1. Overview of the Commercial Activity Tax (CAT)
Sarah E. O’Leary, Administrator, Commercial Activity Tax Division
Ohio Department of Taxation
Hudson, Ohio
November 14, 2009

2. Brief Overview of the CAT Auditing and Compliance Filing Tips
Agenda
Brief Overview of the CAT
Auditing and Compliance
Filing Tips
CAT Statistics
Recent Court Cases
List of Information Releases and Rules 2 2 2

3. Commercial Activity Tax: A few things to keep in mind…
A broad-based, low rate tax (0.26%) on gross receipts from business activity in Ohio
Generally, taxpayers with less than $150,000 in taxable gross receipts are not subject to the CAT
Rate structure of the tax:
Pay $150 minimum tax on first $1 million in taxable gross receipts
Receipts above $1 million, pay $150 plus 0.26% on amount in excess of $1 million 3

4. Nature of the CAT R.C
Tax is imposed annually for the privilege of doing business in Ohio
“Doing business” means any activity for gain, profit, or income (legal or illegal)
Not a transactional tax (important for Ohio’s Constitution)
Not a tax on or measured by income – P.L
Tax may not be billed or invoiced to another
Tax may be passed on as part of price 4

5. CAT Taxpayers R.C (D)
Taxpayers are all persons or groups of persons required to file returns or to pay the tax
“Person” includes corporations, pass-through entities, individuals, joint ventures, clubs, trusts, and disregarded entities 5

6. Excluded Persons R.C. 5751.01(E)
“Excluded persons” include the following entities:
Public utilities, dealers in intangibles, financial institutions and insurance companies that are subject to other taxes imposed by the state
Certain subsidiaries of entities listed above
Certain irrevocable trusts created pre-1972 (before Ohio’s income tax)
Nonprofit organizations
Most governmental agencies
Persons with receipts <$150,000 6

7. Mandatory Combined Reporting
Groups of persons meeting certain ownership thresholds must file as a group
Two options:
Consolidated Elected Taxpayer Group – An election
Combined Taxpayer Group – Mandatory if no election 7

8. Commercial Activity Tax (CAT)
Consolidated Elected vs. Combined Taxpayer
Consolidated Elected Taxpayer
At least 50% or 80% common ownership
Option to include or exclude non-US entities
Must include all entities regardless of nexus in Ohio
Gross receipts between members are excluded
Combined Taxpayer
More than 50% common ownership
Combined only required to include entities with nexus in Ohio
Gross receipts resulting from payments between members are subject to the CAT 8

9. Common Ownership
Value of ownership is owned or controlled, directly or constructively through related interests, by common owners
It is for all or any portion of a tax period
ODT has issued rule to further clarify common ownership:
Rule uses a “vertical control” test focused on voting rights
Family attribution rules do not apply (e.g., IRC provisions addressing owners of S corporations) 9

10. “Bright-line Presence” R.C. 5751.01(I)
MTC Factor Presence Nexus Used:
Person has “bright-line presence” for quarter and remainder of year if any of the following applies:
Property of at least $50,000 within state
Payroll of at least $50,000 within state
Annual taxable gross receipts of at least $500,000
At least 25% of total property, payroll, or gross receipts in this state
Is domiciled in this state (commercially or legally)
Economic presence standard to fairly apply the tax to both instate and out-of-state businesses that benefit from receiving gross receipts from purchasers located in Ohio 10

11. What is Subject to the CAT?
Gross Receipts Definition
Broad Gross Receipts Base
Exclusions
e.g., interest, capital gains, wages (received), bad debt, cash discounts
Situsing Rules – i.e., Taxable Gross Receipts
Limited Credits Applicable to CAT 11 11

12. What is Subject to the CAT? Situsing Rule - Services
Gross receipts from the sale of services are sitused to Ohio in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.
The physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be taken into consideration when determining the proportion of the benefit
Reasonable test can be used – must be applied in uniform and consistent manner 12 12

13. What is Subject to the CAT? Situsing Rule – Everything else
TPP: Ultimate delivery location
Rents/royalties from real property: Property location
Rents/royalties from TPP: Location/Use of TPP
Electricity/Electric transmission distribution: Miles
Sale of real property: Property location
Sale/exchange/distribution/use of IP (e.g., trade names):
Amount of use: Apportion to state(s) of use
Right to use: Apportion to state(s) where right to use
Transportation: Miles
Dividends/interest/financial income: R.C (F)

14. Tax Returns Filing a tax return:
Taxpayers with taxable (Ohio) gross receipts in excess of $150,000, but less than $1 million pay an annual flat tax of $150 (May. 10th each year)
Taxpayers with taxable (Ohio) gross receipts in excess of $1 million pay $150 on the first $1 million ($250K per quarter) and remit the tax on the remainder quarterly 14

15. Tax Returns Example – 1st QTR 2010 Return
$ 150 payment of 2010 tax minimum due May 10, 2010
First Quarter Tax Calculation
$ 1,500,000 in taxable (Ohio) gross receipts
$ ,000 exclusion amount for 4th quarter
$ 1,250,000 x = $3,250
Total payment of $3,400 Due May 10, 2010 15

16. Tax Returns Deadlines for filing a quarterly return:
4th Qtr 2009: February 10, 2010
1st Qtr 2010 & Annual Return: May 10, 2010
2nd Qtr 2010: August 10, 2010
3rd Qtr 2010: November 10, 2010
4th Qtr 2010: February 10, 2011 16

17. Commercial Activity Tax (CAT)
Statute provides three rate adjustments so that the tax does not generate too much revenue
The 2007 and 2009 measurement periods did not trigger a rate adjustment
There is one additional rate adjustment –after FY 2011
These adjustments are made by the Tax Commissioner using a prescribed formula 17

18. Auditing and Compliance

19. Auditing
ODT established an audit team to develop audit procedures and an audit manual. This is an ongoing process as additional audits are completed.
Part of the process included Voluntary Compliance Reviews (VCRs)
No penalties imposed
ODT conducted 10 VCRs
ODT is now conducting normal audits which will, if applicable, include penalties 19

20. Identifying Potential Taxpayers
New Nexus Unit
Ohio Department of Taxation is looking for leads from the following:
Other taxes
- Over 400,000 notices sent
Leads from audits of other taxpayers
- Approximately 750 notices sent
Third party information to locate out-of-state businesses
90,000 mailings made thus far
Various other sources 20

21. Compliance
ODT has issued estimated assessments against entities with apparent bright-line presence. These assessments include:
10% of tax late filing penalty
15% of tax late payment penalty
35% of tax failure to register penalty
(Total potential penalty of 60%)
$100/month, maximum $1,000, penalty for failure to register
Assessments will continue to be issued as additional information is received. 21

22. Voluntary Disclosure Agreements (VDAs)
Information Release CAT – Revised May 2009
Allows VDA for CAT
Interest only – no penalties (as long as taxpayer never contacted via audit or compliance program)
Steps for VDA:
Send request for VDA in writing to CAT Division
ODT sends letter, contract, and returns/regis.
Register, file returns, pay tax
ODT bills for interest

23. Commercial Activity Tax
Filing Tips

24. Tips for Successful Filing
Identify all documents with account #
Do not copy forms and reuse
Only primary entity is required to file
Quarterly taxpayers must file regardless of taxable gross receipts
Reporting multiple periods on one return
New taxpayer
Delinquent taxpayer

25. Tips for Successful Filing
Estimated Returns
Check the proper estimation box on return/OBG
Rule estimate must file reconciliation quarterly
Statutory must file reconciliation yearly
Cannot file an estimate after billing received for that period
No estimates in first Qtr 2007, 2009 or 2011
If filing estimate returns, taxpayer must reconcile

26. Tips for Successful Filing
Amended Returns
Include total TGR for the reporting period, not just difference from original filing
Payments
Identify with CAT account # and period-end date
Mail separately to each tax division
Watch for payment from checking
If electronic, determine why account blocked

27. Commercial Activity Tax
Statistics*
*Information as of November 2, 2009

28. Commercial Activity Tax (CAT)
Types of filers:
Approximately 118,676 taxpayers pay only the $150 annual minimum tax
Another 59,880 taxpayers pay $150 annual minimum tax, plus the quarterly tax on their taxable gross receipts in excess of $1 million
CAT is expected to raise at least $1.3 billion by FY 2010 (with no rate adjustments) 28

29. Taxpayer Registration Types
Active Taxpayers: 178,551
Single Entity: 154,600
Combined Taxpayer Groups: 6,010
Largest Group: 500 Members
Average Group: 3 Members
Consolidated Elected Taxpayer Group: 17,836
Largest Group: 3,020 Members
Average Group: 6 Members 29

30. CAT Revenue Actual Collections – 1st Measurement Period:
FY 2006: $273.4M
FY 2007: $594.9M
Total: $868.3M (Target: $815M [+ 6.5%])
Actual Collections – 2nd Measurement Period:
FY 2009: $1.18B (Target: $1.19B [-1%])
Next measurement period: July 1, June 30, 2010
Trigger: $1.61B
ODT projects collections will be far short of estimate

31. CAT Taxpayer Base by Industry

32. Case Law Update

33. Case Law Update Ohio Grocers Assn. v. Wilkins
Decision by Ohio Supreme Court issued September 17, 2009
28 amici groups supported position (7 briefs)
Beaver Excavating v. Levin
Status Conf. Scheduled later in November Re: Grocers’ decision
Ohio Farmers Foodservice v. Wilkins
September 29, 2009 case dismissed
Overstock.com v. Levin
Motion to Dismiss – Granted August 31, 2009 (Franklin Co.)

34. Administrative Rules and Information Releases

35. Administrative Rules and Information Releases
CAT : CAT Nexus Standards
CAT : Excluded Person
Adm. Rule
CAT : Electronic Filing
Adm. Rule
CAT : “Common Owners and Joint Ventures
Adm. Rule
CAT : Situsing of Services
Adm. Rule
CAT : Transfers of Property Into the State
Adm. Rule

36. Administrative Rules and Information Releases (Continued)
CAT : I.R.C. Section 1221 and 1231 Assets Excluded from Gross Receipts
CAT : Sampling
Adm. Rule
CAT : Request to File Separately
Adm. Rule
CAT : Estimated Payments for Quarterly Taxpayers
Adm. Rule
CAT : Nonprofit Organizations
Adm. Rule
CAT : Temporary Motor Fuel Exemptions
Adm. Rule
CAT : Applicable Excise Tax Rates for Purposes of the CAT

37. Administrative Rules and Information Releases (Continued)
CAT : Agency, Defined
Adm. Rule
CAT : Cash Discounts, Defined
Adm. Rule
CAT : Highway Transportation Services: Bright-Line Presence and Situsing
Adm. Rule
CAT : Qualified Distribution Center
Adm. Rule
CAT : Situsing Receipts from Periodic Payment for Mobile Property
Adm. Rule
CAT : CAT Records Retention Requirements
Adm. Rule

38. Administrative Rules and Information Releases (Continued)
CAT : CAT Changes in Ownership
Adm. Rule
CAT : Rule Estimation and Statutory Estimation Procedures, Compared
CAT : Pre-Income Tax Trusts, Explained With Revocation Procedures
Adm. Rule
CAT : Commercial Activity Tax Credits, Explained
Adm. Rule
CAT : Commercial Activity Tax: Voluntary Disclosure Agreements
CAT : Commercial Activity Tax: Business as usual after Ohio Supreme Court decision in Ohio Grocers Association v. Levin
CAT : Commercial Activity Tax: Change in Due Dates for the Annual Minimum Tax, Annual Returns, Quarterly Returns and Deadline for Cancellations of Accounts

39. Important CAT Contact Numbers
Phone:
Fax:
Website: tax.ohio.gov
Address: Commercial Activity Tax Division
P.O. Box 16158
Columbus, OH
CAT

40. Subscribe to the Department’s tax practitioner e-mailing list.
Notifications
Subscribe to the Department’s tax practitioner ing list.
Click on ODT web site at: Tax.Ohio.Gov 40