This presentation discusses the ramifications to your business and the changes required, all as a result of the long awaited Ohio Municipal reform (H.B. 5). This presentation will assist you in analyzing and determining the steps your business must take to be in compliance all in the name of conformity.

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Ohio Municipal
Reform Update
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2. Ohio Municipal Reform
September 17, 2015

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• Overview of Municipal Reform
• Employer Withholding Issues
• Business Tax Changes
• Individual Tax Changes
• Pending Law Changes
MUNICIPAL REFORM

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• The Good, The Bad and The Ugly of Municipal Reform
 The Good – net operation loss provisions
 The Bad – still potential for multiple income tax filings
 The Ugly – withholding provisions
MUNICIPAL REFORM

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– THE UGLY
• This will be the area that impacts your business the most
 Employee withholding provisions
 There are some good provisions but there are definitely some
ugly provisions
 You need to know where your employees are working if they
travel through-out the state.
 A tracking mechanism might be necessary
MUNICIPAL REFORM

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BACKGROUND
• 33 different organizations in Ohio worked together to
arrive at some municipal reform
• Conversations about municipal reform started back in
2011
• HB 5 was passed in December, 2014
• Many individuals believe current reform did not go far
enough to simplify Ohio’s municipal system
• There are some pending corrections that are under
consideration
MUNICIPAL REFORM

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MUNICIPAL REFORM GOALS
• Align local tax systems to federal and state tax systems
 Adopts NOL provisions
 Adopted
‒ Taxpayer Bill of Rights
‒ Offer in Compromise
• Reduce compliance costs for taxpayers
 PTE owners subject to tax only in resident city
• Substantial revenue neutrality to the overall local tax system –
the intent is not to reduce the tax burden itself.
 Gains/loss offset not permitted for non-residents
 Occasional Entrant Rule expanded but withholding almost always
required

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MUNICIPAL REFORM
• What reform did not accomplish
 No uniform tax rate
 No requirement for a mandatory 100% tax credit for taxes paid to
other cities
 No centralized collection of the tax – RITA and CCA continue to
exist
 No change to the current law’s Throwback provisions

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MUNICIPAL REFORM
• Generally provisions of municipal reform are effective
January 1, 2016
• The net operating loss provisions are effective for taxable
years beginning after 2016
 Not completely phased in until 2023

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OCCASIONAL RULE
TWENTY DAY
• Currently, Ohio cities operate under the 12 day rule to
determine withholding requirements for employees
• Twelve day rule – a city is not entitled to tax the
compensation paid to a non-resident employee for
services performed in the city for twelve or fewer days in
a calendar year
• The 12 day rule does not apply to professional athletes or
entertainers

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• Under the current 12 day rule
 Most cities take the position that once an employee exceeds the
12 days, an employer must retroactively go back and withhold
from the first day of entering the city.
 Most cities also claim that the rule only applies to qualifying
wages
 Any portion of the day counts towards the 12 days
OCCASIONAL RULE
TWENTY DAY

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• Under municipal reform 12 days is now 20 days
• The rule is an employer need not withhold tax for a city if
the employee is working in the city for 20 or fewer days
• Instead the employer must withhold for the Principal
Place of Work city
OCCASIONAL RULE
TWENTY DAY

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• The key is now to determine where the employee worked
for the day
• The current definition of day is
 An employee can only be considered to be in any one city during
a day
 The new law introduces the concept of the “preponderance of a
day”
‒ An employee is considered to have spent a day working in a city if
the employee spent the majority of his day performing services in
one city versus another city. The city with the most time spent is
considered the city where the employee spent his day and will count
towards the 20 day rule.
OCCASIONAL RULE
TWENTY DAY

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• In examining an employee’s work day you consider the
Principal Place of Work city
• What does this mean?
 Time during an employees day is considered time spent in the
Principal Place of Work city
 Time spent traveling from Principal Place of Work city to the first
work city
 Time spent traveling between work assignments is considered
time spent in the Principal Place of Work city
 Traveling from last place of work for the day back to the Principal
Place of Work city
OCCASIONAL RULE
TWENTY DAY

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• Other time that is considered time spent in the Principal
Place of Work city
 Traveling from any location to another location in order to pick up
or load, for the purpose of transportation or delivery, property that
has been purchased, sold, delivered, assembled or improved by
the employer.
 Transporting or delivering property described above provided
that, upon delivery of the property, the employee does not
temporarily or permanently affix the property to the real estate
owned, used or controlled by a person other than the employee’s
employer.
OCCASIONAL RULE
TWENTY DAY

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• Principal Place of Work – must utilize a cascading test to
determine what city is the principal place of work
 The fixed location to which an employee is required to report for
work on a regular basis
‒ Fixed location – permanent place of doing business in Ohio, such as
an office, warehouse, store front or similar that is owned or
controlled by the employer
‒ Cannot be outside of Ohio
‒ Cannot be a location owned by a customer
OCCASIONAL RULE
TWENTY DAY

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• Principal Place of Work
 If no fixed location exists, then the Principal Place of Work means
the worksite location to which the employee is required to report
for employment duties on regular basis
 A worksite location is a construction site or other temporary
worksite in Ohio at which the employer provides services on more
than 20 days during the calendar year
‒ A worksite location cannot include the employee’s residence
‒ A worksite location cannot include a location outside of Ohio
OCCASIONAL RULE
TWENTY DAY

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• Principal Place of Work
 If no fixed location or worksite location, Principal Place of Work
means the location in Ohio at which the employee spends the
greatest number of days in the calendar year performing services
for the employer.
‒ If there is a tie between two or more cities - an employee spends the
equal amount of time in two or more cities during a calendar year,
the employer must allocate the employees wages among those cities
for withholding purposes.
‒ Any allocation method can be utilized as long as fair and reasonable
OCCASIONAL RULE
TWENTY DAY

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• Presumed Worksite Location – is a construction or other
temporary worksite in Ohio at which the employer
provides services that can be expected to last more than
twenty days in a calendar year.
• Services can be expected to last more than twenty days if
either of the following apply:
 The nature of the services are such that it will require more than
20 days, or
 The agreement between the employer and its customer requires
the employer to perform services at the location for more than 20
days.
OCCASIONAL RULE
TWENTY DAY

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• The 20 days would result in a zero tax being paid in the
following scenario:
 The Principal Place of Work is in a non-taxing city
 The employee is a resident of a non-taxing city
OCCASIONAL RULE
TWENTY DAY

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• Once an employee exceeds 20 days, the employer must
withhold tax for the city for each additional day.
 Retroactive withholding is not required under the 20 day rule
 Employer can elect to do retroactive withholding to day one and
seek a refund for withholding for Principal Place of Work
withholding
 An employer can enter into an agreement with a city to bypass
the 20 day rule
OCCASIONAL RULE
TWENTY DAY

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• Exceptions: The twenty day rule does not apply if:
 The employer’s Principal Place of Work is located in the
same city
 The employee performed services at multiple worksite locations
 The employee is a resident of a city and requested the employer
to do withholding from their wages
 The employee is professional athlete or entertainer
OCCASIONAL RULE
TWENTY DAY

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• Sole Proprietors
 Only applies to “qualifying wages” – compensation paid to non-
resident individual for work performed in a city.
 There is a provision to exempt compensation earned by a non-
resident sole proprietor for work performed in a city for 20 or
fewer days.
‒ This doesn’t apply if sole proprietors base of operations is in the city
‒ Also does not apply if the individual is a professional athlete or
entertainer
OCCASIONAL RULE
TWENTY DAY

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• Small Business Exception to 20 day rule
• A small employer only is required to do withholding for
the city where the employer has a fixed location.
• Fixed location – permanent place of doing business in
Ohio. This would be a store, warehouse, office and/or
similar location.
• Small Employer – employer that has less than $500,000
of revenue during the proceeding year.
 Ohio is thinking 90% of employers will fit into this rule
OCCASIONAL RULE
TWENTY DAY

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EXAMPLE #1
• Employee A works in Fairlawn for 18 days, Principal
Place of Work is Twinsburg and resides in Stow. All of
these cities have an income tax.
 Employer must withhold Twinsburg tax for the 18 days worked in
Fairlawn
 No withholding is due for Fairlawn and the employee is not
required to file in Fairlawn

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EXAMPLE #2
• Principal Place of Work is Akron
• Employee works 200 days a year
 185 days in Akron
 15 days in Stow
 Domicile is Twinsburg
 All 200 days subject to Akron withholding

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EXAMPLE #3
• Principal Place of Work is Akron
• Employee works 200 days a year
 170 days in Akron
 30 days in Stow (not a worksite location)
 Domicile is Twinsburg
 Withholding must be done for 190 days in Akron and 9 days in
Stow

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EXAMPLE #4
• Principal Place of Work is Akron
• Employee works 200 days a year
 150 days in Akron
 10 days each in five different cities (Stow, Copley, Hudson,
Mayfield Village and Tallmadge)
 Domicile is Twinsburg
 All 200 days are subject to Akron withholding

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EXAMPLE #5
• Principal Place of Work is a Township
• Employee works 200 days a year
 10 days each in twenty different cities
 Domicile is Twinsburg
 Employer is not required to do any withholding

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EXAMPLE #6
• Principal Place of Work is a Township
• Employee works 200 days a year
 10 days each in twenty different cities
 Domicile in a Township
 No withholding is required

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• Withholding straightforward if have a Principal Place of
Work, if no Principal Place of Work where is withholding
required.
• Potentially the withholding can change weekly
• Do you need to go back and adjust withholding every
week?
• Do you need to adjust to the beginning of the year?
PLACE OF WORK
NO PRINCIPAL

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• Out-of-state employer (is not a small employer)
• Has no fixed location in Ohio
• Has no worksite location in Ohio
• Employee works in Ohio
 5 days in Solon during first quarter
 7 days in Akron during second quarter
 13 days in Mayfield during third quarter
 19 days in Twinsburg during the fourth quarter
 WHAT WITHHOLDING IS REQUIRED AND WHERE?
PLACE OF WORK
NO PRINCIPAL

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• Assume employee paid once a month.
• First Quarter - Withholding would be required to be done for Solon.
Withholding would be required from the first day worked in Solon
until the last day worked. Solon is considered the Principal Place of
Work.
• Second Quarter - Once the employee begins working in Akron this
would become the new Principal Place of Work and withholding
would now be due for Akron.
• Third Quarter - Mayfield becomes the new Principal Place of Work
and withholding is required now for Mayfield.
• Fourth Quarter - withholding would change to Twinsburg since this
would now be considered the Principal Place of Work.
 Technically, to be in compliance should adjust withholding each time a new
Principal Place of Work is established.
PLACE OF WORK
NO PRINCIPAL

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PLACE OF WORK
• Out-of-state employer (is not a small employer)
• Has no fixed location in Ohio
• Has no worksite location in Ohio
• Employee works in Ohio
 10 days in Solon during first quarter
 7 days in Akron during second quarter
 13 days in Mayfield during third quarter
 19 days in Twinsburg during the fourth quarter
 WHAT WITHHOLDING IS REQUIRED AND WHERE?
NO PRINCIPAL

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• Assume employee paid once a month.
• First Quarter - Withholding would be required to be done for Solon.
Withholding would be required from the first day worked in Solon
until the last day worked. Solon is considered the Principal Place of
Work.
• Second Quarter – Solon withholding would still be required because
Solon would still be considered the employee’s Principal Place of
Work location since the employee has spent the most time in Solon.
Since not over 20 days in Akron, no Akron withholding would be
required.
• Third Quarter - Mayfield becomes the new Principal Place of Work
and withholding is required now for Mayfield.
• Fourth Quarter - withholding would change to Twinsburg since this
would now be considered the Principal Place of Work.
 Technically to be in compliance should adjust withholding each time a new
Principal Place of Work is established.
PLACE OF WORK
NO PRINCIPAL

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• Out-of-state employer (is not a small employer)
• Has no fixed location in Ohio
• Has no worksite location in Ohio
• Employee works in Ohio
 5 days in Solon during first quarter
 7 days in Akron during second quarter
 13 days in Mayfield during third quarter
 19 days in Twinsburg during the fourth quarter
 WHAT WITHHOLDING IS REQUIRED AND WHERE?
PLACE OF WORK
NO PRINCIPAL

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Pass-Through Entities
• No change in S Corporations
 Taxed at the entity level
 Owners not taxed in majority of municipalities unless the
municipality voted in 2002 or 2004 to tax S Corporation income
• Other PTEs
 Taxed at the entity level
 Also taxed at individual level for residents only
BUSINESS TAX CHANGES

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Net Operating Losses (NOL)
• Conformity with 5 year carryforward for NOLs incurred in
taxable years beginning after 2016.
• Can only claim 50% of NOL during 2018 through 2022
 Applies even to cities that had an NOL provision
• May carryforward any “limited” NOLs 5 years
• NOLs applied on a pre-apportionment basis
• Pre-2017 NOLs are carryforward based on existing
municipality rules
 50% limitation does not apply
 Must first use pre-2017 NOLs before new NOLs
BUSINESS TAX CHANGES

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Example of NOL for city that did not previously allow NOLs
BUSINESS TAX CHANGES
2016 2017 2018 2019
Net Profit ($15,000) ($15,000) $80,000 $100,000
NOL Available (50%
applies)
n/a n/a ($7,500) ($3,750)
Taxable Income ($15,000) ($15,000) ($72,500) $96,250
NOL Available for CF $0 ($15,000) ($7,500) ($3,750)
Note: will never fully utilize 2017 loss

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Throwback Rule for Apportionment
• Current rule stays in place
 Not a “true” throwback rule
 For throwback not to apply, employee must solicit regularly at the
location of delivery
 Solicitation by affiliate employees does not apply
• Example: Mayfield Ohio business has employees solicit
sales in Nevada. Nevada has no income tax. Goods are
shipped from Mayfield
 Under “true” throwback, the sales would be considered a Mayfield
sale
 Under city rules, sales are considered Nevada sales
BUSINESS TAX CHANGES

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Consolidated Returns
• Corporate taxpayers can file a consolidated return if they
file a consolidated federal return
 Binding for five years
 To opt out after five years an election must be made in the 1st
year following the last year of the five year rule
• Nexus combined returns are not allowed under new law
 Does not negate agreements entered into before 2016
BUSINESS TAX CHANGES

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Consolidated Returns
• Affiliated Pass-Through Entities – Corporate groups
making the consolidated election may choose to include
or exclude 80% or more owned PTEs
• Forced Combination – a municipality may force a
taxpayer to file a consolidated return if they file a
consolidated federal return. The forced combination can
occur if
 No arms-length intercompany transactions AND
 There is a distortive allocation of profit
BUSINESS TAX CHANGES

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Gains/Losses Offsets
• Gains/losses from a resident’s PTE (except S
Corporations) and gains/losses generated by the
taxpayers own efforts may offset each other
 S corporation do not flow to resident unless they live in a
municipality that established the taxation of S corporation income
in 2002 or 2004.
• Business losses may not offset wages
INDIVIDUAL TAX CHANGES

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Gains/Losses Offsets - Example
Bill is a Madison Village resident, 1% tax rate
Bill has the following income/loss:
PTE #1 Income $15,000
PTE#2 Loss $20,000
Wages $10,000
Tax due is $100 ($10,000 *1%) - loss from PTE #2 will
offset Income from PTE#1, but cannot be used to offset
any wages
INDIVIDUAL TAX CHANGES

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Gains/Losses – Nonresidents
Gains/losses generated by more than one PTE cannot
offset for a nonresident individual
Municipality can only tax nonresident individual on their
portion of direct profit or loss in a municipality
INDIVIDUAL TAX CHANGES

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Resident or Nonresident?
Can you be a nonresident of OH but a resident of an Ohio
municipality?
Did not adopt Ohio’s bright-line test but said the individual
is a resident if:
• The individual was domiciled in the municipality on the last
day of the immediately preceding tax year or
• The tax administrator reasonably concludes residency
• Individual can rebut presumption of residency
INDIVIDUAL TAX CHANGES

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Resident or Nonresident?
25 Factors used to determine residency – no other factors are
considered. All factors need not be present.
Examples:
- Location of abodes and employment
- Driver’s license
- Voter records
- Location of banks
- Location of doctors
- Domicile proclaimed in a will
- Location of 25% or more of owned business ventures
INDIVIDUAL TAX CHANGES

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Income and Deductions
• Unreimbursed business expenses – deductible to the extent
deducted on federal return
• Gambling losses deductible if qualify as professional gambler
• Exempt Income – New law provides 19 types of exempt income.
• Intangible income remains exempt unless municipality taxed
intangible income on March 29, 1988 and approved by its voters
November 8, 1988 it may continue to do so
• Minors – based on decision of municipality – may exempt wages of
those under 18
INDIVIDUAL TAX CHANGES

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• Returns are due on the same date that applies for
personal income tax – April 15 (for calendar year
taxpayers)
 Applies to both individuals and net profit tax returns
• Federal extension automatically extends municipality
return – no notice is required to the city
 NOTE – if no federal extension there is no provision to provide a
municipality extension
• Payment of tax – no payment is required with return if the
amount due is $10 or less
• Considered timely based on “Mailbox rule” – must be
postmarked by the due date
MISCELLANEOUS

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• Estimated Taxes – required if annual tax will exceed $200
• Safe Harbors
 90% of current year tax liability, or
 100% of prior year tax liability, or
 The taxpayer was not domiciled in municipality as of January 1 of
tax year
• Statute of Limitations – to collect
 3 years after the tax was due or the return was filed (whichever
later), or
 1 year after any appeal of an assessment is finalized
• Statute of Limitations – to refund
 3 years after the tax was due or paid (whichever later)
MISCELLANEOUS

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• There are still significant items from a withholding
perspective that need to be worked out
• RITA and CCA are addressing but that does not mean
that all cities will comply
• Subscribe to Skoda Minotti’s blog for more information on
Municipal Reform
CONCLUSION

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• An entire section of Ohio Revised Code was inadvertently
removed from H.B.5 when Municipal Reform was enacted;
will be put back into the code section
• Currently, as the law was written, City Administrators can
be personally liable and the change would remove this
potential liability
• All returns are due April ‘15 – it does not matter if the
taxpayer had a fiscal year filing or not. The legislation
would correct this issue to address the due date of a city
return for a fiscal year taxpayer.
CONCLUSION

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PENDING CHANGES
• Under legislation there were no provisions for a taxpayer
to request an extension unless a federal extension was
requested.
• The provision would provide for a city extension even if
no federal extension was obtained.

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• All cities must enact new regulations adopting the
provisions of H.B.5.
• Both RITA and CCA are working to develop these uniform
regulations that the cities can then adopt.
PENDING CHANGES

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CONTACT US
Mary Jo Dolson, CPA
Partner
(440) 449-6800
mdolson@skodaminotti.com
Amy J. Gibson, CPA
Principal
(440) 449-6800
agibson@skodaminotti.com