Ohio Budget Law Makes Numerous Tax Policy Changes

July 2021

BY

Geoff FrazierManaging Director, State and Local Tax

Mike FeiszliManaging Director, State and Local Tax

Tony MonteliscianiManaging Director, State and Local Tax

On July 1, 2021, Ohio’s governor signed H.B. 110 into law. As part of the $72 billion two-year budget, legislative changes were made to several areas of Ohio taxation. The following highlights important developments under the new law related to sales, commercial activity, municipal income and state income taxation, and the expansion of the job creation tax credit.
 

Repeal of Sales Tax on Employment Services and Employment Placement Services

Effective October 1, 2021, sales and use tax will no longer be imposed on employment services (personnel provided to perform work under the supervision and control of the purchaser) and employment placement services (locating employment for a job seeker or locating job candidates for an employer). 
 

Commercial Activity Tax (CAT) Permanent Exemption and Change to the Minimum CAT Computation

Under H.B. 110, the CAT exemption for Bureau of Workers’ Compensation dividends has been made permanent, beginning with amounts paid in 2022. S.B. 18, enacted earlier this year, exempted these dividends paid in 2020 and 2021.

Further, the minimum CAT computation will now be computed based on the taxpayer’s taxable gross receipts reported in the preceding calendar year, rather than the current calendar year. This change will help to clarify the reporting requirement for alternative minimum tax taxpayers and simplifies the process of reconciling actual tax paid versus actual liability, because current law requires taxpayers to estimate future gross receipts. This provision serves to codify into law the Department of Taxation’s current practice.
 

Municipal Income Tax Changes

H.B. 110 provides that the business net profit tax payroll factor is to be calculated based on the principal place of work location of employees through December 31, 2021.

The temporary municipal income tax withholding rule, which allows employers to withhold based on employees’ principal work location, has been extended through December 31, 2021. This provides that a temporary municipal income tax withholding rule in effect during the Governor's COVID-19 emergency declaration extends through December 31, 2021, regardless of when the declaration ends. Under prior law, the rule was set to expire 30 days after the emergency declaration ends, which was rescinded on June 18. Under the temporary rule, employers are allowed, but are not required, to withhold municipal income taxes to an employee's principal place of work, even though the employee may be working from home or another location due to the emergency declaration.

The law also specifies that for 2021, this is strictly a withholding provision. Whether an employee’s wages are subject to tax in a municipal jurisdiction is determined under the normal taxability and sourcing rules. This provides an opportunity for employees to file for municipal tax refunds if their employer withholds for their principal work location municipality while the employee was actually working elsewhere. Withholding for 2020 was not addressed. Litigation challenging municipalities’ ability to impose tax on income earned outside of the municipality by employees working at home during the pandemic is ongoing.  
 

Permanent Rate Reductions to State Income Tax

Beginning in 2021, a 3% income tax rate cut is enacted as well as further consolidation of the income tax brackets. The rate on nonbusiness income also is reduced. Previously, the rates ranged from 2.850% to 4.797%. After January 1, 2021, the rates will range from 2.765% to 3.990%. 
The table below shows the changes between pre-2021 individual income brackets and rates and the brackets and rates beginning in 2021 and onwards:
 
Pre-2021 Individual Income Brackets Pre-2021 Rate 2021 Individual Income Brackets 2021 Rate
$0 - $22,150 0.000% $0 - $25,000 0.000%
$22,151 - $44,250 $316.18 + 2.850% $25,001 - $44,250 $346.16 + 2.765%
$44,251 - $88,450 $946.03 + 3.326% $44,251 - $88,450 $878.42 + 3.226%
$88,451 - $110,650 $2,416.12 + 3.802% $88,451 - $110,650 $2,304.31 + 3.688%
$110,651 - $221,300 $3,260.16 + 4.413% More than $110,650 $3,123.05 + 3.990%
More than $221,300 $8,143.14 + 4.797%    
 

Jobs Creation Tax Credit (JCTC) Reporting and Expansion

The JCTC is a refundable credit applied against CAT. Beginning with reports filed for 2020, businesses that receive the JCTC can include work-from-home employees in their annual employment and payroll reporting. This will allow the payroll of those work-from-home employees to count towards computing and verifying the credit. Current law only allows JCTC recipients whose applications were approved after September 29, 2017 to include work-from-home employees.

The JCTC, issued by the Director of Development, requires the director to adopt rules establishing alternative JCTC eligibility requirements for businesses that do not meet the minimum employment of 10 new employees or payroll thresholds prescribed by current rules but are otherwise eligible for the credit. This limits total credits awarded under the new eligibility criteria to $25 million per fiscal biennium and reduces, from $50 million to $25 million, the biennial credit allotment for an existing income tax credit for investments in smaller businesses.