What does state use tax apply to?

Generally, the purchase of tangible personal property is subject to use tax if sales tax is not applied at the time of purchase. Common items assessed during audits include:

• Office equipment, computers, scanners, printers, monitors
• Office supplies, such as paper, file folders, and writing instruments
• Office furniture, such as desks, chairs, lamps, and TVs
• Janitorial supplies, such as gloves, towels, mops, and buckets

Use tax also applies to certain taxable services, including:

• Landscaping and snow removal
• Installation and repairs
• Janitorial services and extermination
• Automatic data processing
• Storage
• Maintenance
• Employment placement

What doesn’t use tax apply to?

There are fifty-six (56) enumerated exceptions, with subparts, in the sales tax statute that also constitute exceptions to use tax. Each exemption is very specific and requires an analysis of facts and circumstances. Important exemptions worth mentioning include property acquired to be used directly in, or as an adjunct to, the manufacturing process; food; items sold to governments or charities; and certain utilities unless they are delivered by a broker.

Because of the fact-intensive nature of the exemptions, as well as the particular facts surrounding the uses of purchased products, it is important for businesses to collaborate with their professional advisors to determine use tax liability.

A Use Tax Audit: In a Nutshell

The Ohio Department of Taxation has increased its efforts to identify cases of missed use tax filings. If you receive notice of an audit, contact your professional advisor immediately. Do not ignore the audit notice. Audits can take years, cost thousands in fees, time, and lost opportunities, not to mention the final imposition of a tax liability, with associated interest and penalties. It is critical to enlist an experienced tax attorney that can help you defend an audit.

Compliance Tips to Consider

• Good business practices and document retention are critical to defending an audit. Businesses should document activities in a well-organized manner and properly maintain purchase orders, receipts, sales records, invoices, cancelled checks, and other records.
• An experienced attorney can provide guidance on tax compliance when purchase(s) are made that may be subject to use tax. It is always preferable to avoid an audit entirely by correctly and timely remitting state sales and use tax returns.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

The post State Use Tax for Small Businesses Overview appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Business and nonbusiness income are important concepts in Ohio tax law. Business income refers to the apportionable income among states where the taxpayer’s business is conducted, and it is generated from the business’ operations. Ohio nonbusiness income refers to the earnings allocated to the business’ state of domicile which is generally produced outside of normal business operations. Ohio law favorably taxes business income at a flat 3% and provides for a business income deduction. These tax treatments are not available to nonbusiness income.

Previously, the Ohio Department of Taxation’s position was that the sale of a business interest did not qualify as business income, subject to the favorable flat tax rate and business income deduction, despite the statutory definition of business income including proceeds from a liquidation of a business interest. Taxpayers that claimed business sales’ proceeds as business income, along with claiming the corresponding deduction, were challenged by the Department of Taxation, sometimes resulting in litigation.

To help resolve the disputed interpretations of liquidation proceeds and sales proceeds, HB 515 now provides two scenarios in which income from the sale of an equity interest in a business definitively constitutes business income eligible for the corresponding deduction: (i) if the equity sale is treated as an asset sale for federal income tax purposes (for example, an Internal Revenue Code §338(h)(10) election was made); or (ii) if the seller materially participated in the business activities during the year in which the business is sold, or in any of the five years preceding the sale. Satisfying either of these scenarios will enable the taxpayer to claim the business sales proceeds as business income in Ohio.

It is important to note that legislation is intended to be remedial, such that it will apply to petitions for reassessment, refund applications, and appeals pending on or after HB 515’s effective date, as well as to any sales transaction that is subject to audit on or after HB 515’s effective date.

If you are contemplating the sale of an Ohio business, we welcome the opportunity to speak with you and discuss the impact of HB 515 on your potential transaction, as well as how McCarthy Lebit’s Mergers & Acquisitions team can further assist you with a successful transaction.

Please reach out to request a consultation or call us at 216-696-1422.

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