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February 1, 2006

The CAT Tax

#Tax Advisor, #2006 Archived

In recognition of the single most significant change in Ohio tax law, this newsletter will be a discussion of the new CAT TAX and its affect on you and your clients:


  • February 10th 2006, the initial filing and tax payment for the Ohio CAT tax is due.
  • Gradual repeal of the personal property tax over 4 years.
  • Gradual repeal of the corporate franchise tax over 5 years.
  • Reduction in personal income taxes over 5 years.
  • Phase in Commercial Activity Tax.
  • Eliminate 10% real estate tax rollback for commercial and industrial property.

The Commercial Activity Tax is a tax imposed on the taxpayer's gross receipts for the privilege of doing business in Ohio. The Ohio Department of Taxation's position is that any out of state business with gross receipts of $500,000.00 coming from Ohio customers is subject to the CAT. This goes far beyond the traditional nexus test for income taxes, and sales and use taxes.

Companies shipping goods into Ohio for further delivery to points outside Ohio, may properly exclude those sales from the CAT if, at the time the contract is executed, the subsequent non Ohio locations are known.

While the rate at first blush seems manageably low, [.26%] it is disguised by the cumulative pyramiding of the tax on sequential sales within Ohio. In other words, a Manufacturer whose product goes thru several stages from raw materials to finished product within Ohio may find the tax to be 350% to 400% of the original base tax. This tax may hand a competitive advantage to both integrated manufacturers filing on the consolidated basis and out of state competitors, because in both cases they can avoid or minimize the impact of the CAT. The tax cannot be separately imposed on customers.

Ohio businesses with affiliated entities should immediately determine on or before February 10th 2006 whether they should file either on a consolidated basis or on a combined basis. [Information Release CAT 2005-15] Taxpayers who fail to elect consolidated basis must count all intercompany transactions as taxable sales. Taxpayers who elect consolidated status may eliminate all intercompany transactions but are required to concede all business nexus issues. Failure to timely elect on or before February 10 2006 results in combined reporting for 2 years. It is also possible to file on both the combined basis and on the consolidated basis for parts of a business group.

Call Stephen L. Robison, Esq. for more information on how the CAT TAX
may affect your clients and what planning you can do to minimize its effect.

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