individual for services performed within the municipal corporation for twelve or fewer days within a calendar year. This is often referred to as the "occasional entrant rule." Beginning January 1, 2016, HB 5 changes R.C. 718.011 to increase the number of days for the occasional entrant rule from twelve to twenty. A nonresident individual would not incur municipal taxes on his/her wages until the twenty-first day of work. The Rule applies unless the situation meets one of four exceptions. The main exception imposed by HB 5 is when the employer is operating a construction or temporary worksite where the services to be performed are reasonably expected to last more than twenty days, and the nature of the service or agreement for the service provides for more than twenty days for completion. In this situation, municipal taxes can be incurred from day one of services rendered. In similar fashion in the event an employee performs services in multiple municipal corporations during a calendar year, but not one of those municipal corporations held a majority the employer must allocate the employee's wages among the municipal corporations and taxes will be incurred accordingly.
R.C. 718.08 provides for estimated tax liability. Pursuant to HB 5 changes, any return required to be filed for taxable years beginning January 1, 2016, a municipal corporation will be required to collect estimated taxes from every tax payer if the estimated tax liability will be $200.00 or more. R.C. 718.08(B)(1). This is a $100.00 increase from the current minimum of many cities. Taxpayers required to make estimated payments must file a declaration of estimated taxes with their municipal income tax returns. The law further requires the payments be made quarterly, under the same percentages as the current law, on April 15, June 15, September 15 and December 15. R.C. 718.08(C)(1). In the event of underpayment of any portion of the estimated tax a municipality may charge a penalty and interest. R.C. 718.08(D). The amount of the penalty and interest is governed by R.C. 718.27(A)(5) and (C)(2). The interest rate is "the federal short-term rate, rounded to the nearest whole number per cent, plus five per cent." R.C. 718.27(A)(5). A penalty equal to fifteen percent of the amount not timely paid. R.C. 718.27(C)(2). R.C. 718.08(D) further provides for the calculation of underpayment per quarterly payment.
To determine the amount of underpayment for the first quarterly payment it is twenty-two and one half per cent of the total tax liability minus any amount paid by the taxpayer by April 15th. R.C. 718.08(D)(1)(a). The percentage goes up to forty-five percent of the tax liability for the second quarterly payment and sixty-seven and one-half percent for the third quarterly payment R.C. 718.08(D)(1)(b)&(c). The taxpayer is still getting credit for any amount paid by the date prescribed for each quarterly payment. The amount of underpayment for the final quarter is ninety percent of the tax liability minus the amount paid by the taxpayer by December 15th. R.C. 718.08(D)(1)(d). Provisions from the current law stating a municipal corporation may not penalize a taxpayer for underpayment of estimated taxes when the taxpayer was not domiciled in the municipal corporation at the beginning of the year or paid estimated taxes of at least 100% of the total tax liability from previous year are maintained by HB 5. In addition, HB 5 prohibits a municipal corporation from penalizing a taxpayer for underpayment of estimated taxes if at least 90% of the amount due for the current year has been paid. R.C. 718.08(E).
HB 5 has made several changes to the qualifying wage base. Under current law, R.C.718.03, a municipal corporation could enact an ordinance permitting nonqualified deferred compensation and employee stock option-related compensation to be subtracted from a taxpayers Medicare wage base. Although this may remain as the qualifying wage base post HB 5, a time limitation on the adoption of an ordinance exempting such income was instituted. Under the new law contained within R.C. 718.01(R), the deduction of such compensation is only permissible if the municipal corporation adopted an ordinance or resolution before January 1, 2016 exempting the amount from withholding and tax. HB 5 further changes the qualifying tax base by excluding compensation on account of a disability related to sickness or an accident paid by a party unrelated to the employer (R.C. 718.01(R)(1)(b)) and any amount included in wages that is exempt income (R.C. 718.01(R)(1)(e)). Exempt income is defined by R.C. 718.01(C)(1)-(19) which includes such compensation as alimony and child support received; compensation for personal injuries or property damages except for punitive damages or lost wages; and dues or other contributions received by certain organizations.
Income subject to tax when derived from a taxpayer engaging in a business or profession within a municipal corporation is governed by R.C. 718.02. Although the three factor apportionment formula used in the current law did not change under HB 5, the new law will provide the taxpayer the right to request to use a different accounting method or modify the impact of the factors used. R.C. 718.02(B)(1) and (2). In addition, a tax administrator may also require a taxpayer to use an alternative apportionment method after issuing an assessment to the taxpayer. R.C. 718.02(B)(3).
Finally, one of the biggest HB 5 changes is contained in R.C. 718.01(E)(8) regarding carryover of net operating losses (NOLs). Under the current law, municipalities can choose whether to recognize NOLs and for how long to permit carry forward. HB 5 requires all municipal corporations to apply a five-year carryover period for any NOLs incurred in tax years beginning January 1, 2017. The new law further provides a five-year period to phase in the carryforward rules. Under R.C. 718.01(E)(8)(c)(i) for tax years 2018 through 2022 a person may not deduct more than 50% of the NOL carryover. Beginning tax year 2023, the full amount of NOL carryover may be deducted. R.C. 718.01(E)(8)(c)(ii).
There are some additional changes to consider. Beginning with returns filed on or after January 1, 2016, if a taxpayer fails to file a return when required, fails to pay income tax or estimate income tax, or an employer fails to withhold tax from an employee, a municipal corporation may impose not only interest and penalties, as prescribed by R.C. 718.27(A)(5) and R.C. 718.27(C)(2), but the municipal corporation's post-judgment collection costs and fees which includes attorney's fees. R.C. 718.27(G). A taxpayer is only required to remit tax, for any taxable year after 2015, if the amount due is $10.00 or more. R.C. 718.05(H)(1). Whether or not tax is owed, the taxpayer must still file a return. R.C. 718.05(H)(1). When a request for refund is made by a taxpayer, a refund shall only be made for overpayments over $10.00. R.C. 718.19(A)(1). Any municipal corporation that currently has an ordinance to levy a tax at a rate above 1% must amend or re-enact its ordinance before January 1, 2016 to continue to levy at the higher rate. R.C. 718.04(B).
1 Ohio Municipal League Legislative Bulletin December 29, 2014: Governor Signs Bills; Unfinished Issues Expected to Resurface Next Year, http://www.omlohio.org/Bulletin/Archives/2014%20Bulletin.pdf
2 R.C. Chapter 718; http://codes.ohio.gov/orc/718