Vorys, Sater, Seymour and Pease, one of Ohio largest and most respected Ohio law firms, put out an an analysis of Governor Kasich’s new sales tax plan yesterday. Their conclusion? “This tax expansion will hit Ohio businesses most directly and hardest.”
“If you can think of or describe an act rendered for a fee that is not expressly excluded, it’s a taxable service under the bill,” says the study. They also note that this type of broadening has only been attempted a few times before and “Each time, the effort failed for political, economic, practical, compliance and/or enforcement reasons.”
One of the biggest impacts on businesses will come in the form of a new tax on commercial real estate rents. For many small businesses, rent is their largest expense. John Kasich plans to increase that expense by an addition 5%.
Businesses will now be taxed on the credit processing and bank merchants fees they already pay to credit card companies for accepting their cards. ”All merchants understand the big bite out of sales receipts this fee means,” says the study. ”That cost just got more expensive by the amount of sales and use tax”
Kasich’s plan contains no exemption for the resale of services or for equipment used in providing services. While businesses selling tangible personal property have a sales tax exemption when purchasing the items they sell or the components of the items they assemble or manufacture, services will have no such exemption.
Businesses providing services will also receive no exemption for purchasing the equipment they use in their business or for subcontracting to other service providers. The study uses the example of a software developer who has to pay taxes on the computers she uses for her business and must pay a sales tax to a subcontractor who is hired to assist with any work. According to the authors “the tax on tax pyramiding effect will be extraordinarily heavy.”
Sales taxes will now be extended to the transfer of any digital products as well as to intangible property like “Sales or uses of trademarks, copyrights, patents, franchises and licenses.” The authors express serious concern in this area: ”We know of no other state that has ever attempted to expand its sales and use tax base to include intangible property. On its face, it would impose tax on sales of stock, bonds, commercial paper, money markets, mutual funds and business investments of all kinds.”
The authors also express concern over the lack of guidance in the bill on where and to whom taxes on intangible personal property should be paid. ” It’s a nightmare,” they conclude.
They also worry that the lack of exemptions for sales transactions between members of affiliated groups ”will hit businesses with Ohio headquarters particularly hard.”
The study concludes that Kasich’s new sales tax proposal “will have drastic tax effects on each business in Ohio in the form of new taxes to pay and/or collect” and compliance may require major investments in new hardware and software, like point-of-sale and invoicing systems, and will most certainly require huge investments in time, effort and cost to review all contracts, processes and internal protocols.
When John Kasich said he wanted the state to “move at the speed of business” we all thought he was talking about making government faster. Judging by his new tax plan, it seems he meant slowing down business instead.