Recent Changes to the Ohio Commercial Activity Tax (CAT)

The Ohio Commercial Activity Tax (CAT), introduced in 2005, replaced the Ohio franchise tax and has since played a significant role in the state’s revenue collection. This annual tax is levied on the privilege of conducting business in Ohio, based on the gross receipts generated from business activities within the state. It’s important to note that the CAT applies to out-of-state companies that meet its “bright-line nexus” criteria by satisfying at least one of the following conditions:

• Ownership of property in Ohio valued at a minimum of $50,000 at any time during the calendar year.
• Payroll in Ohio totaling at least $50,000 during the calendar year.
• Taxable gross receipts originating from Ohio sources during the calendar year.
• At least 25% of its total property, total payroll, or total gross receipts are in Ohio at any time during the calendar year.
• Domiciliation in Ohio, whether as an individual or for corporate, commercial, or other business purposes.

Understanding the CAT Calculation

Under the current legislation, the CAT allows for the exclusion of the first $1 million in Ohio gross receipts from the tax base. Gross receipts exceeding $1 million are subject to a 0.26% tax rate, and taxpayers falling into this category are required to file quarterly tax returns. However, for businesses with Ohio gross receipts between $150,000 and $1 million, an annual return is mandatory, and they are subject to a minimum tax of $150.

Recent Changes in Ohio Tax Law: House Bill 33

Ohio House Bill 33, signed into law on July 3, 2023, ushers in significant changes to various Ohio taxes, including the CAT. Starting in 2024, businesses with taxable gross receipts of $3 million or less will no longer be subject to the CAT. This threshold increases to $6 million for tax periods beginning in 2025 and beyond. Additionally, the annual minimum tax requirement will be eliminated, providing businesses with more financial flexibility.

Adjusting Your CAT Account

Businesses should take specific actions if they need to adjust their CAT accounts due to these changes. Annual taxpayers, with their 2023 returns due on May 10, 2024, should cancel their CAT accounts with an effective date of December 31, 2023, when filing their final 2023 returns. Quarterly taxpayers projecting taxable gross receipts of $3 million or less in 2024 should file their last quarterly return, due on February 12, 2024, and cancel their CAT accounts with the same effective date of December 31, 2023.

Considerations for Businesses Near the Exclusion Threshold

For businesses with taxable gross receipts just below the new exclusion amount, it’s essential to weigh their options. They may choose to continue filing quarterly returns, knowing that no tax is due until their annual gross receipts exceed $3 million. Alternatively, they can opt to cancel their CAT accounts, effective December 31, 2023, and reactivate them once the new exclusion amount is surpassed. Keep in mind that businesses are required to register and pay the tax within 30 days of exceeding the exclusion amount.

Benefits for Small Businesses

Following the two-year phase-in period, many small businesses will no longer be subject to Ohio’s commercial activity tax. This significant increase in the CAT exclusion threshold, up from the previous $150,000 threshold, will provide much-needed tax relief to businesses that conducted sales in Ohio without a physical presence in the state.

Navigating the CAT Changes

Understanding the Ohio Commercial Activity Tax and its recent changes is essential for businesses operating in the state. With the increased exclusion threshold and the elimination of the annual minimum tax, businesses can plan for their tax obligations more effectively and potentially enjoy tax relief. Whether you’re an annual or quarterly taxpayer, knowing how to adjust your CAT account is vital for compliance with Ohio tax laws and optimizing your financial strategy. Contact our team of tax experts for more information.

By LORA AMENT, CPA, MBA