A controversial tax attempts to circumvent long-standing nexus standards.
Ohio’s controversial Commercial Activities Tax (“CAT”) is an attempt to skirt around the nexus standards for subjecting businesses to state income taxes.
Effective July 1, 2005, Ohio enacted CAT, which is based on gross receipts rather than income. The CAT legislation includes a nexus test that applies to Taxpayers exceeding a specified threshold of sales, but that have no physical presence in Ohio. It also includes an election to file on a consolidated basis, which means that a business would have to report on behalf of all companies in its affiliated group, even those companies without substantial nexus in Ohio, a round about way of wiping out the constitutional protection all businesses are entitled to.
Gross receipts taxes guarantee a steady flow of income for a state. They are not based on net income, so it is difficult for a company to reduce its tax liability by trying to eliminate gross receipts.
Tax professionals agree that this tax will be challenged by Ohio Taxpayers and closely scrutinized by other states, with some even considering proposing similar legislation. Only time will tell, as states are hesitant to make drastic changes to their tax structures. However, if Ohio succeeds, we can expect other states to quickly follow.
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