Click here to view Steve’s January 17, 2013 report which was presented to the Taxation Section of the Ohio State Bar Association as Chair of the Sales/Use Tax Subcommittee. The Bay Mechanical Supreme Court decision provides a useful summary of the necessary evidence to support the one-year permanent assignment exemption from an otherwise taxable employment service. Although “permanent assignment” language or its equivalent is strongly suggested, arguably a taxpayer can prevail as long as the contract language is not inconsistent with permanent assignment, while performance is consistent with permanent assignment.

Also, the BTA recognized that penalty abatement can be pursued via a refund claim outside a Petition for Reassessment. See Smedley.

Ohio Govenor John Kasich will unveil his proposed budget for FY 2014-15 next month. During the last budget, Gov. Kasich focused on closing a substantial deficit. This time around, he is expected to propose a significant reduction to Ohio's personal income tax, among other things. It will be interesting to see how Gov. Kasich proposes to offset this revenue reduction. The Plain Dealer discusses several possibilities in a recent article, including taking the $20 billion available to the state under President Obama's Affordable Care Act. 

Ohio's next biennium budget will take effect July 1, 2013. We will continue to provide updates on the tax aspects to be included in the upcoming budget. 

The Ohio Supreme Court in Beaver Excavating Co. v. Testa recently ruled that the allocations of receipts from Ohio’s commercial activity tax (CAT) derived from sales of motor vehicle fuel is unconstitutional. Pursuant to the Ohio Constitution, tax revenue derived from, or “related to,” motor-vehicle fuel sales must be used for improving, repairing or maintaining the state highway system, or related purposes. However, CAT revenue is allocated to the state’s general fund, and funds for the benefit of schools and local governments. Therefore, the CAT is unconstitutional as applied to receipts from motor-fuel sales to the extent the revenue is used for nonhighway purposes. The Court carefully distinguished its decision in Ohio Grocers Assn. v. Levin where it held that the CAT, as applied to grocers and other food retailers, was a privilege-of-doing-business tax, not an excise tax levied on the sale of food for off-premises consumption which is also prohibited by the Ohio Constitution.

The Court, with the parties’ support, exercised discretion to apply its holding prospectively. Accordingly, fuel vendors are not entitled to a refund of CAT previous paid on receipts from motor-vehicle sales. Further, the Tax Commissioner will continue to collect the CAT from such vendors, but will hold the amounts derived from motor-vehicle fuel sales until the General Assembly amends the CAT’s expenditure statute to allocate revenue derived from motor-vehicle fuel sales to highway purposes.

Depending on the nature of the project, contractors may claim an Ohio sales / use tax exemption on material purchases using several different exemption certificates. If installing a business fixture (i.e., permanent attachment to real property that primarily benefits the specific business operated on the premises), the contractor, acting as a retail vendor in this situation, can claim the resale exemption by providing suppliers with a standard exemption certificate when purchasing materials that will be transferred to the customer. The contractor may use a blanket exemption certificate, which covers all purchases from that vendor unless specified otherwise, or a unit exemption certificate, which only covers a single purchase. Assuming the contractor will make future taxable purchases from the supplier of materials to be incorporated into real property improvements, a unit exemption certificate is likely more appropriate. Alternatively, contractors can also use the multi-state Certificate of Exemption adopted by the Streamline Sales and Use Tax Governing Board. To be valid, any exemption certificate must contain the information set forth in O.A.C. § 5703-9-03(G). 

When installing a business fixture, the contractor must collect sales tax from its customer unless an exemption is available. If claiming an exemption on its sale, such as when the customer is a government agency or charitable organization, or the property will be used directly in manufacturing, the contractor should obtain one of the aforementioned exemption certificates from its customer to evidence the exempt nature of the transaction. 

On the other hand, contractors may purchase materials exempt from Ohio sales and use tax based upon an exempt real property improvement. These include construction contracts whereby building materials are incorporated into real property under a contract with a government agency, or into a horticulture or livestock structure, a house of public worship or a hospital, among others. O.A.C. § 5703-9-14(D)(1). To properly claim the exemption in these cases, the contractor should obtain a Sales and Use Tax Construction Exemption Certificate (Form STEC CC) from the property owner or general contractor, and then issue a Sales and Use Tax Contractor’s Exemption Certificate (Form STEC CO) to its supplier. 

Refer to our earlier post for protecting contractors from misclassifying real property improvements.

The rules concerning which components of a construction project become real property upon installation and those that are business fixtures (remaining personal property) are often confusing. Even the Ohio Department of Taxation has taken an inconsistent approach at times – for example, arguing (albeit unsuccessfully) that golf bunkers and tee boxes were personal property in a 2007 Board of Tax Appeals decision, while a 2007 Tax Commissioner’s Opinion found that bunkers were land and, thus, real property. Likewise, in the two seminal decisions concerning business fixtures, the Ohio Supreme Court found that roller coasters and station houses at Geauga Lake Amusement Park were personal property, while the Board of Tax Appeals later ruled that Polaris amphitheater and other structures were real property. Suffice it to say, it is often difficult to determine the portions of a construction project representing business fixtures, upon which the contractor must collect sales tax from its customer, versus those which become real property upon which the contractor must pay use tax on its materials.

Ohio Revised Code Section 5739.03(C) provides a procedure which protects the contractor from misclassification by requesting a certification from its customer – the contractee – as to the real property and personal property components of the project. The request must be sent via certified mail, return receipt requested, prior to entering into the contract or agreement. The contractor will be protected from a misclassification if it relies upon in good faith, and acts consistent with, the contractee’s certification. And if the contractee fails to provide the requested certification, the contractor may rely upon its good faith determination as to its Ohio sales and use tax obligations. However, since this procedure shifts the exposure of a misclassification to the contractee, it would be prudent to advise the contractee prior to requesting such a certification.

If you need help complying with the procedures for requesting a certification for your customer, or classifying components of a construction contract as real or personal property, contact us as we have extensive experience in this area. In fact, Steve represented the taxpayer in the controlling Ohio Supreme Court case (Funtime v. Wilkins) governing this area.