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Construction and Real Estate Industry Impact on Proposed Ohio Sales Tax Expansion

On February 12, 2013, the Ohio House of Representatives introduced House Bill 59 which contains the details of Governor John Kasich’s Biennial Budget proposal for fiscal years 2014 – 2015. The common theme throughout the proposal is continued job creation with a variety of changes including significant tax reform, Medicaid expansion and increased school funding. With regard to tax reform, Governor Kasich is proposing substantial changes to the administration of the Personal Income Tax, Sales Tax and Severance Tax, all in an effort to reduce Ohioans’ tax burden by $1.4 billion over three fiscal years.

One of Governor Kasich’s primary goals in the budget bill is to reduce the personal income tax rate by 20% across the board over the next three years and to reduce the tax burden on owners of pass-through entities (i.e. LLCs, Partnerships and S-Corporations) by allowing for a 50% deduction of business income up to $750,000 (a $375,000 deduction).
In order to offset the revenue loss that would follow from a reduction in personal income tax rates, the Governor is proposing substantial changes to Ohio’s sales tax structure. Citing various studies that embrace the concept, the proposal would decrease sales tax rates and expand the tax base to include most services. Many of these services have a direct impact on the construction and real estate industry.Highlights of the sales tax reform include:
  • Reduction of the state sales tax rate from 5.5% to 5%;
  • Expansion of the sales tax base to include all “non-essential” services;
  • Exempt services would include health care, construction, rental of residential property, education, social assistance (daycare and elderly care), insurance premiums, residential trash removal, and oil and gas drilling;
  • Reduction of county and transit authority tax rates to offset the additional collections from the broader tax base.

As mentioned in the highlights above, construction services and rental of residential property would remain exempt from Ohio sales tax, but the proposed changes would expand the sales tax base to include a number of services that are prevalent in the construction and real estate industry.

If H.B. 59 is enacted in its current form, services that would become subject to sales tax include, but are not limited to:

  • Intercompany fees
  • Commercial office rents Legal fees
  • Accounting fees
  • Property management fees Asset management fees
  • Property maintenance fees Overhead management fees Brokerage fees
  • Title insurance fees Appraisal fees
  • Inspection fees
  • Mortgage origination fees

In addition to paying tax on previously exempt services, contractors and those involved in real estate services will see increased costs as they relate to sales tax compliance and administration. A significant number of businesses who have not previously filed sales tax returns will need to implement processes to begin doing as such.

Expanding the sales tax base is one mechanism being utilized to raise revenue to compensate for the proposed reduction in income tax revenue. Governor Kasich has also proposed a reform to Ohio’s Severance Tax structure, which is aimed at addressing the difference in both process and volume production between horizontal and traditional vertical drilling and maximizing benefit from the recent oil and gas boom in Eastern Ohio.

Finally, if enacted in its current form, the budget will cause a $400 million surplus in the budget reserve, or “rainy-day fund”, and would trigger a statutorily required refund to taxpayers. This refund would accelerate tax savings in 2013, but the net effect would not increase the permanent rate reduction beyond the three-year 20% proposal.

Next Steps

This budget proposal is in its early stages and will undergo multiple levels of review and revision as it moves through the Ohio General Assembly before being finalized by June 30, 2013. Those in the construction and real estate industries should be aware of the potential implications specific to their businesses. GBQ will provide updates as they become available. Complete details of House Bill 59, including bill text and a full analysis can be found by visiting the Ohio General Assembly Website.

Should you have any additional questions please contact your GBQ representative at 614.221.1120.