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Advocates and opponents weigh in on HB 5

Legal News Reporter

Published: January 29, 2015

Changes are in the works for Ohio’s municipal income tax system. This after Gov. John Kasich signed the controversial Substitute House Bill No. 5 (HB 5), which proponents believe will help small businesses by standardizing local tax laws and forms.

“Ohio has more than 600 municipalities,” said Steven Dimengo, a partner at Buckingham, Doolittle & Burroughs. “Businesses have to deal with many different rules as to what the withholding requirements are and which of the hundreds of different forms used by the municipalities they have to file.

“The lack of uniformity has made it difficult to conduct business in the state,” said Dimengo. “Many organizations, including The Ohio Society of CPAs, the Ohio State Bar Association and the Ohio Chamber of Commerce, supported this legislation because they believe it will make the state more business friendly.”

“Advocates felt that more uniformity was needed among the political subdivisions, especially municipal corporations,” said Paul Dutton, a partner at Harrington, Hoppe & Mitchell, who handles corporate business transactions and public sector work. “They said that businesses that did work in multiple jurisdictions were being required to fill out too many forms, some that were unique to a specific community.

“For example, here in Mahoning Valley, Niles and Struthers, along with other municipal corporations, have their own forms but most of the municipalities will also accept generic forms,” said Dutton. “Nevertheless, each community requires a separate filing which is confusing and time consuming.”

The new law, which was signed by the governor in December 2014, takes effect in 2016.

“One of the measures in HB 5 creating a more business-friendly environment is increasing the casual entrant rule for employer withholding,” said Dimengo. “Under the new rule, employers will not be required to withhold municipal income tax for nonresident employees performing services in a municipality for no more than 20 days in a year.

“Withholding municipal income tax from employee wages can be a nightmare for an employer,” said Dimengo. “For example, if a contractor does business in 40 municipalities during the year, but is only in a given jurisdiction for a few weeks, the employer would have to figure out whether to withhold tax. If the employer gets it wrong, the penalties can be more than the tax itself.

“Under HB 5, employers are not required to begin withholding municipal income tax until the 21st day that the employee works on their project in a municipality and are not required to retroactively withhold tax on wages earned for the first 20 days,” said Dimengo. Prior to HB 5, he said employers had to collect and remit taxes for employees if they conducted business in a municipality for longer than 12 days.

“The 20-day casual entrant rule even applies to compensation earned by a sole proprietor reported on Schedule C, if the sole proprietor does not have a base of operation in the municipality where he/she worked temporarily,” said Dimengo.

In addition, a phase-in plan starting in 2017 allows companies to carry forward net operating losses (NOLs) for five years to offset taxes on future profits. Dimengo said most northeast Ohio municipalities already have such a policy but it is less common in the rest of the state.

“This provision is expected to be very helpful to small businesses,” said Dutton. “In the past if an entrepreneur lost money for three years and then showed a profit in year four, he/she could not deduct the losses from the profits and would have to pay taxes on all the proceeds from year four. Now a business owner can carry those losses forward for five years.”

Dutton said the new provisions would only impact cities and villages since unincorporated townships cannot charge income tax.

Dimengo said HB 5 also provides uniformity regarding the types of income that are subject to tax and those that are exempt. “Notably, exempt income will include social security benefits, retirement benefits, compensation for personal injury or property damage and alimony and child support, among others.

“HB 5 will also benefit businesses by specifically defining taxable income and its components for all municipalities,” said Dimengo. “Prior to HB 5, each municipality could have included different components in its tax base. Now, it is more straightforward as to what is and is not included.

“Proponents are happy about the bill’s passage but would have liked to have seen it go even further,” said Dimengo.

While the change may help businesses, opponents argue the law will deal municipalities a severe blow, cutting revenue back even further when local governments are already reeling from state funding cuts, the end of the tangible personal property tax and the abolition of the estate tax.

“HB 5 will cost the cities of the state of Ohio enormous amounts of revenue in the aggregate at a time when cities are badly hurting from previous revenue losses,” said 28th District Democratic Ohio Senate Tom Sawyer. “The aggregate loss is estimated between ten to hundreds of millions of dollars.

 “The problem is that we don’t really know what the actual amounts will be,” said Senator Sawyer, a former mayor of Akron.“The bill included a proposed legislative study to answer the question after the fact but those questions should have been answered before the enactment not after. This is no way to legislate.  Lawmakers should know the fiscal consequences of the bills they are enacting.”

“The two greatest challenges that I think municipalities are facing from HB 5 are the significant revenue loss and the General Assembly taking away the home rule authority from municipalities when it comes to administering their tax,” said Kent Scarrett, director of communications/lobbyist for the Ohio Municipal League.

“The Ohio Constitution grants cities and villages the right to administer their local government responsibilities and that includes the administration of the municipal income tax.

“The General Assembly has said no longer can municipalities use the Ohio Constitution home rule provision to administer their local tax responsibilities and that this will now be a responsibility of the state,” said Scarrett. “This is something that is very dangerous because we feel it violates the constitution’s home rule authority and it grows the authority of the state government over the domain of local government. I think this will generate future challenges and lawsuits.”

“Whether this law is viewed as good or bad depends upon whose ox is being gored,” said Dutton. “If you are a municipal corporation with a lot of transient business activity, there will be a loss of revenue. On the other hand, if you are a small business that engages in short durations of work in various municipalities, your employees will save some money on taxes and you won’t have to deal with the paperwork.

“As an example, if an employer is located in Niles, the employee lives in Youngstown and the business occurs in Warren for a period of eight days, a portion of the income tax withheld in Niles will go to Youngstown and Warren will get nothing,” explained Dutton.

Still, he cautioned the real impact would not be known until at least 2017.

“The law needs to be in effect for at least a year before it can be determined how much revenue will be lost,” said Dutton.