Centralized collection of the Ohio municipal net profit tax is here

Written on Jan 24, 2018

Centralized collection

By Adam Garn, CPA, JD, MT

Ohio's biennial budget bill, Am. Sub. H.B. 49 (the "Bill"), brought on important new features to Ohio's municipal income tax system. For taxable years beginning on or after Jan. 1, 2018, the Bill created an elective method of centralized collection and administration for net profit taxpayers. It also eliminated the anti-competitive throwback rule and modified the fourth quarter due date for estimated tax payments for individuals. In addition, the Bill required the Ohio Department of Taxation (ODT) to complete a feasibility study of allowing taxpayers to file individual municipal tax returns through the joint federal and state Modernized e-File (MeF) program and clarified the late payment penalty. These changes are on top of the sweeping uniformity provisions adopted in Am. Sub. H.B. 5 (H.B. 5) of the 130th General Assembly which were effective for taxable years beginning on or after Jan. 1, 2016.

General rules
Effective for taxable years beginning on or after Jan. 1, 2018, taxpayers subject to a municipal net profit tax may elect to file on a centralized basis. Individuals, electric companies and telephone companies are not eligible to elect to file on a centralized basis under this section. (Electric and telephone companies already file on a centralized basis using different rules.) If a taxpayer elects to file on a centralized basis, the net profit tax will be administered and collected by the Ohio tax commissioner. The tax commissioner will administer the net profit tax under Revised Code sections 718.80 to 718.95 (which are separate provisions from the current municipal net profit tax). The tax commissioner has already started to establish rules and regulations that will be applicable to electing taxpayers.

The election
A taxpayer may elect to file on a centralized basis by the first day of the third month after the beginning of the taxpayer's taxable year (March 1 for calendar year taxpayers). The ability to elect to file on a centralized basis has been available since October 2017 and is available at www.tax.ohio.gov/MunicipalTax.aspx or by filing Form MNP R. In February 2018, it is anticipated that a taxpayer will be able to make the election via the Ohio Business Gateway (OBG). Once the election has been made by the electing taxpayer, it automatically renews year to year unless an electing taxpayer terminates the election by filing a form with the tax commissioner by the first day of the third month of any taxable year. There is no fee to the taxpayer to make an election and to participate in the centralized municipal tax system.

A taxpayer making or terminating the election must also notify each municipal corporation in which the taxpayer conducted business during the previous taxable year. Notification of the election should be made by filing Form MNP MN to each municipality. A taxpayer should consider obtaining confirmation that the municipal corporation has received its election once an electing taxpayer has provided the form to the municipality. New businesses that elect into the centralized collection system are the only taxpayers that are not required to notify any municipal corporations of its election.

Computation of the tax
Electing taxpayers will be subject to similar statutory provisions for computing taxable income, apportionment and tax liability as taxpayers who do not make the election. Please note that a taxpayer will compute these amounts under Revised Code sections 718.80 to 718.95 for years in which the election is made. These provisions are generally parallel with the other sections of Chapter 718 that are applicable to non-electing taxpayers but a taxpayer should carefully read these new sections. Additionally, since the tax commissioner will be the administrator of the municipal net profit tax and will establish a separate set of rules and regulations, a taxpayer should pay careful attention to interpretations of the tax commissioner and how those interpretations may be different (for better or worse) than interpretations made by the tax administrator employed by the municipality. Currently, the tax commissioner has already established three administrative rules, effective as of January 12, including:

  • 5703-41-01 - Filing of returns and payments by electronic means.
  • 5703-41-02 - Joint economic development zones and joint economic development districts.
  • 5703-41-03 - Change in taxable year and declaration of estimated taxes for short taxable years.

It is anticipated that additional administrative rules will be proposed in the future. One of the benefits of the centralized system is that the rulemaking process will be done under state law, which is a transparent process and will allow taxpayers and practitioners to provide comments and ideas, unlike the local rule process.

Consolidated tax returns
Under current law, a taxpayer may elect to file a separate tax return in one municipality and a consolidated return in a different municipality. The consolidated tax return is based upon the federal consolidated group of the taxpayer. Taxpayers that choose to elect to file on a centralized basis will be able to continue filing separately in one municipal corporation and consolidated in a different municipal corporation. For taxpayers that have elected to file on a consolidated basis in the past, the continuation of the election is required to be honored by the tax commissioner.

Alternative apportionment
Under current law, a taxpayer may request an alternative apportionment method including separate accounting, the exclusion of one or more of the factors, the inclusion of one or more additional factors that would provide for a more fair reflection of the taxpayer’s income that is fairly attributable to the municipal corporation, or a modification of one or more of the factors. Typically, an agreement is in place between a taxpayer and a municipality to document the specific alternative apportionment agreement. Taxpayers that have an agreement in place and wish to file on a centralized basis should contact the tax commissioner to request that the agreement is honored by the tax commissioner. Further, electing taxpayers may, in the future, make requests for alternative apportionment directly to the tax commissioner.

Electronic filing
ODT has assigned a working group of individuals to design and implement a brand new municipal net profit filing platform for electing taxpayers. An electing taxpayer must file any tax return, estimated taxes, or extension through the OBG. Payments must also be made through the OBG. Because the tax commissioner must provide a method for taxpayers to electronically submit documents, the statewide centralized system has an advantage over the current filing process, which typically requires taxpayers to mail copies of a federal tax return directly to the city. If electing taxpayers cannot file and pay electronically, the electing taxpayer may request to be excused from these requirements by applying to the tax commissioner and showing good cause.

If a taxpayer has not been excused from these requirements and fails to file or pay electronically, the tax commissioner is authorized to impose a penalty against a taxpayer for each failure.

An electing taxpayer that receives an extension for federal income tax purposes also automatically receives an extension for municipal net profit tax purposes. The extended due date is the fifteenth day of the tenth month after the last day of the taxable year (Oct. 15 for calendar year taxpayers). An electing taxpayer that does not receive a federal extension may request a six-month extension from the tax commissioner. The extension request should be granted so long as the request is received on or before the due date of the tax return. Any extension of time to file a return is never an extension of time to pay the tax due.

Since the tax commissioner will be the administrator of an electing taxpayer’s municipal net profit tax, the tax commissioner has the authority to audit electing taxpayer's municipal net profit tax returns. Taxpayers must preserve records for six years following the end of the taxable year to which the records or documents relate, unless the tax commissioner consents in writing that records may be destroyed.

If a municipality believes that it has information in its possession that would change the tax liability of an electing taxpayer, the municipality may refer the taxpayer to the tax commissioner for an audit. However, the tax commissioner is not required to audit a taxpayer merely because the taxpayer was referred by the municipality. The statute of limitations for the tax commissioner to audit an electing taxpayer is three years from the date the return was required to be filed or the date that the return was actually filed, whichever is later. If an electing taxpayer fails to file a return or files a fraudulent return, there is no statute of limitations.

Assessments and appeals
The tax commissioner has the authority to issue assessments against a municipal net profit taxpayer that makes the election. If a taxpayer wishes to appeal an assessment issued by the tax commissioner, the procedures will be similar to appeals of other taxes currently administered by the tax commissioner. A petition for reassessment must be filed within 60 days of a taxpayer receiving the assessment. If a request for a personal appearance hearing is made by a taxpayer on the petition, the tax commissioner shall be required to hold a hearing that will allow the taxpayer to present evidence and explain its position.

Thereafter, the tax commissioner is required to either issue a corrected assessment or a final determination. If an adverse final determination is issued by the tax commissioner, the taxpayer may appeal it to the Ohio Board of Tax Appeals.

Information sharing
Upon receiving notification of the election from a taxpayer on Form MNP MN, a municipality must submit specific taxpayer information about the electing taxpayer to the tax commissioner. If a municipality does not provide this information to the tax commissioner, a municipality will have a percentage of its tax funds withheld until the municipality complies with the request.

For every electing taxpayer that had apportionable income in a municipality for any prior year, the tax commissioner also must provide information to the municipality twice a year. Throughout

the year, the tax commissioner must also provide a taxpayer's name, federal identification number and tax amounts collected by the tax commissioner to municipalities. It is expected that the tax commissioner and municipalities will be sharing information about taxpayers to efficiently administer the municipal net profit tax.

Municipalities file litigation over the centralized collection process
In November 2017, more than 130 municipalities joined together to file a civil lawsuit in the Franklin County Court of Common Pleas to challenge the constitutionality of the centralized collection process and some of the changes made under H.B. 5 of the 130th Ohio General Assembly, which were adopted to apply uniform definitions among municipalities. Specifically, the municipalities have alleged that the Bill and H.B. 5 violate the home rule amendment of the Ohio Constitution, among other claims.

In December 2017, 22 RITA municipalities joined together to file a separate civil lawsuit in the Lorain County Court of Common Pleas to challenge the constitutionality of the centralized collection process.

Both lawsuits are requesting an injunction against the implementation of the centralized collection process until the court determines the constitutionality of the tax provisions. At the time of drafting this article, neither lawsuit had yet impacted the centralized collection process.

Overall, the ability for taxpayers to file on a centralized basis is a great step toward reducing the cost of complying with Ohio's onerous municipal net profit tax. Taxpayers should examine the significant potential benefits of opting in to the centralized collection system. It is anticipated that numerous tests of the new OBG will be completed before the first filing deadline and the new OBG will be able to handle even the most complex municipal net profit returns.

If a decision is made to elect into the statewide centralized collection system, the election must be made by calendar year taxpayers by March 1, 2018.

Adam Garn, CPA, JD, MT is an attorney with Zaino Hall & Farrin LLC.

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  1. Angela Van Fossen | Feb 02, 2018
    Great info!  Thanks.  We'll be sharing it with our OCA members.

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