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Multistate Tax Alert: Proposed Ohio Financial Institutions Tax

On March 16, 2012, Governor Kasich made public the legislative language for Ohio’s new tax on financial institutions, including nonbank financial organizations. Taxpayers need to understand the basic aspects of the proposed tax and consider how it might impact their business.

Our initial observations concerning this proposed tax on financial institutions are as follows:

  • Apportionment factor only takes into account gross receipts reported for purposes of FR Y-9, or call report, and the provisions are vague in some areas. For example:
    • How are dividends and other types of noncustomer revenue sitused?
    • Is trading revenue included in the factor?
    • What is the definition of “capital asset”?
  • Businesses must consider which entities are included in a FR Y-9 Report, a call report, or are considered to be a nonbank financial organization (i.e., a dealer in intangibles) because all those entities are subjected to this tax. Such entities are not subjected to the CAT.
  • A nonbank financial organization essentially expands the definition of the dealers in intangibles to also include such entities that do not have an Ohio office but would otherwise constitute a dealer in intangibles.
  • The tax commissioner is directed to draft rules regarding when an entity is considered to be “primarily engaged” in nonbank financial organization activities. This adds to the uncertainty of how the new tax will be applied.
  • The tax rate could increase or decrease automatically if receipts are 10% more or less than predicted after the first year, which leads to further uncertainty.
  • The current research and development credit contained in the corporation franchise tax (which is based on federal definition) is not authorized for this new tax.
  • Corporate subsidiaries of banks that previously paid under the nonbank corporation franchise tax and that now become subject to this new tax will lose the book benefit of any deferred tax assets related to NOL carryforwards or other income tax attributes.
  • Unlike the corporation franchise tax, the financial institutions tax is imposed for the privilege of doing business in the prior calendar year and a financial institution that exits Ohio before the end of the year must still pay the tax.

The following are some of the major highlights of the new tax proposal (based on the as introduced Version of H.B. 487):

The Tax – Required to be paid in each tax year for the privilege of doing business in Ohio for any portion of the calendar year preceding the tax year. Effective for tax years commencing on or after January 1, 2014.

Tax Year – The calendar year for which the tax is required to be paid

Taxable Year – The calendar year preceding the year in which an annual report is required to be filed

Taxpayer – “Financial Institution” is defined to include the following:

  • Bank organizations, including:
    • National bank
    • Federal savings association or federal savings bank
    • Bank
    • Banking association
    • Trust company
    • Savings and loan
    • Savings bank
    • Any foreign bank organization
    • Corporation organized under 12 U.S.C. 611
    • Agency or branch of a foreign bank
    • Entity licensed as a small business investment company under the Small Business Investment Act of 1958
    • A company chartered under the Farm Credit Act of 1933
    • Bank organization does not include:
      • An institution organized under the Federal Farm Loan Act
      • An insurance company
      • A credit union
  • A holding company of a bank organization
  • A nonbank financial organization:
    • Basically, a former dealer in intangibles, except that the requirement to have an Ohio office is not part of this definition
  • Financial institution does not include:
    • A diversified savings and loan company

Consolidation – Required in the following situations:

  • All entities included in the FR Y-9 form are consolidated
  • All entities included in a call report and not included in an FR Y-9 form
  • All nonbank financial organizations that are not included in a group described above if a nonbank financial organization:
    • Directly or indirectly owns or controls more than 50 percent of the ownership interests in one or more other nonbank financial organization
    • Controls more than 50 percent of the ownership interests in two or more nonbank financial organizations

Tax amount – Greater of:

  • Minimum tax: $1,000
  • The sum of:
    • 8 mills on the first $500 million of apportioned net worth
    • 2.5 mills of apportioned net worth exceeding $500 million

Apportionment:

  • Single factor – Based on gross receipts from services:
    • Gross receipts – All items of income, without deduction for expenses
      • Holding company – Gross receipts reported on FR Y-9
      • Bank organization – Gross receipts reported on the call report
      • Nonbank financial organization – Gross receipts include all items of income reported in accordance with GAAP
  • Situsing method – Similar to CAT, but not as detailed: Gross receipts are sitused to Ohio with respect to the benefit customers receive in Ohio from services of the bank compared to the customers’ benefit everywhere:
    • Physical location where the customer ultimately uses or receives the benefit of what was received shall be paramount in determining the proportion of the benefit in Ohio to the benefit everywhere
  • Gross receipts from the sale of capital assets are excluded from the apportionment calculation
  • Alternative apportionment is available upon request

Estimated tax:

  • Due dates are:
    • August 15 (minimum tax or one-third of estimate, whichever is greater) and November 15 (one-half of estimate) of the year preceding the tax year
    • February 15 (one-half of estimate) of the tax year
  • Administration, penalties and interest:
    • Tax return is due March 31 of each year, with a 90 day extension available
    • Law contains standard administration procedures
    • If taxpayer fails to pay any tax or file any return required under Chapter 57 of the Ohio Revised Code, the tax commissioner is required to report that to the attorney general and the attorney general is required to cancel the taxpayer’s authority to do business in Ohio
  • Tax credits:
    • Job creation credit – Refundable
    • Job retention credit – Refundable and nonrefundable
    • Bank organization assessment credit – Nonrefundable
    • Rehabilitation credit – Refundable
    • Ohio venture capital authority credit – Refundable
    • Qualified equity investment credit – Nonrefundable
    • Motion picture production credit – Refundable

For information about other proposed policies in Governor Kasich’s Mid-Biennium Review, please refer to our recent Ohio Statehouse Update: Governor Kasich unveils Mid-Biennium Review.

If you would like more information on this proposed tax on financial institutions, please contact:

Thomas M. Zaino
614.458.0030
tzaino@mcdonaldhopkins.com

Multistate Tax Practice

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. This can be a daunting task. We provide a broad range of state and local tax services to our clients, including tax planning, tax controversy, real estate tax abatement and exemption, and tax policy advocacy. With attorneys who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience for the benefit of our clients.

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IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments), was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction matter addressed herein.

© 2012 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.