Tax Committee February 12, 2013

Table of Contents Page #

Agenda 2 Guest Bios 3 OMA Public Policy Report 4 OMA Tax News From The Quarter 7 OMA Tax Legislation 10 OBM Monthly Financial Report 11 House Ways and Means Committee Roster 35 Senate Ways and Means Committee Roster 37 CAT Refund Press Release 38 CAT Refund Facts and Figures 39 House Bill 472 Analysis 41 House Bill 510 Counsel Report 47 House Bill 5 Counsel Report 53 Beaver Excavating Counsel Report 57 State Operating Budget Highlights 59 State Operating Budget Tax Report 88 Sales Tax for Local Governments 90 Tax Reform Facts 94 Ohio Department of Tax Presentation 96

2013 Tax Committee Calendar Meetings will begin at 10:00 a.m. Tues., Feb. 12, 2013 Tues., June 04, 2013 Tues., Nov. 12, 2013

OMA Tax Committee Meeting Sponsor:

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OMA Tax Policy Committee February 12, 2013

AGENDA

Welcome & Self-Introductions: Allan Thompson A K Steel Corporation

Public Policy Report

Rob Brundrett OMA Staff

OMA Counsel’s Report

Mark Engel, Bricker & Eckler LLP OMA Tax Counsel

Discussion

State Operating Budget

Guest Speakers Nick Cipiti Director of Policy and Budget Ohio Department of Taxation Charlie Rhilinger Chief Counsel – Tax Appeals Ohio Department of Taxation Steve Russell Sr. Audit Manager Ohio Department of Taxation

Committee Meetings begin at 10:00 a.m. and conclude by 1:00 p.m. Lunch will be served. Register for committee meetings online at www.ohiomfg.com, click on Events. Additional committee meetings or teleconferences, if needed, will be scheduled at the call of the Chair.

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Ohio Department of Taxation Nicholas Cipiti, Deputy Tax Commissioner, Ohio Department of Taxation Nicholas (Nick) Cipiti is deputy tax commissioner for policy and budget for the Ohio Department of Taxation. A native of the Cleveland area, he received his bachelor’s degree in business from Kent State University, and went to work for Xerox. He subsequently earned an MBA from John Carroll University and was offered a position in Columbus in the accounting/finance department of the Ohio Bar Title Insurance Company where he worked his way up to executive vice president in charge of two subsidiaries and operations in four states. Nick later worked for the Ohio Bankers Association as vice president and executive vice president of its subsidiary, the Ohio Bankers Service Corporation. He then started his own business, providing accounting, tax preparation and financial advising services to individuals and small businesses. He also owned a Liberty Tax Service franchise. Nick’s community service includes charter member of Clintonville Rotary, Kiwanis, American Red Cross Columbus chapter board member, Columbus Reads mentor and adjunct instructor of business at Columbus State Community College. He has three children. Daughter Sandra is an accountant, and his two sons, Todd and Nicholas, both served in the U.S. Marine Corps in the Middle East.

Charles W. Rhilinger, Jr., Office of Chief Counsel, Ohio Dept. of Taxation Charlie Rhilinger is an executive administrator in the Office of Chief Counsel for the Ohio Department of Taxation. He is responsible for overseeing the Tax Appeals Division and the Bankruptcy Division. Prior to his transfer to the Office of Chief Counsel, Charlie was the manager of the department’s Los Angeles district office. He received an LL.M. in Taxation from the University of San Diego and is a member of the California Bar. Steven B. Russell, Assistant Administrator, Ohio Department of Taxation, Audit Division Steven (Steve) Russell began his career at the Ohio Department of Taxation almost 20 years ago. For the last 17 years, he has specialized in sales and use tax auditing which includes experience with manufacturers, construction contractors and retailers. Prior to becoming assistant administrator, Steve was a part of the Audit Division’s Review and Support Group where he helped administer the direct pay authority program. As assistant administrator, he is responsible for forming Audit Division practices and providing technical guidance. Steve is also an audit representative to the Streamlined Sales Tax Project for the state of Ohio. He received his bachelor’s degree in accounting from Otterbein College in 1991.

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TO: OMA Tax Committee FROM: Rob Brundrett DATE: February 12, 2013 SUBJECT: Tax Policy Highlights Overview The new General Assembly was sworn in the first week of January. The Ohio Senate begins the 130th General Assembly under new leadership. Keith Faber (R-Celina) was selected by his Republican colleagues to become the next Senate President. President Faber served as President Pro Tempore under President Niehaus in the 129th General Assembly. The Senate leadership team changed at the number two position as well, with Senator Chris Widener (R-Springfield) moving into the President Pro Tempore position and leaving his former post as Chairman of the powerful Finance Committee. Senators Tom Patton (R-Strongsville) and Larry Obhoff (R-Medina) round out the Republican leadership team. The Senate Democrat leadership posts remained the same with Senator Eric Kearney (D-Cincinnati) remaining as the Minority Leader. His leadership team is made up of Senators Joe Schiavoni (D-Boardman), Nina Turner (D-Cleveland) and Edna Brown (D-Toledo). On the House side Bill Batchelder (R-Medina) remains Speaker of the House. His leadership teams added a new member to replace the term limited Lou Blessing. Jim Buchy a longtime legislator (R-Greenville) moves in to the Assistant Minority Whip position. The rest of Speaker Batchelder’s team consists of Matt Huffman (R-Lima), Barbara Sears (R-Maumee), John Adams (R-Sidney) and Cheryl Grossman (R-Grove City). The House Democrat leadership teams remains the same with Representative Armond Budish (D-Beachwood) reelected as Minority Leader. His team consists of Matt Szollosi (D-Toledo), Tracy Maxwell Heard (D-Columbus) and Debbie Phillips (D-Athens). State Financial Condition Real GDP expanded at an annual rate of 3.1% in the third quarter of 2012, up from the estimate of 2.0% and growth of 1.3% in the second quarter. The quarter beat predictions. Ohio total nonfarm payroll employment increased by 1,600 jobs in November and is up by 103,200 jobs year-to-date. The Ohio unemployment rate decreased from 6.8% to 6.7% in December and stands a full percentage point below the national unemployment rate. Leading economic indicators have weakened recently, but remain consistent with uninterrupted growth at a modest pace across the country and especially in Ohio.

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State Budget Proposal The Governor released his state budget proposal on February 4. The proposal contains a new income tax cut and service tax structure. The plan moves the tax base further from income and puts more of the burden on consumption based taxes. Income tax The Governor’s income tax cut has two parts. The first part would cut the income tax for all payers by 20 percent. This would reduce the top marginal tax rate from 5.925 percent to 4.74 percent. The cut would be phased in over three years. The second part of the income tax would be targeted at small businesses. Owners of pass through entitites would be allowed a deduction of 50 percent of their annual income up to $750,000 with the deduction capped at $375,00. Sales tax The Governor’s plan would expand the sales tax base to include a wide range of services but would exempt certain services essential to all families. The overall sales tax rate for Ohio would drop from 5.5 percent to 5.0 percent. Severance Tax/Income Tax Reduction The Governor is also pushing an increase in the severance tax. Last year he attempted to raise the severance tax on horizontal wells operating in Ohio and tied that income generated to a fluctuating income tax reduction. This plan introduced in the budget would also raise the severance tax but is not tied to a fluctuating drop in income tax rates. The proposed income tax rate in this budget is permanent at 20 percent. Lame Duck Legislation House Bill 601 House Republicans introduced House Bill 601 which was billed as an attempt to create more uniformity amongst local government income taxes. The bill received only one hearing in early December. The House decided not push the issue at the end of the session and the coalition of business groups supporting the bill including the OMA agreed not to push until the next General Assembly. Representatives Grossman and Henne have reintroduced the bill in this General Assembly (HB 5). The House has designated this bill a priority issue. Local Governments have mobilized and are fighting the legislation and have made inroads with many of their local legislators. As of now the bill appears to be headed for a major fight. House Republicans are considering putting the bill on hold after it receives sponsor testimony until after the House passes the state operating budget. Senate Republicans have not indicated whether this is a priority issue or not for their caucus. There is rumored to be at least two other bills with Republican support that might be introduced with support from local governments. House Bill 510 During lame duck the General Assembly passed House Bill 510 which was originally part of the Governors’ Mid-Biennium Review bill package. The legislation reforms and updates the manner in which Ohio taxes its financial institutions. The bill creates a new financial institutions tax replacing the corporation franchise tax and tax on dealers in

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intangibles. The modernization on how these institutions are taxed lowers the rate in which they are taxed. House Bill 472 During lame duck the General Assembly passed HB 472 that included a midnight amendment providing a new carve out in the Commercial Activities Tax (CAT). The bill allowed businesses who operate precious metal smelters to be exempt from the CAT. This amendment appears to favor a single business in southeast Ohio. CAT Refunds The Governor announced in December that the Department of Taxation is changing its policies and procedures regarding CAT overpayments. Current Ohio law requires businesses to request a refund. The law does not obligate the state to notify a taxpayer if a refund is available. The Department is now researching to see if companies have made overpayments and are sending refund checks regardless if a company has requested their refund. Estate Tax Repeal The Estate Tax was repealed as a rider to the state budget last General Assembly. The repeal went into effect January 1, 2013. The OMA advocated in support of repeal. This was a significant policy gain during the last General Assembly. General Assembly Committee Assignments The Ohio House and Senate have made their committee assignments for the 130th General Assembly. Both the House and Senate have returned the previous Ways and Means Committee Chairmen. Peter Beck and Tim Schaffer will be back with gavel in hand for the 130th. Both committee chairs could play a large role in the tax reform package the Governor has proposed in his budget. We will continue monitoring the both Ways and Means Committees for any news and updates.

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Tax

Kasich Taxation Innovation

On February 4, as he unveiled his biennial budget, Governor Kasich proposed a 50 percent personal income tax exclusion from the first $750,000 of income for owners of pass-through entities. The OMA called the governors’ plan “truly innovative.”

“The effect of this specific proposal would be to free up much-needed working capital for small businesses across Ohio, increasing job-creating investment in those companies. The proposed personal income tax reduction also would help entrepreneurs in early-stage businesses where the risks are high and working capital often is in short supply,” said OMA president Eric Burkland in a release to the media.

The governor’s proposal includes a 20 percent reduction in all personal income tax rates. The governor pays for the personal income tax rate reductions by broadening the sales tax base to services and increasing the state severance tax on the extraction of oil and gas using horizontal drilling. Broadening the sales tax base also allows the governor to lower the sales tax rate from 5.5 percent to 5 percent.

OMA tax counsel Mark Engle of Bricker & Eckler LLC writes in a summary of the governor’s proposal: “This proposal reflects a policy decision to shift Ohio’s revenue sources from income and investment to consumption.” This is a welcome policy decision for Ohio manufacturing. 2/6/2013

Contact Your Legislator. Now.

Manufacturers who support Governor Kasich’s call for reform of the personal income tax should immediately contact their state representatives and senators. Legislators are being bombarded by special interests that oppose the reforms. They need to hear from business leaders about the positive effect the governor’s proposal will have on the Ohio economy. Find your state legislators here. Please copy Rob Brundrett on any correspondence. Rob manages OMA’s Tax Committee and will head up the manufacturing tax advocacy effort in the General Assembly. The Tax Committee meets on Tuesday, February 12. All OMA members can register here for phone or in-person attendance. 2/6/2013

Municipal Income Tax Reform Legislation

Reintroduced

Among the priority bills of the House of Representatives is a municipal income tax reform bill from the last General Assembly. Re-introduced by Representatives Cheryl Grossman (R-Grove City) and Michael Henne (R-Clayton), House Bill 5 seeks to make Ohio’s municipal income taxes more uniform across the more than 600 taxing municipalities. The OMA is participating in a coalition that supports uniformity to ease the administrative burden on firms operating in multiple municipalities. The bill received heavy criticism last year from local governments and the Ohio Municipal League, which fear a loss of revenue and control. Join the OMA Tax Committee on February 12 to learn how to help enact House Bill 5. Tax Commissioner Joe Testa will present perspectives on this bill as well as other tax policy proposals in the governor’s newly proposed budget. Register here. 1/31/2013

JobsOhio (Finally) to Issue Bonds It was reported this week that JobsOhio will move forward in issuing $1.5 billion in bonds to complete its leasing of Ohio’s wholesale liquor profits, which it plans to use in its economic development activity. The private agency announced it received a favorable rating from two bond agencies. JobsOhio continues to face a legal threat as it awaits an Ohio Supreme Court decision that will determine whether several Democratic legislators and Progress Ohio, a policy think tank, have standing to sue the organization to prevent its use of liquor profits. 1/10/2013

Fiscal Cliff Legislation – Experts Run Down What

Happened to Taxes

OMA Connections Partner, GBQ Partners, reports that the bill that averted the"fiscal cliff" passed by the U.S. House and Senate provides greater certainty with regard to income tax rates, which "hopefully will allow business owners and individuals an opportunity to plan for the future. In many respects the deal is not a temporary fix, as many thought might happen at the last minute. Changes to tax rates on ordinary income, estate tax, dividends, capital gains, and the Alternative Minimum Tax patch, are intended to be permanent in nature." Here's their rundown.

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And another OMA Connections Partner, Plante Moran, offers this version of the tax impacts. 1/2/2013

Tangible Property Regulation Delayed - Taxpayers May Benefit from Early Adoption

OMA Connections Partner, Plante Moran, reports that the IRS has deferred the effective date of new tangible property regulations from tax years beginning on or after January 1, 2012, to tax years beginning on or after January 1, 2014. The new regulations were issued in late December 2011 to guide taxpayers on how to account for amounts paid to acquire, produce, or improve tangible property.

With the announced delay in the effective date, taxpayers may benefit from the early adoption of either the entire regulations or select provisions. Plante Moran offers a summary of the new guidance and potential planning opportunities and a comprehensive article covering the tangible property regulations. 12/18/2012

Legislature Doles Out More CAT Exemptions for Christmas

As the General Assembly was winding down late last week, the Senate slipped an amendment into House Bill 472 that exempts precious metal smelters from the commercial activity tax (CAT). The amendment apparently is targeted to benefit a smelter in southeast Ohio. This latest carve-out emphasizes the importance of defending the CAT during the budget process next year. 12/20/2012

Ohio Refunding Overpaid CAT

Earlier this week, Governor Kasich and Tax Commissioner Joe Testa held a press conference to announce a new policy whereby the Ohio Department of Taxation (ODOT) is proactively identifying business tax refunds and contacting taxpayers so that they may request those funds back from the State of Ohio. The initial focus is on overpaid commercial activity tax (CAT).

OMA Connections Partner, GBQ Partners, offers this summary of the potential opportunity. 12/20/2012

Beaver Attacks CAT Late last week the Ohio Supreme Court issued its ruling on Beaver Excavating Co. v. Testa. In a 6-1 decision the Court ruled that the state could no longer use the money generated by the commercial activity tax (CAT) on sale of motor vehicle fuel. The court found that the state was violating the constitution's

ban on using gas tax revenues for non highway purposes. Going forward the state must use this revenue for road projects. The ruling is estimated to shift $140 million a year to road projects. Here's a summary by OMA tax counsel Bricker & Eckler LLP. 12/13/12

OMA Calls on Congress to Hold the Line on Federal Payroll Taxes On December 10, the OMA and other national and state business organizations urged leaders in Congress not to increase the Federal Unemployment Tax (FUTA). The letter asked congressional leadership to maintain current FUTA rates and base, protect employer financed federal unemployment trust fund accounts, and eliminate restrictions on state solvency measures. The business coalition urged Congress to prevent any further increases to the tax burden and provide states the flexibility to address state unemployment trust fund solvency issues. 12/13/12

Uniform Municipal Income Taxes?...Not so Fast

This week the Ohio House of Representatives heard sponsor testimonies on House Bill 601, which would create more uniformity throughout Ohio’s various municipal income tax codes. While the bill has the support of a broad coalition of business groups including the OMA, cities continue to oppose the bill arguing that the bill erodes home-rule and reduces local income tax revenues.

The sponsors of the bill indicated that they are not seeking passage of the legislation in the lame duck session, but instead want to engage all stakeholders in a public forum in the hope that they can pass the bill in the next General Assembly. The House has shown interest in continuing hearings through the lame duck session to hear from the various stakeholders. 11/29/2012

Thompson Takes the Reins

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Allan Thompson, Manager, Corporate Taxes, AK Steel Corporation, was installed as chairman of the OMA Tax Committee this week. Allan takes over from Anthony Long, Assistant Counsel, Honda of America Manufacturing. Before passing the gavel to Allan, Tony recounted the momentous period that saw the elimination of personal property tax, elimination of corporate franchise tax, 21% reduction of personal income tax, elimination of estate tax, and defense of the broad-base, low-rate commercial activity tax.

“OMA members owe Tony a debt of gratitude for his decade of tax policy leadership and I look forward to working with committee members to build on the strong foundation,” said Chairman Thompson.

The committee discussed: a proposal to make municipal income tax collection practices more uniform; a proposal to revise to the Board of Tax Appeals processes; and principles for potential restructuring of severance taxes on “fracked” oil and gas production.

Governor Kasich’s budget director, Timothy Keen, visited with the group about the upcoming state budget. Contact the OMA’s Rob Brundrett at any time to discuss tax matters of concern or interest. 11/16/201

A Snapshot of the New Auditing Clarity Standards

According to OMA Connections Partner, GBQ Partners LLC, the auditing world has been abuzz lately with the Clarity Standards, an initiative the American Institute of CPAs has been working on since 2004; the new standards are finally effective for December 31, 2012 year-ends. The goal is to converge the U.S. generally accepted auditing standards (GAAS) with the international standards on auditing, making GAAS easier to apply for nonpublic companies and making the standards more consistent throughout the world.

There are two significant differences under the new standards that will be clearly visible to management of an audited entity. They relate to the auditor's opinion report and the management representation letter. These differences are designed to help the auditor better communicate with management. Read more. 11/13/2012

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Taxation Legislation Prepared by: The Ohio Manufacturers' Association

Report created on February 8, 2013

HB5 MUNICIPAL CORPORATIONS INCOME TAXES (GROSSMAN C, HENNE M) To revise the laws

governing income taxes imposed by municipal corporations. Current Status: 2/13/2013 - House Ways and Means, (First Hearing)

All Bill Status: 1/30/2013 - Referred to Committee House Ways and Means 1/30/2013 - Introduced

State Bill Page: http://www.legislature.state.oh.us/bills.cfm?ID=130_HB_5

HB24 TAX EXPENDITURE REVIEW COMMITTEE (BOOSE T) To create a Tax Expenditure Review

Committee for the purpose of periodically reviewing existing and proposed tax expenditures. Current Status: 2/6/2013 - Referred to Committee House Ways and Means All Bill Status: 2/5/2013 - Introduced State Bill Page: http://www.legislature.state.oh.us/bills.cfm?ID=130_HB_24

HB26 SALES-USE TAX EXEMPTION (MAAG R) To exempt from sales and use taxes the sale or use

of investment metal bullion and coins. Current Status: 2/6/2013 - Referred to Committee House Ways and Means All Bill Status: 2/5/2013 - Introduced State Bill Page: http://www.legislature.state.oh.us/bills.cfm?ID=130_HB_26

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1312111009080706

6

3

0

-3

-6

-9

Source: Blue Chip Economic Indicators, Jan-13

Real GDPPercent Change, Annual Rate

Bars: 1-QtrLines: 4-Qtr

Forecast

January 10, 2013

MEMORANDUM TO: The Honorable John R. Kasich, Governor

The Honorable Mary Taylor, Lt. Governor

FROM: Timothy S. Keen, Director

SUBJECT: Monthly Financial Report

ECONOMIC SUMMARY

Economic Performance Overview

Real GDP growth expanded by 3.1% in the third quarter of 2012, up from the initial

estimate of 2.0% and growth of 1.3% in the second quarter.

U.S. total nonfarm payroll employment increased by 155,000 jobs in December, and

the October and November increases were revised up by a total of 14,000 jobs. The

unemployment rate was unchanged at a revised 7.8%, compared with an average of

8.1% during the previous twelve months.

Ohio total nonfarm payroll employment increased by 1,600 jobs in November and is

up by 103,200 jobs year-to-date. The Ohio unemployment rate decreased from 6.9%

to 6.8% in November and stands a full percentage point below the national

unemployment rate.

Leading economic indicators have weakened recently, but remain consistent with

uninterrupted growth at a modest pace across the country and especially in Ohio.

Economic Growth

Real GDP growth was revised up to 3.1% for the

third quarter of 2012 from the initial estimate of

2.0%. The economy grew by 1.3% in the second

quarter and 2.0% in the first quarter. Excluding a

large accumulation of unsold goods and a large

increase in federal defense spending – neither of

which is likely sustainable – the growth rate was

1.7%. Compared with a year earlier, real GDP

was higher by 2.6%. Since the expansion

officially began in the second quarter of 2009, real

GDP has advanced at an annual rate of 2.2% – the

slowest pace during the first thirteen quarters of

any expansion during the post-war period.

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The increase in real GDP in the third quarter primarily reflected positive contributions from

consumer spending, business inventories, federal government spending, residential fixed

investment, and exports. These positive contributions were partly offset by negative

contributions from nonresidential fixed investment. Imports, which are automatically counted in

spending within each category and are then backed out by being subtracted from the total, were

little changed.

Real final sales was little changed during the quarter, rising 2.4%, up from 1.7% in the second

quarter and staying at the top of the range of quarterly growth rates during the last eighteen

months. Since the expansion officially began in the second quarter of 2009, real final sales has

increased at an annual rate of only 1.6% – the slowest pace by a notable margin among

expansions in the post-war period that have lasted for at least thirteen quarters.

The acceleration in activity during the third quarter resulted primarily from a build-up in

business inventories and greater federal government spending. Consumer spending made only a

small contribution to faster growth, and fixed investment in equipment and software declined for

the first time since the end of the recession in 2009. The positive factors in the third quarter –

especially the increase in inventory accumulation and the jump in federal defense spending –

likely did not make positive contributions in the fourth quarter. In fact, reduced consumer

spending and business investment related to Hurricane Sandy are expected to shrink fourth-

quarter growth.

The consensus among forecasters is that real GDP expanded at about half the third quarter pace

in the fourth quarter. Forecasters project that growth will continue at a modest pace below 3.0%

throughout in 2013, according to the January Blue Chip Economic Indicators consensus.

Hurricane Sandy is expected to keep fourth-quarter growth 0.25-0.50 points lower than

otherwise. Although repairs to storm damage

will add in noticeable ways and amounts to

economic activity, any incremental spending is

likely over time to displace other spending that

would have, but now will not, take place,

producing no net advantage – and almost

certainly a disadvantage – to longer-term

growth.

Leading indicators remain consistent with slow

but uninterrupted growth through 2013. After

four consecutive weekly decreases, the 4-week

moving average of the Weekly Leading Index

increased in each of the five weeks ending at

the end of 2012. The 6-month smoothed rate of

change improved to 4.9% from a low of 3.1%

reached in mid-November.

13121110090807

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140

130

120

110

100

ECRI Weekly Leading IndexIndex 1992 = 100, 4-Week Moving Average

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- 3 -

The composite Leading Economic Index from the Conference Board has traced out a see-saw

pattern during the eight months ending in November to stand only marginally higher than in

March. The 6-month smoothed rate of change was 0.9% in November, down from a peak of

11.0% in March 2010, but still above zero and consistent with uninterrupted economic growth,

albeit at a modest pace.

The ratio of the coincident index to lagging index – itself a leading indicator – has been even

weaker recently. The ratio decreased by 0.3% in November after falling in six out of the

previous ten months. The ratio has had a long lead time at business cycle peaks in the past. The

recent pattern is consistent with the current slow pace of economic growth, but not necessarily

with a near-term recession, particularly in context with other leading indicators.

Despite slow growth at the national level over the summer, the Ohio economy continued to make

progress through November. The Ohio Coincident Economic Index, compiled by the Federal

Reserve Bank of Philadelphia, increased 0.2% in November for the 35th

increase in a row. The

state coincident index combines four state-level indicators to summarize current economic

conditions. The four components are nonfarm payroll employment, average hours worked in

manufacturing, the unemployment rate and real wage and salary disbursements.

The 12-month rate of change in the Ohio Coincident Economic Index was 5.4% in November –

up from a recent low of 3.1% last October, but off the peak of 5.9% in August. The rate of

change was notably lower during the most recent four months than during the previous four

months, but the index was higher than one month and three months earlier in 45 states. The

diffusion of increases and decreases across states has been a reliable indicator of changes in

economic growth in the past, and currently points to uninterrupted growth in the Ohio and

national economies.

The companion Ohio Leading Economic

Index remained below 2.0% for the fifth-

straight month in November. The index, which

is compiled by the Federal Reserve Bank of

Philadelphia, is designed to predict the rate of

increase in the coincident index during the next

six months. The index exceeded 3.0% during

April-June. Index values have been revised

significantly on occasion, but as it stands the

recent pattern is consistent with ongoing

expansion of the Ohio economy through the fall

and winter. The diffusion of positive readings

has been broad in recent months, with the index

being greater than zero in 48 states in October

and 49 states in November.

121110090807

6

4

2

0

-2

-4

-6

Source: Philadelphia Federal Reserve Bank

Ohio Leading Economic IndexProjected 6-Month Rate of Change, %

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13121110090807

12

10

8

6

4

2

0

Unemployment RatePercent

U.S. (through Dec)Ohio (through Nov)

Employment

National nonfarm payroll employment

increased by 155,000 jobs in December, and the

October and November increases were revised

up by a total of 14,000 jobs. Employment

growth has averaged 160,000 per month during

the last six months, compared with an average

gain of just 67,000 during the three months

before that. The continued growth in payrolls

during December indicates that the economy

continued to expand through the fall, albeit at a

modest pace.

The unemployment rate was unchanged at

7.8%, as the November level was revised higher

by 0.1 percentage point. The December level

was 0.9 percentage points lower than a year ago

and under the average of 8.2% during the

previous twelve months. During the past year,

the labor force increased by 1.566 million

people, and the number counted as unemployed

decreased by 843,000. While still

extraordinarily high, the broadest measure of

unemployment held steady at 14.4% in

December, down from 15.2% a year ago. The

average and median durations of unemployment

both declined significantly, but remained well

above their respective norms.

The length of the workweek edged higher by

0.1 hours overall and was unchanged in

manufacturing during December.

Manufacturing overtime hours increased by 0.1

hour. As a result, aggregate hours worked

increased by 0.5%. Average hourly earnings

increased by 0.3% to 1.7% above the year

earlier level, compared with inflation of 1.8% during the twelve months ending in November.

Major sectors posting gains in employment during December included education and health

services (+65,000), leisure and hospitality (+31,000), construction (+30,000), manufacturing

(+25,000), and professional and business services (+19,000). Temporary help employment,

which is viewed as somewhat of a leading indicator of total employment and is included in

professional and business services, slipped by 1,000 jobs, continuing what is now a 5-month

string of modest growth. Government employment declined by 13,000 jobs. Information was

down by 9,000 jobs, and trade, transportation and utilities was pulled down by an 11,000

decrease in retail employment.

13121110090807

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100

95

90

85

Nonfarm Payroll EmploymentJanuary 2007 = 100

Ohio (through Nov) U.S. (through Dec)

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- 5 -

Ohio nonfarm payroll employment increased by 1,600 jobs in November, adding to the 17,900

job gain in October. Employment is up by 103,200 jobs year-to-date. The Ohio unemployment

rate decreased from 6.9% to 6.8% in November – the second consecutive reading below 7.0%.

The rate is down from 8.1% last November and a full percentage point below the national

unemployment rate.

Month-to-month changes in Ohio employment across sectors were mixed during November.

Employment increased in trade, transportation and utilities (+8,000), manufacturing (+4,700),

and in financial activities (+2,000). Employment decreased in leisure and hospitality (-5,400),

other services (-3,000), government (-2,100), and in professional and business services (-1,800).

During the twelve months ending in November, Ohio employment increased in all major sectors

except government (-2,200) and natural resources (-800). The largest year-over-year

employment increases occurred in education and health services (+25,100), trade, transportation

and utilities (+20,000), professional and business services (+18,000), and manufacturing

(+15,300). Private sector employment increased by 102,600 jobs, or 2.4%.

Among the contiguous states, year-over-year employment growth was strongest in Indiana,

Kentucky, (+2.1%) and Ohio (+2.0%), followed by Pennsylvania and Michigan (+0.8%).

Employment decreased 1.8% in West Virginia. Year-over-year growth in manufacturing

employment was 2.4% in Ohio. Among the contiguous states, manufacturing employment

increased in Indiana (+4.7%), Michigan (+3.5%), Pennsylvania (+1.5%), and Kentucky (1.2%)

and decreased in West Virginia (-5.5%). Also contributing to the decline in total employment in

West Virginia was a large decline in mining and logging employment.

For the Ohio and contiguous state region, employment increased 1.3% during the twelve months

ending in November, compared with a 1.4% increase outside the region. Growth in regional

employment has outpaced growth outside the

region since the trough in employment in

February 2010 by 3.8% for Ohio and contiguous

states to 3.6% for all other states.

Consumer Income and Consumption

Household income and spending picked up in

November after a miss in October. Personal

income and disposable personal income each

increased 0.6% after a dip to 0.1% in October in

each case. Real disposable personal income

jumped by 0.8% in November after declining on

balance during August-October. Personal

consumption expenditures increased 0.4% in

November, and the October decline was revised

up from -0.2% to -0.1%, leaving the saving rate

little changed at 3.4%. The saving rate remains

well below the peak of 6.7% reached during the

financial crisis in May 2009.

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-6

Real Income and Consumption12-Month % Change

Real Disposable Personal IncomeReal Personal Consumption Expenditures

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On balance since January, income growth has increased in absolute terms and relative to

spending growth. For example, year-over-year growth in real disposable personal income

increased from -0.2% in January to 2.5% in November while growth in real personal

consumption expenditures was little changed at 2.1%, up slightly from 1.8%.

The rebound in consumption during November reflected a 2.7% increase in spending on durable

goods. Services increased 0.5%, while non-durable goods fell 1.0%. Fueling the rise in durable

goods spending was an 8.7% increase in purchases of light motor vehicles to an annual selling

rate of 15.5 million units – the best since January 2008. The pace of sales slowed a bit in

December to 15.3 million units, as the boost from post-storm sales in November faded.

Holiday shopping reflected the recent moderate

trends in employment in earnings. Chain store

sales increased 0.7% and 0.6% in the weeks

ending December 22nd

and December 29th

,

respectively. Compared with a year earlier,

sales were higher by 2.7% during the week

ending December 29th

. Better job growth and a

notable decline in gasoline prices from

September through year’s end probably

contributed positively to spending.

The mood of consumers deteriorated

significantly in December, reflecting soured

views of the outlook, but stable assessments of

current conditions. The Conference Board

index of consumer expectations decreased by

nearly 18.0% from 80.9 to 66.5, while the

present situation component increased by more

than 9.0%. The University of Michigan index

of expectations also decreased by nearly 18.0%,

from 77.6 to 63.8. The present conditions

component decreased modestly. The

deterioration in views of the future might have

reflected concern about the future of tax and

spending plans by the federal government that

were under negotiation. The agreement reached

shortly after the New Year, which was greeted

positively by equity markets, might lead to

improved outlooks as soon as January.

Manufacturing

Industrial activity rebounded sharply in

November. Overall industrial production

increased 1.1% following a storm-induced

decline of 0.7% in October. Manufacturing

13121110090807

120

100

80

60

40

20

Consumer ConfidenceAbout the Future

Conf. Board, 1985=100 U. of Michigan, 1966Q1=100

13121110090807

105

100

95

90

85

80

Industrial ProductionIndex 1997 = 100

Page 16 of 109

- 7 -

output also increased 1.1%, recouping the 1.0% prior month decrease. A large rebound in motor

vehicle assemblies after three weak months contributed to the gain. Utility output increased

1.0% after a flat October, and mining output increased by 0.8%. Compared with a year earlier,

industrial production and manufacturing output were higher by 2.5% and 2.7%, respectively.

Factory shipments edged higher for a third-straight month in November, and new orders held

their ground after two consecutive increases. Aircraft and petroleum and oil posted large

declines, while machinery posted a large gain in activity. The solid increase in non-defense

capital goods, excluding aircraft was a key reversal. New orders increased 2.6% in November

following a 3.0% rise in October. The back-to-back gains leave the level still below the

December 2011 peak, but up convincingly from the September 2012 low. The December 2011-

September 2012 decline had been sufficiently large and long-lived to raise concerns about the

overall economic expansion.

Purchasing managers continued to send the

message in December that activity remained

lackluster. The overall index remained

essentially at the neutral level where it has been

since last June. The new orders component was

unchanged at almost exactly neutral.

Production remained a bit above neutral, but

slipped modestly from November. Promising

signs included the increase to above 50.0 for the

first time since last May in the index of new

export orders and the increase in the index of

order backlogs from depressed levels in

October and November and to the highest level

(although still below 50.0) since last April.

Overall, the report sent the message that

manufacturing activity continues to trend at a

moderate pace.

Construction

Total construction put-in-place decreased

0.3% in November, and the October increase

was revised down to 0.7%. The decline ended a

7-month string of increases. Excluding

residential improvements, which are

imprecisely estimated and often revised

substantially, activity decreased 0.2%. The

storm in the northeast is believed to have played

a role in the weaker activity in November.

Total construction in November was 7.7%

above the year earlier level and up 16.1% from

what looks increasingly with each passing

month like the cycle low in March 2011, but

13121110090807

70

60

50

40

30

20

Purchasing Managers IndexNeutral = 50

13121110090807

1200

1100

1000

900

800

700

Construction Put-In-PlaceBillions of $, SAAR

Page 17 of 109

- 8 -

remains 28.6% below its pre-recession peak.

Private construction decreased 0.2% in November, also ending a 7-month streak of monthly

increases. Private residential construction edged higher by 0.4% and the October gain that was

originally reported as 3.0% was revised down to 1.3%. Compared with a year earlier, residential

construction was higher by 19.0%. Nonresidential construction fell by 0.7% and the October

change was revised down from 0.3% to a decline of 0.2%. Compared with a year earlier,

nonresidential activity was up 8.2%.

The Architecture Billings Index from the

American Institute of Architects improved for

the sixth month in a row in November, rising to

53.2 – the highest level since December 2010,

and before that, November 2007. A level of

50.0 is neutral. The Inquiries for New Work

Index also increased for the sixth consecutive

month to 59.6 – a 9-month high. The Billings

Index for the Midwest improved for a third-

straight month, rising to 54.4 from 52.2 in

October.

The 3-month moving average of housing starts

increased 4.5% in November to the highest

level since August 2008. Midwest housing

starts increased 6.5% on a 3-month moving

average basis in November on top of double-

digit gains in the preceding two months and a solid gain the month before that. Despite the

recent improvement, U.S. housing starts still proceeded during the three months ending in

November at an annual rate of only a little more than 40.0% of the pace set in the record year of

2005. Homebuilders continue to face buyers that have high debt levels, have large inventories of

unoccupied houses in many markets, and

struggle with still-challenging labor market

conditions and expectations of little or no price

appreciation.

Sales of existing homes increased 1.5% in

November on a 3-month moving average basis

following slightly larger gains in the previous

three months. Sales were essentially unchanged

on balance from January through July. Sales of

existing homes in the Midwest have followed a

similar pattern, but have increased a bit more

rapidly.

Sales of newly built homes increased 0.9% in

November on a 3-month moving average basis.

The October gain was revised to a slight

13121110090807

60

55

50

45

40

35

30

Architecture Billings IndexIndex, Neutral = 50

U.S. Midwest

13121110090807060504030201

12

10

8

6

4

2

New and Existing Home SalesMonths' Supply at Current Sales Rate

Page 18 of 109

- 9 -

decline. Sales of new homes in the Midwest decreased for the second month in the last three to

almost 10.0% below the August level.

The inventory of existing homes declined in November relative to the pace of sales. At 5.3

months, the length of time that would be necessary for the number of existing homes currently

offered for sale to be sold was the lowest since October 2005. The inventory of new homes has

flattened out in recent months, settling at 4.7 months to sell the current supply at the current pace

of sales – the average during the most recent seven months. The measure peaked at 12.2 months

in January 2009, and is near the historical norm.

Home prices posted a ninth-straight increase in October, according to the S&P/Case-Shiller 20-

city composite home price index. The index increased 0.7% in October, lifting the total increase

since the cyclical low point reached in January to 5.4%. The index was still down 30.3% from

the all-time peak reached in April 2006. Home prices in Cleveland increased 0.3% in October

after a 0.6% rise in September. Cleveland home prices are up 3.4% from the low point, but

remain 18.5% below the peak reached in January 2006.

Page 19 of 109

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REVENUES

December GRF receipts totaled $2,571.9 million and were $343.5 million (15.4%) above the

estimate. Monthly tax receipts totaled $1,681.6 million and were $76.3 million (4.8%) above the

estimate, while non-tax receipts totaled $874.3 million and were $267.2 million (44%) above the

estimate. Transfers totaled $16.0 million and met the estimate. Year-to-date variances by

category are provided in the following table ($ in millions).

Category Includes: YTD Variance % Variance

Tax

receipts

Sales & use, personal income, corporate

franchise, public utility, kilowatt hour,

foreign & domestic insurance, other

business & property taxes, cigarette, soft

drink, alcoholic beverage, liquor

gallonage, estate & horse racing

$131.2 million 1.4%

Non-tax

receipts

Federal grants, earnings on investments,

licenses & fees, other income, intrastate

transfers

($129.1 million) (3.0%)

Transfers Budget stabilization, liquor transfers,

capital reserve, other $3.7 million 4.5%

TOTAL REVENUE VARIANCE: $5.7 million 0.0%

Driven by a stronger-than-expected performance in the personal income tax, December tax

receipts totaled $1,681.6 million and exceeded the estimate by $76.3 million (4.8%). On a year-

over-year basis, monthly receipts were $96.1 million (6.1%) higher than they were in December

2011, with the largest contributions to this year-over-year growth attributable to the personal

income tax, non-auto sales tax, estate tax, and commercial activity tax.

GRF Revenue Sources Relative to Monthly Estimates - December 2012

($ in millions)

Individual Sources Above Estimate Individual Sources Below Estimate

Non-Auto Sales Tax $8.0 Corporate Franchise Tax ($2.6)

Auto Sales Tax $3.3 Cigarette Tax ($1.8)

Personal Income Tax $60.2 ISTV’s ($1.2)

Commercial Activity Tax $2.5 Other Sources Below Estimate ($1.4)

Kilowatt Hour Tax $2.7

Federal Grants $269.2

Estate $4.0

Other Sources Above Estimate $0.7

Total above $350.6 Total below ($7.0)

Page 20 of 109

- 11 -

Non-Auto Sales and Use Tax

December non-auto sales tax receipts totaled $680.4 million and were $8.0 million (1.2%) above

estimate. Year-to-date, this tax source is $23.3 million (0.6%) below the estimate. On a year-

over-year basis, December 2012 receipts were $31.7 million (4.9%) above those of December

2011. Fiscal year 2013 year-to-date receipts are $161.9 million (4.6%) higher than those at the

same point in fiscal year 2012.

Auto Sales Tax

Auto sales tax receipts for the month of December totaled $76.2 million and were $3.3 million

(4.5%) above the estimate, compensating for the November shortfall and bringing the year-to-

date total to $5.6 million (1.1%) above the estimate. On a year-over-year basis, December 2012

receipts were $4.0 million (5.0%) below those of December 2011, while fiscal year 2013 year-to-

date receipts are $19.9 million (3.9%) higher than the same point in the previous fiscal year.

Personal Income Tax

December personal income tax receipts totaled $822.0 million and were $60.2 million (7.9%)

above the estimate. Reversing the trend of the last two months, the withholding component

which totaled $720.6 million, was $47.3 million (7.0%) above the estimate in December. The

other components of this tax source also returned to positive territory in December, and

estimated payments recorded the second highest overage at $10.6 million (9.9%) above the

estimate.

On a year-over-year basis, personal income tax receipts for the month of December were $71.0

million (9.5%) higher than the December 2011 level. The withholding component remained the

leading contributor of the year-over-year growth and was $45.8 million (6.8%) higher than the

same month in the previous fiscal year. Further contributing were reductions in distributions to

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

2.4

July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. April May June

Rec

iep

ts

Tax Revenue Comparison by Month

($ in billions)

FY 2011 FY 2012 FY 2013

Page 21 of 109

- 12 -

the local government fund that were $16.7 million (38.9%) lower than those of December 2011

as a result of changes contained in H.B. 153.

Year-to-date, personal income tax receipts for the first half of fiscal year 2013 are $76.2 million

(1.8%) above estimate and $362.5 million (9.3%) higher than the level in the corresponding

period in fiscal year 2012.

FY2013 PERSONAL INCOME TAX RECEIPTS BY COMPONENT ($ in millions)

ESTIMATE ACTUAL $ VAR ESTIMATE ACTUAL $ VAR

DEC DEC DEC Y-T-D Y-T-D Y-T-D

Withholding $673.3 $720.6 $47.3 $3,900.0 $3,951.8 $51.8 Quarterly Est. $107.4 $118.0 $10.6 $437.9 $467.7 $29.8 Trust Payments $1.7 $2.2 $0.5 $11.4 $16.8 $5.4 Annual Returns & 40 P $8.6 $10.0 $1.4 $129.8 $127.0 ($2.8) Other $8.0 $7.9 ($0.1) $49.7 $56.2 $6.5 Less: Refunds ($11.5) ($10.5) $1.0 ($161.2) ($170.3) ($9.1) Local Distr. ($25.7) ($26.2) ($0.5) ($164.1) ($169.4) ($5.3)

Net to GRF $761.8 $822.0 $60.2 $4,203.5 $4,279.7 $76.2

Corporate Franchise Tax

Similar to November, higher-than-anticipated refunds continued in December, as corporate

franchise tax receipts for the month were -$1.6 million compared to the estimate of $1.0 million.

Despite this, year-to-date corporate franchise tax receipts are $51.7 million above the estimate,

and are $45.7 million higher than those at the same point in fiscal year 2012. As noted in

previous months’ reports, refund activity for the year-to-date has not been as high as expected

and that combined with a number of unexpected one-time settlements have driven the year-to-

date performance higher both relative to estimate and relative to fiscal year 2012 performance.

OBM anticipates that this pattern will not continue and that refund activity will pick up in the

months ahead.

Commercial Activity Tax

December Commercial Activity Tax (CAT) receipts to the GRF totaled $3.7 million and were

$2.5 million (211.2%) above the monthly estimate. On a year-over-year basis, GRF CAT

receipts were $3.1 million (520.8%) higher than for those of December 2011, largely due to

provisions contained in H.B. 153 that modified the distribution of CAT receipts, with the portion

of total receipts being allocated to the GRF increasing from 25.0 percent in fiscal year 2012 to

50.0 percent in fiscal year 2013. Due to a number of refunds, the all-funds CAT receipts for the

month of December totaled -$2.1 million and were $4.5 million below the $2.4 million

estimate. On a year-to-date basis, total GRF CAT receipts total $397.5 million and are $13.1

million (3.2%) below estimate, while all-funds CAT receipts are $801.0 million and are $27.2

million (3.3%) below the estimate of $828.2 million. The GRF recording positive receipts from

the CAT when all funds CAT receipts were negative for the month of December is the result of

Page 22 of 109

- 13 -

the timing of the crediting of CAT receipts to the GRF relative to the timing of the processing of

refunds. Had the refunds occurred earlier in the month, GRF CAT receipts for the month would

have also been negative. While this timing issue was a positive for the GRF in December, OBM

expects a reduction of GRF receipts in January as that is when the impact of the refunds on the

GRF will be felt.

On December 7, 2012, the Ohio Supreme Court issued a ruling in the case of Beaver Excavating

Co. v. Testa. The ruling stated that prospectively, CAT revenues related to the sale of motor fuel

must be used for highway purposes in order to meet the requirements of the Ohio

Constitution. OBM and the Department of Taxation are currently working on procedures to

comply with the Court’s ruling.

Kilowatt-Hour Tax

For the second month in a row, kilowatt hour receipts exceeded the estimate by $2.7 million

(14.4%) with receipts of $21.4 million against an estimate of $18.7 million. As a result, the year-

to-date total is now $3.4 million (2.1%) below estimate. Earlier in the calendar year, the

continued shortfall experienced in this tax source was largely the result of a milder-than-

expected winter, though the shortfall following increased demand due to a warmer-than-usual

summer was unexpected. OBM will continue to monitor this tax source in the coming months.

On a year-over-year basis, this tax source was nearly equal to the December 2011 level, while

year-to-date fiscal year 2013 receipts are $1.4 million (0.9%) higher than those at the same point

in the previous fiscal year.

Cigarette Tax

December cigarette tax receipts totaled $66.4 million and were $1.8 million (2.6%) below the

estimate. Year-to-date, this tax source is $2.8 million (0.7%) below the estimate. On a year-

over-year basis, December 2012 cigarette tax receipts were $4.8 million (6.7%) lower than those

of December 2011, while year-to-date fiscal year 2013 receipts are $10.4 million (2.7%) lower

than the same point in the previous fiscal year, a decline that is below the 3.0 percent decline we

have seen with this tax source in recent years.

GRF non-tax receipts totaled $874.3 million in December and were $267.2 million (44.0%)

above the estimate primarily due to an overage in federal grants. As mentioned in the November

monthly report, the federal grant revenue coding error, which occurred in November, was

corrected in December and is reflected in the performance of non-tax receipts in this month’s

report. For the year to date, non-tax receipts are $129.1 million (3.0%) below estimate with

federal grants again being the major factor. GRF transfers during the month of December were

$16.0 million and met the estimate.

Page 23 of 109

GENERAL REVENUE FUND RECEIPTS

ACTUAL FY 2013 VS ESTIMATE FY 2013

($ in thousands)

MONTH YEAR-TO-DATE

ACTUAL ESTIMATE ACTUAL ESTIMATEREVENUE SOURCE DECEMBER DECEMBER $ VAR % VAR Y-T-D Y-T-D $ VAR % VAR

TAX RECEIPTS

Non-Auto Sales & Use 680,373 672,400 7,973 1.2% 3,673,890 3,697,200 (23,310) -0.6% Auto Sales & Use 76,212 72,900 3,312 4.5% 531,152 525,600 5,552 1.1%

Subtotal Sales & Use 756,585 745,300 11,285 1.5% 4,205,042 4,222,800 (17,758) -0.4%

Personal Income 821,971 761,797 60,174 7.9% 4,279,650 4,203,456 76,194 1.8%

Corporate Franchise (1,639) 1,000 (2,639) -263.9% 51,659 0 51,659 N/A

Commercial Activity Tax 3,735 1,200 2,535 211.2% 397,483 410,600 (13,117) -3.2%

Public Utility 6 200 (194) -97.1% 43,974 50,900 (6,926) -13.6%

Kilowatt Hour 21,384 18,700 2,684 14.4% 158,430 161,800 (3,370) -2.1%

MCF Tax 0 0 0 N/A 15,189 18,100 (2,911) -16.1%

Foreign Insurance (316) 0 (316) N/A 142,438 137,700 4,738 3.4%

Domestic Insurance (139) 0 (139) N/A 4,625 (500) 5,125 1025.0%

Other Business & Property 15 0 15 N/A 360 (1,200) 1,560 130.0%

Cigarette 66,447 68,200 (1,753) -2.6% 368,140 370,900 (2,760) -0.7%

Alcoholic Beverage 5,020 4,600 420 9.1% 28,699 30,000 (1,301) -4.3%

Liquor Gallonage 3,443 3,200 243 7.6% 20,252 19,800 452 2.3%

Estate 5,111 1,100 4,011 364.6% 73,373 33,800 39,573 117.1%

Total Tax Receipts 1,681,622 1,605,297 76,325 4.8% 9,789,314 9,658,156 131,159 1.4%

NON-TAX RECEIPTS

Federal Grants 871,682 602,483 269,199 44.7% 4,159,806 4,285,257 (125,451) -2.9%

Earnings on Investments 0 0 0 N/A 2,263 1,500 763 50.8%

License & Fees 438 950 (512) -53.9% 11,354 13,126 (1,772) -13.5%

Other Income 2,144 2,409 (264) -11.0% 5,823 15,848 (10,025) -63.3% ISTV'S 26 1,243 (1,218) -97.9% 12,236 4,870 7,366 151.3%

Total Non-Tax Receipts 874,290 607,085 267,205 44.0% 4,191,482 4,320,601 (129,119) -3.0%

TOTAL REVENUES 2,555,912 2,212,381 343,531 15.5% 13,980,796 13,978,756 2,040 0.0%

TRANSFERS

Budget Stabilization 0 0 0 N/A 0 0 0 N/A

Liquor Transfers 16,000 16,000 0 0.0% 78,000 78,000 0 0.0%

Transfers In - Other 0 0 0 N/A 8,872 5,166 3,706 71.7% Temporary Transfers In 0 0 0 N/A 0 0 0 N/A

Total Transfers 16,000 16,000 0 0.0% 86,872 83,166 3,706 4.5%

TOTAL SOURCES 2,571,912 2,228,381 343,531 15.4% 14,067,668 14,061,923 5,746 0.0%

Table 1

Page 24 of 109

GENERAL REVENUE FUND RECEIPTS

ACTUAL FY 2013 VS ACTUAL FY 2012

($ in thousands)

MONTH YEAR-TO-DATE

DECEMBER DECEMBER $ % ACTUAL ACTUAL $ %REVENUE SOURCE FY 2013 FY 2012 VAR VAR FY 2013 FY 2012 VAR VAR

TAX RECEIPTS

Non-Auto Sales & Use 680,373 648,679 31,695 4.9% 3,673,890 3,512,017 161,874 4.6% Auto Sales & Use 76,212 80,201 (3,989) -5.0% 531,152 511,260 19,892 3.9%

Subtotal Sales & Use 756,585 728,879 27,706 3.8% 4,205,042 4,023,277 181,766 4.5%

Personal Income 821,971 750,955 71,016 9.5% 4,279,650 3,917,132 362,518 9.3%

Corporate Franchise (1,639) 3,697 (5,336) -144.3% 51,659 6,007 45,652 759.9%

Commercial Activity Tax 3,735 602 3,133 520.8% 397,483 196,507 200,976 102.3%

Public Utility 6 (680) 686 100.8% 43,974 55,307 (11,333) -20.5%

Kilowatt Hour 21,384 21,661 (277) -1.3% 158,430 157,027 1,403 0.9%

MCF Tax 0 2 (2) N/A 15,189 18,170 (2,981) -16.4%

Foreign Insurance (316) 6 (322) -5419.5% 142,438 134,249 8,189 6.1%

Domestic Insurance (139) 4 (143) -3614.2% 4,625 61 4,563 7424.5%

Other Business & Property 15 4 10 234.5% 360 (1,783) 2,144 120.2%

Cigarette 66,447 71,211 (4,764) -6.7% 368,140 378,529 (10,390) -2.7%

Alcoholic Beverage 5,020 4,635 385 8.3% 28,699 29,829 (1,131) -3.8%

Liquor Gallonage 3,443 3,195 248 7.8% 20,252 19,473 778 4.0% Estate 5,111 1,308 3,802 290.6% 73,373 35,808 37,564 104.9%

Total Tax Receipts 1,681,622 1,585,479 96,143 6.1% 9,789,314 8,969,595 819,719 9.1%

NON-TAX RECEIPTS

Federal Grants 871,682 642,470 229,213 35.7% 4,159,806 4,037,470 122,336 3.0%

Earnings on Investments 0 0 0 N/A 2,263 1,186 1,076 90.7%

License & Fee 438 966 (528) -54.7% 11,354 20,071 (8,717) -43.4%

Other Income 2,144 1,808 336 18.6% 5,823 8,051 (2,228) -27.7% ISTV'S 26 2,132 (2,107) -98.8% 12,236 8,352 3,885 46.5%

Total Non-Tax Receipts 874,290 647,376 226,914 35.1% 4,191,482 4,075,130 116,353 2.9%

TOTAL REVENUES 2,555,912 2,232,855 323,057 14.5% 13,980,796 13,044,725 936,071 7.2%

TRANSFERS

Budget Stabilization 0 0 0 N/A 0 0 0 N/A

Liquor Transfers 16,000 14,500 1,500 10.3% 78,000 72,500 5,500 7.6%

Transfers In - Other 0 726 (726) N/A 8,872 48,975 (40,104) -81.9% Temporary Transfers In 0 55,700 (55,700) N/A 0 180,718 (180,718) N/A

Total Transfers 16,000 70,926 (54,926) N/A 86,872 302,193 (215,321) -71.3%

TOTAL SOURCES 2,571,912 2,303,781 268,131 11.6% 14,067,668 13,346,919 720,750 5.4%

Table 2

Page 25 of 109

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DISBURSEMENTS

December 2012 GRF disbursements, across all fund uses, totaled $1,832.1 million and were

$50.9 million (2.9%) above estimate. On a year-over-year basis, disbursements for December

2012 were $29.2 million (1.6%) higher than those of December 2011. Year-to-date variances by

category are provided in the table below:

Category Description YTD Variance % Variance

Expenditures and

transfers between

agencies (ISTVs)

State agency operations, subsidies, tax

relief, debt service payments, and

pending payroll (if applicable) ($324.5 million) (2.2%)

Transfers

Temporary or permanent transfers out

of the GRF that are not agency

expenditures

$13.4 million

4.2%

TOTAL DISBURSEMENTS VARIANCE: ($311.1 million) (2.0%)

GRF disbursements are reported according to functional categories. This section contains

information describing spending and variances within each of these categories.

Primary, Secondary and Other Education

This category includes expenditures made by the Department of Education, the eTech Ohio

Commission, the Ohio State School for the Blind, and the Ohio School for the Deaf. December

disbursements in this category totaled $279.2 million and were $3.7 million (1.3%) below the

estimate.

December disbursements for the Department of Education alone totaled $275.2 million and were

$5.3 million (1.9%) below the estimate. Expenditures for the school foundation program totaled

$260.9 million and were $1.9 million (0.7%) below the estimate. The variance in the foundation

funding line item is due to normal fluctuations between actual Average Daily Membership

(ADM) and estimated ADM for the month. Additionally, Ohio Education Computer Network

and Education Management Information System subsidy payments planned for December were

not made until January. The department has also modified its schedule of disbursements this

fiscal year to reimburse entities for claims made rather than through automatic payment. This

will have the effect of pushing disbursements into the third and fourth quarters of the fiscal year

when entities are likely to make claims for these payments.

Higher Education

December disbursements for Higher Education totaled $172.3 million and were $1.3 million

(0.8%) above the estimate for the month. Year-to-date disbursements are $12.2 million (1.1%)

below the estimate. On a year-over-year basis, disbursements in this category were $10.8

million (6.7%) higher than for the same month in the previous fiscal year, while year-to-date

expenditures are $11.2 million (1.0%) lower than at the same point in fiscal year 2012.

Page 26 of 109

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Public Assistance and Medicaid December disbursements in this category, which include all GRF expenditures by the Ohio

Department of Job and Family Services (ODJFS), totaled $1,160.9 million and were $66.9

million (6.1%) above the estimate. Fiscal year-to-date expenditures are $7,119.1 million, which

is $199.0 million (2.7%) below estimate.

Public Assistance and Non-Medicaid

ODJFS, Non-Medicaid, General Revenue Fund (GRF) disbursements totaled $50.7 million for

the month of December and were $0.8 million (1.6%) above the estimate. Major monthly

variances were attributable to the following:

Family Assistance – Local (ALI 600521) disbursements were $3.4 million above estimate

due to higher than anticipated line item county expenditures for the month.

TANF State/Maintenance of Effort (ALI 600410) subsidy disbursements were $1.6

million (10.0%) below estimate due to lower-than-anticipated Ohio Works First cash

assistance payments made during the month. The department estimates that it will

disburse all line item funds by the end of the fiscal year to ensure the federal TANF

Maintenance of Effort is met.

Early Care and Education (ALI 600535) child care disbursements were $1.3 million

(22.2%) below estimate. This is attributable to lower-than-anticipated monthly child care

expenditures as well as child care disbursements being funded more heavily with

Temporary Assistance for Needy Families and Child Care and Development Fund federal

grants during the month.

Medicaid

This sub-category includes expenditures by the Department of Job and Family Services for

Medicaid services contained primarily in the 600525 line item. Please note that administrative

costs related to the ODJFS program are included in the previous sub-category.

Expenditures

GRF disbursements year-to-date for the ODJFS portion of the Medicaid program are $6,739.9

million, which is $146.5 million (2.1%) below estimate and $377.2 million (5.9%) above the

same point in the previous fiscal year. Disbursements in December totaled $1,110.3 million and

were $66.18 million (6.3%) above the estimate and $248.2 million (28.8%) above the same

month in the previous fiscal year. Due to hospital assessment collections being delayed,

payments normally made from non-GRF funds had to be temporarily funded by the GRF. This

will be reversed in the coming months.

All funds year-to-date disbursements are $7,467.7 million, which is $294.0 million (3.8%) below

the estimate and $138.0 million (1.9%) above the same point in the previous fiscal year. All

funds disbursements for the month of December totaled $1,275.1 million and were $74.9 million

(5.5%) below the estimate and $50.5 (4.1%) above disbursements in December 2011.

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The chart below shows the current month’s disbursement variance by funding source:

December Projection December Actual Variance Variance %

GRF $ 1,044,078,905 $ 1,110,257,174 $ 66,178,269 6.3%

Non-GRF $ 305,911,543 $ 164,879,556 $(141,031,987) -46.1%

All Funds $ 1,349,990,448 $ 1,275,136,730 $ (74,853,718) -5.5%

Categorical Variances

Managed Care ABD and CFC – The $41.0 million negative variance within managed care

categories account for much of the total monthly underspend. The ABD category saw a lower

caseload in December than previously expected. The negative variance in the CFC category is

driven by lower-than-expected capitation payments, delivery payments, and caseload.

Department of Aging Waivers – Another negative variance was observed in the Aging Waivers

category. In December, PACE and PASSPORT/Choices experienced lower-than-expected

caseload volume. In addition, the service cost per consumer enrolled in PASSORT/Choices was

lower than projected. This contributed $13.9 million to the overall negative variance.

Hospitals – The $16.4 million negative variance observed within the hospital category is due to

better-than-expected performance by the MITS system regarding the accuracy of claims

adjudication.

Caseload

Total December enrollment across all categories was 2.34 million. The most significant

components are the Covered Families and Children (CFC) category, which decreased by 6,584

persons to a December total of 1.69 million persons, and the Aged, Blind and Disabled (ABD)

category, which increased by 2,106 people to a December total of 380.9 thousand covered lives.

Total enrollment across all categories for the same period last year was 2.18 million covered

persons, including 1.66 million persons in the CFC category and 403.6 thousand people in the

ABD category. Please note that these data are subject to revision.

Health and Human Services

This category includes GRF expenditures for the following state agencies: Health, Aging, Mental

Health, Developmental Disabilities, and ODADAS. Examples of expenditures in this category

include: administration of the state’s psychiatric hospitals; operating subsidies to county boards

of developmental disabilities; various immunization programs; and Ohio’s long term care

ombudsman program. To the extent that these agencies spend GRF to support Medicaid

services, that spending is reflected in this category instead of the previous category.

December disbursements in this category totaled $63.8 million and were $1.7 million (2.8%)

above the estimate. On a year-over-year basis, this category was $13.4 million (26.5%) higher

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than the same month in the previous fiscal year. Year-to-date disbursements are $19.2 million

(3.6%) below the estimate.

Department of Health

December 2012 disbursements for the Department of Health totaled $3.2 million and were $0.5

million (13.3%) below estimate. Year-to-date expenditures are $37.6 million, which is $15.0

million (28.6%) below the estimate. Major monthly variances within individual line items were

attributable to the following:

Mothers and Children Safety Net Services disbursements were $0.3 million below

estimate for the month as a result of the department is waiting for some sub-grantees to

comply with programmatic requirements before distributing funding.

Breast and Cervical Cancer Screening disbursements were $0.2 million below estimate

for the month as a result of fewer subsidies are being distributed to mitigate overspending

in earlier months.

Help Me Grow disbursements were $0.4 million above estimate and can be attributed to

providers successfully adapting to the program’s new fee for service model, allowing

spending in this line to better align with year-to-date estimates.

Department of Aging

December 2012 disbursements for the Department of Aging totaled $0.6 million and were $0.2

million (26.4%) below estimate for the month. Year-to-date expenditures are $5.9 million,

which is $0.6 million (9.1%) below estimate. The monthly variance can be attributed to lower-

than-expected payments made in the Senior Community Services line. However, as Area

Agencies on Aging begin their program year in January 2013, these payments will even out

throughout the year relative to the estimate.

Department of Mental Health

December disbursements for the Department of Mental Health totaled $17.4 million and were

$0.9 million (5.7%) above estimate. Year-to-date expenditures are $164.0 million, which is $7.9

million (4.6%) below the estimate. Major monthly variances within individual line items were

attributable to the following:

Expenditures within the Hospital Services line item were $0.8 million (5.8%) above

estimate due to higher-than-anticipated payroll costs as well as IT license purchases that

were planned for the first quarter of the fiscal year but that instead occurred in December.

Central Administration expenses were also $0.2 million (10.9%) above estimate due to

higher-than-anticipated payroll costs.

Department of Developmental Disabilities

December disbursements for the Department of Developmental Disabilities totaled $39.0 million

and were $1.6 million (4.3%) above the estimate. The variance is primarily attributable to

higher-than-anticipated spending in the Medicaid State Match line item, which was $1.6 million

(4.3%) above the estimate as a result of greater-than-predicted Transitions Waiver expenditures.

Medicaid State Match line item disbursements are $0.7 million (0.3%) below estimate for the

year. Year-to-date expenditures for the department as a whole are $268.3 million, which is $2.1

million (0.8%) below estimate.

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Justice and Public Protection

This category includes GRF expenditures by the Department of Rehabilitation & Correction and

the Department of Youth Services. During the month of December, disbursements in this

category totaled $112.1 million and were $13.5 million (10.8%) below the estimate. On a year-

over-year basis, this category was $8.9 million (7.3%) below the same month in the previous

fiscal year. Year-to-date disbursements are $1,010.2 million, which is $30.7 million (2.9%)

below the estimate.

Department of Rehabilitation and Corrections

Department of Rehabilitation and Correction disbursements totaled $86.5 million in December

and were $12.4 million (12.5%) below the estimate. This variance was largely caused by a delay

in billing and processing in the main Institutional Operations line.

General Government

December disbursements for the General Government category totaled $20.1 million and were

$0.3 million (1.7%) above the estimate. On a year-over-year basis, this category was $2.5

million (14.1%) higher than the same month in the previous fiscal year. Year-to-date

disbursements are $20.2 million (10.2%) below the estimate.

Department of Natural Resources

Year-to-date, disbursements for the Department of Natural Resources are $54.4 million, which is

$1.7 million (3.0%) below estimate. December disbursements for the department totaled $2.9

million and were $0.9 million (31.3%) below estimate. The monthly variance is primarily

attributable to the following:

The Healthy Lake Erie line item was $0.5 million below estimate as a result of lower-

than-anticipated program expenses.

The Division of Parks and Recreation line item was $0.3 million below estimate as a

result of lower-than-anticipated payroll expenses.

Tax Relief and Other

Payments from the tax relief category are made to local governments and school districts to

reimburse these entities for revenues foregone as a result of the 10.0 percent and 2.5 percent

rollback, as well as the homestead exemption. December disbursements for tax relief totaled

$0.1 million and were $0.9 million (86.3%) below the monthly estimate of $1.0 million. For the

first half of the fiscal year, tax relief payments totaled $881.9 million and were $7.8 million

(0.9%) above estimate. While tax relief payments for the first half of the fiscal year were

slightly above estimate, OBM expects to end the fiscal year within the current annual estimate.

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MONTH YEAR-TO-DATE

Functional Reporting Categories ACTUAL ESTIMATED $ % YTD YTD $ %

Description DECEMBER DECEMBER VAR VAR ACTUAL ESTIMATE VAR VAR

Primary, Secondary and Other Education 279,160 282,857 (3,697) -1.3% 3,288,207 3,325,655 (37,448) -1.1%

Higher Education 172,253 170,922 1,331 0.8% 1,080,688 1,092,768 (12,079) -1.1%

Public Assistance and Medicaid 1,160,940 1,093,969 66,970 6.1% 7,119,069 7,318,050 (198,981) -2.7%

Health and Human Services 63,823 62,073 1,749 2.8% 511,299 530,546 (19,247) -3.6%

Justice and Public Protection 112,086 125,621 (13,536) -10.8% 1,010,164 1,040,856 (30,692) -2.9%

Environmental Protection and Natural Resources 2,888 3,791 (903) -23.8% 41,364 43,073 (1,709) -4.0%

Transportation 1,836 563 1,273 226.2% 5,588 5,561 27 0.5%

General Government 20,052 19,718 333 1.7% 177,450 197,634 (20,184) -10.2%

Community and Economic Development 4,021 5,625 (1,604) -28.5% 47,029 55,931 (8,901) -15.9%

Tax Relief and Other 141 1,036 (895) -86.3% 881,853 874,094 7,758 0.9%

Capital Outlay 0 0 0 N/A 137 0 137 N/A

Debt Service 9,901 10,287 (385) -3.7% 437,921 441,090 (3,169) -0.7%

Total Expenditures & ISTV's 1,827,101 1,776,464 50,637 2.9% 14,600,770 14,925,258 (324,487) -2.2%

Transfers Out:

Operating Transfer Out 5,000 4,750 250 5.3% 332,208 318,848 13,360 4.2%

Temporary Transfer Out 0 0 0 N/A 0 0 0 N/A

Total Transfers Out 5,000 4,750 250 N/A 332,208 318,848 13,360 4.2%

Total Fund Uses 1,832,101 1,781,214 50,887 2.9% 14,932,979 15,244,106 (311,127) -2.0%

Table 3GENERAL REVENUE FUND DISBURSEMENTSACTUAL FY 2013 VS ESTIMATE FY 2013

($ in thousands)

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YEAR-TO-DATE

Functional Reporting Categories DECEMBER DECEMBER $ % ACTUAL ACTUAL $ %Description FY 2013 FY 2012 VAR VAR FY 2013 FY 2012 VAR VAR

Primary, Secondary and Other Education 279,160 514,878 (235,718) -45.8% 3,288,207 3,529,957 (241,750) -6.8%

Higher Education 172,253 161,486 10,767 6.7% 1,080,688 1,091,718 (11,030) -1.0%

Public Assistance and Medicaid 1,160,940 909,523 251,416 27.6% 7,119,069 6,765,225 353,844 5.2%

Health and Human Services 63,823 50,436 13,386 26.5% 511,299 555,938 (44,639) -8.0%

Justice and Public Protection 112,086 120,957 (8,871) -7.3% 1,010,164 949,023 61,141 6.4%

Environmental Protection and Natural Resources 2,888 2,531 357 14.1% 41,364 42,440 (1,076) -2.5%

Transportation 1,836 744 1,092 146.9% 5,588 5,265 322 6.1%

General Government 20,052 17,579 2,472 14.1% 177,450 160,207 17,244 10.8%

Community and Economic Development 4,021 4,988 (967) -19.4% 47,029 47,411 (382) -0.8%

Tax Relief and Other 141 415 (274) -65.9% 881,853 865,060 16,793 1.9%

Capital Outlay 0 0 0 N/A 137 120 17 14.4%

Debt Service 9,901 13,101 (3,200) -24.4% 437,921 193,157 244,764 126.7%

Total Expenditures & ISTV's 1,827,101 1,796,640 30,461 1.7% 14,600,770 14,205,521 395,250 2.8%

Transfers Out:

Operating Transfer Out 5,000 6,281 (1,281) N/A 332,208 326,263 5,945 1.8%

Temporary Transfer Out 0 0 0 N/A 0 237,356 (237,356) N/A

Total Transfers Out 5,000 6,281 (1,281) N/A 332,208 563,619 (231,410) -41.1%

Total Fund Uses 1,832,101 1,802,921 29,180 1.6% 14,932,979 14,769,139 163,839 1.1%

GENERAL REVENUE FUND DISBURSEMENTS

MONTH

ACTUAL FY 2013 VS ACTUAL FY 2012($ in thousands)

Table 4

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FUND BALANCE

Table 5 describes the estimated General Revenue Fund (GRF) ending fund balance for FY 2013.

Based on the estimated revenue sources for FY 2013 and the estimated FY 2012 disbursements,

transfers, and encumbrances, the GRF ending fund balance for FY 2013 is an estimated $552.0

million.

The GRF ending fund balance should not be considered as a balance available for expenditure in

FY 2013 nor should it be considered as equivalent to the FY 2013 surplus calculation as defined

in Section 131.44 of the Ohio Revised Code.

It is important to note that the GRF ending fund balance will be impacted by any GRF

expenditures or transfers that may be authorized by the General Assembly or by the Controlling

Board during the course of the fiscal year.

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FUND BALANCE

GENERAL REVENUE FUND

FISCAL YEAR 2013

($ in thousands)

July 1, 2012 Beginning Cash Balance $ 973,446

Plus FY 2013 Actual Revenues 20,443,500

Plus FY 2013 Actual Federal Revenues 8,151,329

Plus FY 2013 Actual Transfers to GRF 187,500

Total Sources Available for Expenditure & Transfer

29,755,775

Less FY 2013 Actual Disbursements 28,574,011

Less FY 2013 Actual Total Encumbrances as of June 30, 2013 236,790

Less FY 2013 Actual Transfers Out 392,981

Total Actual Uses

29,203,782

FY 2013 UNENCUMBERED ENDING FUND BALANCE* 551,993

*Note: Targeted one half of one percent year-end carryover balance is $143.9 million

OBM staff that contributed to the development of this report were:

Astrid Arca, Jason Akbar, Jim Bennett, Benjamin Boettcher, Frederick Church, Jim Coons, Paul

DiNapoli, Rebecca Gray, Catherine Hookway, Joshua Hope, Kurt Kauffman, Deanna Kimball,

Sári Klepacz, Isabel Louis, Matthew Martin, Jeff Newman, Katherine Nickey, Lawrence Parson,

Steven Peishel, Leslie Piatt, Penny Rader, Aaron Rausch, Daniel Schreiber, Lillian Stockell, and

Chris Whistler.

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There is no hearing data yet posted for this committee. Please check back later.

Peter Beck(R)

Chair

Terry Boose(R)

Vice Chair

Tom Letson(D)

RankingMinority

Ron Amstutz(R)

Nan A. Baker(R)

John Barnes,Jr. (D)

John Becker(R)

Terry Blair(R)

Mike Foley(D)

Doug Green(R)

Jeff McClain(R)

Bill Patmon(D)

John M.Rogers (D)

Gary Scherer(R)

Kirk Schuring(R)

StephenSlesnick (D)

RobertSprague (R)

Louis Terhar(R)

Page 35 of 109

Home | Directory | Disclaimer | Committees | Support Copyright © 2013 The Ohio House of Representatives. All Rights Reserved.

RolandWinburn (D)

Page 36 of 109

Saturday, February 9, 2013

[ Committee Directory ]Ways and Means

Tim Schaffer (R)

Chair

Bob Peterson (R)

Vice Chair

Charleta B. Tavares

(D)

Ranking MinorityMember

Bill Beagle (R) Capri S. Cafaro (D)

John Eklund (R) Cliff Hite (R) Larry Obhof (R) Michael J. Skindell (D) Chris Widener (R)

The Senate Ways and Means Committee oversees

legislation that affects state and local government

revenues, as well as tax collection. The committee

makes recommendations to the full Senate for the

advice and consent of governor's appointments to the

Ohio Department of Taxation.

Home | Directory | Disclaimer | Committees | Support Copyright © 2013 The Ohio Senate. All Rights Reserved.

Page 37 of 109

December 18, 2012

MEDIA CONTACTS Governor’s Office: Rob Nichols, (330) 760-7582, Rob.Nichols@governor.ohio.gov Dept. of Taxation: Gary Gudmundson, (614) 466-0099, Gary_Gudmundson@tax.state.oh.us

OHIO RETURNING $13 MILLION IN TAX OVERPAYMENTS TO BUSINESSES THAT

DIDN’T KNOW THEY WERE OWED MONEY

New Policy Will Automatically Tell Businesses When They Are Eligible For A Refund

COLUMBUS – Today Gov. John R. Kasich joined Ohio Department of Taxation (ODT) Commissioner Joe Testa in beginning to return more than $13 million to 3,500 Ohio businesses that unknowingly overpaid their Commercial Activity Tax (CAT). These refunds are the first resulting from a new policy that reverses previous anti-business practices and instead notifies a business taxpayer when they've made an overpayment and helps them with the process of reclaiming their money. In the past ODT didn’t notify businesses of overpayments—even if the Department was aware of it—but instead made businesses discover the error themselves and then ask for their money back. If businesses failed to discover the error within a certain amount of time then they forever lost the right to reclaim it. “If government knows a job creator paid too much in taxes then it should do the right thing and give the money back, because government works for us, not the other way around. It’s just simple fairness and I can’t believe this wasn’t being done already. It’s yet another example of a wrong-headed thing that state government was doing that we discovered and are fixing. I just can’t figure out why no one was trying to fix these kinds of problems before,” said Kasich. To help create a more jobs-friendly climate, ODT is implementing the new policy beginning with the CAT and will begin notifying about 3,500 taxpayers who may have overpaid by a total of as much as $13.7 million. Other taxes will be analyzed in the months ahead and ODT will begin reaching out to all taxpayers who unknowingly paid too much tax. The Department will work to raise the visibility and understanding of tax refund procedures and will notify taxpayers who appear to have a refund due. Refund request forms and more information about this program are available at the ODT web site – www.tax.ohio.gov. Read the fact sheet here: http://www.governor.ohio.gov/Portals/0/12.18.12%20Taxation%20CAT%20Tax%20Return%20Fact%20Sheet.pdf

###

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Making Ohio More Taxpayer Friendly: Returning Tax Overpayments to Businesses

FACT SHEET

The Ohio Department of Taxation (ODT) is changing policy, procedures and systems to ensure that business taxpayers get refunds back when they overpay. While current Ohio law requires businesses to request a refund, it does not obligate the state to notify the taxpayer that a refund is available. In the past, if potential refunds go unclaimed the practice has been for the state to not notify the business and simply keep the money. Gov. Kasich and Commissioner Joe Testa are changing this anti-business policy so job creators are automatically notified of any business tax overpayments. Similar policies are already in place for income tax filers.

Ohio’s old policy on returning business tax overpayments is anti-business, so we’re fixing it. The mission of this administration is to make Ohio a friendlier place for job creation, and not notifying businesses that they’ve overpaid their taxes is wrong and anti-business. Under the new policy, ODT will update systems to proactively notify business taxpayers of overpayments so they can, among other things, reinvest this money back into their businesses.

ODT is making it easier for business taxpayers get their money back.

Proactive outreach is ongoing to businesses that may have overpaid CAT taxes to the state. ODT has identified two groups of CAT taxpayers that will be contacted and encouraged to file for a refund:

1. Taxpayers who are indisputably due a refund need only file a refund request form. Overpayments by this group total about $6.5M plus interest.

2. Taxpayers who may be due a refund will be asked to provide additional information and a refund request form. Overpayments by this group total about $7.2M plus interest.

ODT is currently exploring the possibility of displaying credit balances when a taxpayer files their CAT tax return through the Ohio Business Gateway.

Once ODT is finished working through the CAT accounts, credit balances in other business taxes will be similarly analyzed to identify other business taxpayers eligible for refunds.

ODT has identified about 3,500 Commercial Activity Tax (CAT) taxpayers eligible for refunds totaling $13.7M.

ODT is currently in the process of reviewing CAT tax records of more than 184,000 taxpayers. Current Ohio law allows ODT to look back four years for CAT taxpayers who may be eligible for a refund.

Through sampling, ODT believes approximately 11,000 CAT taxpayers will ultimately be found to be eligible for a tax refund.

ODT will send letters to all potentially eligible taxpayers notifying them that they have a credit balance and may be due a refund.

- OVER –

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Common examples of how business taxpayers overpay without realizing it:

File amended returns with lower tax liability than the original liability reported and paid.

File amended returns with greater tax liability than the original return, then pay the full amended amount instead of just the difference in the tax amount due.

Make duplicate (double) payments to their accounts.

Fail to use their unused exclusion from the previous period(s). ($1M per year is excluded from tax)

Commercial Activity Tax (CAT) Background:

The CAT is Ohio’s primary business tax. It is imposed on a business’ gross receipts at a rate of 0.26 percent. No tax is due if a business has gross receipts of less than $150,000 per year.

The CAT generated tax revenues of $1.65B in fiscal year 2012.

As of December 20, 2012, there were 184,622 active CAT filers in Ohio

Refund request forms and more information about this program are available at the ODT web site – www.tax.ohio.gov.

# # #

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1 5950283v1

HB 510 Revises Taxation of Financial Institutions

By Mark A. Engel

Bricker & Eckler LLP

The Ohio General Assembly has passed legislation that reforms and updates the manner in which

Ohio taxes financial institutions. The new financial institutions tax (“FIT”) replaces the

remaining vestiges of the corporation franchise tax and the tax on dealers in intangibles. The

FIT will apply in tax years beginning on and after January 1, 2014. The governor is expected to

sign the bill. 2012 Am. Sub. H.B. 510. Link here: http://www.legislature.state.oh.us/bills.

cfm?ID=129_HB_510

Under current law, banks and similar entities are taxed at a rate of 13 mills on their Ohio net

worth. Dealers in intangibles, such as mortgage brokers, stockbrokers, and finance and loan

companies not otherwise classified as financial institutions, are taxed at a rate of 8 mills on their

Ohio shares and capital. The bill modernizes the taxation of financial institutions and lowers the

rate at which they are taxed. Dealers in intangibles, except to the extent included in the tax base

of a financial institution, are subjected to the commercial activity tax, like other business entities.

Taxpayers: Under the law, “bank organization” means the type of banking or savings

associations, whether created under state or federal law, previously taxed as financial institutions

under the franchise tax.1 A “financial institution” includes bank organizations, holding

companies of bank organizations, and certain nonbank financial organizations. Where two or

more entities are consolidated for filing regulatory reports, such as an FR Y-9 or a call report,

“financial institution” means all entities included in the report. It does not include a company

charted under the “Federal Farm Loan Act,” an insurance company, or a credit union.2

A “captive finance company” generally means a person that derives at least 75% of its gross

income for the current taxable year and two preceding taxable years from

(i) financing transactions with or for members of its affiliated group, or an affiliated

group member’s customers, distributors, franchisees, or manufacturing-related

suppliers;

(ii) issuing bonds or other publicly traded instruments for the benefit of the affiliated

group; or

(iii) making short- or long-term investments with the affiliated group’s cash reserves for

the benefit of the affiliated group.

An affiliated group is a group of entities under common ownership of 50% or more. For

example, the financing arm of a manufacturer that extends credit to dealers or retail customers of

its products is a captive finance company. Captive finance companies are excluded from the

FIT, therefore they are subject to the commercial activity tax.3

A “nonbank financial organization” includes every person that is not a bank organization or a

holding company of a bank organization and that engages in business primarily as a small dollar

1 R.C. 5726.01(A) 2 R.C. 5726.01(H) 3 R.C. 5726.01(D)

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2 5950283v1

lender.4 A “small dollar lender” means any person engaged primarily in the business of loaning

money to individuals, provided that the loan amounts do not exceed five thousand dollars and the

duration of the loans do not exceed twelve months. A small dollar lender does not include a

bank organization, credit union, or captive finance company.5

Entities such as dealers in intangibles and small dollar lenders that are not subject to the FIT will

be subject to the commercial activity tax.

Tax Rate: The tax is imposed on each financial institution for the privilege of doing business

in Ohio. It is imposed for each year that the financial institution is doing business in Ohio, or

that it otherwise has nexus with Ohio under the Constitution of the United States, on the first day

of January.6 The annual tax due is the greater of the minimum tax of $1,000,

7 or the tax

calculated under the following schedule:

8 mills on the first $200 million of Ohio equity capital; plus

4 mills for each dollar of the Ohio equity capital between $200 million and $1,300

million; plus

2.5 mills for each dollar of Ohio equity capital in excess of $1,300 million.

The law also contains two periods at which the tax rate may be adjusted. If the total tax actually

collected for the 2014 tax year exceeds $200 million (the “first target tax amount”) by more than

10 per cent, then all tax rates shall be reduced by the percentage that the amount collected

exceeded the first target tax amount. If the amount collected is less than 90 percent of the first

target tax amount, then the top rate shall be increased by the percentage equal to the shortfall that

is less than 90 percent.8

For the tax year beginning January 1, 2016, a similar calculation and rate adjustment is made to

the extent that the tax collected exceeds or falls short of 106 percent of the first target tax

amount, as adjusted if at all pursuant to the prior paragraph.9

Any adjustment is rounded to the nearest one-tenth of one mill per dollar. Any adjustment

applies to tax years beginning on or after January 1, 2015, or January 1, 2017, respectively.

Tax Base: The “total equity capital” of a financial institution means the sum of the common

stock, preferred stock, other surplus, retained earnings, treasury stock, and other equity

components of the financial institution.10

“Ohio equity capital” means the portion of the total equity capital that is apportioned to Ohio

pursuant to R.C. 5726.05.11

Under that section, equity capital is apportioned to Ohio using a

4 R.C. 5726.01(M)(1) 5 R.C. 5727.01(O) 6 R.C. 5726.02 7 R.C. 5726.02(B), R.C. 5726.04(A)(1) 8 R.C. 5726.04(E)(2), (3) 9 R.C. 5726.02(E)(4), (5) 10 R.C. 5726.01(S) 11 R.C. 5726.01(T)

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3 5950283v1

factor based upon the gross receipts of the financial institution.12

The apportionment factor is a

fraction, the numerator of which is the total gross receipts in Ohio for the year, and the

denominator of which is the total gross receipts everywhere for the year. Gross receipts

generally are in Ohio in the proportion that the customers benefit from the services provided in

Ohio; in making this determination, the location where the customer ultimately uses or receives

the benefit shall be paramount in determining the proportion.

The statute13

provides a list of examples of gross receipts that are included in the numerator of

the fraction:

Receipts from the lease, sublease, rental or subrental of real property located in Ohio, or

of tangible personal property to the extent the property is used in Ohio;

Interest, fees, penalties, or other charges received from loans secured by real property

located in Ohio, or from loans not secured by real property if the borrower is in Ohio;

Net gains, but not less than zero, from the sale of loans secured by real property located

in Ohio, or of loans not secured by real property if the borrower is located in Ohio;

Interest, annual fees, penalties, or any other charge from credit card receivables and from

cardholders; net gains, but not less than zero, from the sale of credit card receivables; and

reimbursement fees of a credit card issuer, all if the billing address of the cardholder is in

Ohio;

Receipts from merchant discounts if the merchant is located in Ohio;

Loan servicing fees from loans secured by real property located in Ohio, or from loans

not secured by real property if the borrower is located in Ohio, or derived from servicing

loans from other financial institutions if the borrower is located in Ohio; and

Receipts not otherwise listed if the payor of the receipts is located in Ohio.

Receipts from investment or trading assets and activities are in Ohio either to the extent the

customer is in Ohio, or at the election of the taxpayer, to the extent the activities are assigned to a

regular place of business in Ohio, based on where the day-to-day decisions regarding the activity

are made. Once made, the election cannot be changed without the permission of the Tax

Commissioner. The burden is placed on the taxpayer to establish the activity takes place at a

place of business outside Ohio.14

If the statutory apportionment provisions do not fairly represent the extent of a taxpayer’s

business activity in Ohio, the taxpayer may request and the Tax Commissioner may permit or

require the use of an alternative apportionment method.15

If the total equity capital of a financial institution includes investment in a real estate investment

trust that is and, on January 1, 2012 was, traded on a public stock exchange, the portion of the

equity associated with the ownership of the real estate investment trust is phased in by 20%

increments between tax year 2014 and 2018, when the investment is fully included.16

During the

12 R.C. 5726.05(A) 13 R.C. 5726.05(C); this method is substantially the same as that used for most services under the commercial

activity tax, see R.C. 5751.033(I) 14 R.C. 5726.05(D)-(F) 15 R.C. 5726.05(G) 16 R.C. 5726.041

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4 5950283v1

phase-in period, the gross receipts of the real estate investment trust included in both the

numerator and the denominator of the apportionment factor are likewise phased in.

Reporting & Paying the Tax: The greater of the minimum tax, or one-third of the

calculated tax due, must be paid by January 31 annually. If the tax due exceeds the minimum

tax, additional payments of one-half of the balance are due March 31 and May 31.17

Payments

must be made electronically.18

Special rules for computing the estimated tax apply if the

taxpayer was not a financial institution for the current tax year and the two prior tax years.19

An annual report is due October 15, together with any unpaid tax.20

Penalties & Interest: The following penalties may be imposed:21

For any report that is not filed timely, a penalty equal to the greater of $50 per month up

to $500, or 5 percent per month up to 50 percent of the tax due

Except for any estimated tax payment, a penalty of 15 percent for any tax that is not paid

timely

For a report that does not contain all information required by law or rule, or that is

frivolous or intended to delay or impede administration of the law, a penalty up to $500

For a fraudulent report or refund claim, a penalty equal to the greater of $1,000 or 100

percent of the tax due or claim made

There is also a penalty for the failure to remit tax payments or to file reports electronically. For

each of the first two failures to file electronically, a penalty of 5 percent of the amount of the tax

that was required to be paid may be imposed. For the third and subsequent event, the penalty is

increased to 10 percent of the payment that was required.22

All penalties may be abated by the tax commissioner.

With respect to the estimated tax, interest at the rate prescribed by R.C. 5703.47 applies to the

extent the amount of estimated tax that is paid is less than the amount of tax shown to be due on

the report that is filed for the tax year.23

In addition, if any tax other than an estimated payment

is not paid when due, interest at the rate prescribed by R.C. 5703.47 applies from the date the

payment was due until it is paid or an assessment is issued.24

Assessment & Refunds: Assessment and refund provisions mirror provisions of other

existing taxes. The statute of limitations for both deficiency assessments and refund claims is

17 R.C. 5726.06(A) 18 R.C. 5726.03(C)(1), R.C. 5726.06(B)(1) 19 R.C. 5726.06(C) 20 R.C. 5726.03(A) 21 R.C. 5726.21 22 R.C. 5726.03(C)(4) 23 R.C. 5726.07(A), (B) 24 R.C. 5726.32

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four years, although the periods may be extended by agreement of the taxpayer and the Tax

Commissioner.25

In addition to assessments, a taxpayer that fails to file a report or to pay the tax may have its

organizing document of creation authorizing it to do business in Ohio canceled. A taxpayer

having its document of creation canceled may be reinstated upon filing all reports, paying all tax,

and paying a reinstatement fee.26

Credits Against the Tax: The following credits may be claimed against the tax:

The refundable credit for jobs creation or retention under R.C. 122.17 or R.C.

122.17(B)(2) or (3)27

The nonrefundable credit for job retention under R.C. 122.171(B)(1)28

A nonrefundable credit equal to the aggregate annual assessment paid by each member of

the taxpayer to the division of financial institutions of the Department of Commerce29

A refundable credit for the rehabilitation of a historic building for which a certificate is

issued under R.C. 149.31130

A refundable credit for each member holding a venture capital loan certificate under R.C.

150.0731

A nonrefundable credit for a qualified equity investment under the New Markets

program32

A refundable credit for a motion picture production certificate issued under R.C. 122.8533

A refundable credit for qualified research and development expenses34

A nonrefundable credit for tax year 2014 only for the tax paid by a dealer in intangibles

that is part of the financial institution and that paid the dealers in intangibles tax during

201335

In addition, if any member of the affiliated group making up a financial institution and that

includes a “diversified savings and loan holding company,” or a “grandfathered unitary savings

and loan holding company” (both as defined under federal law and neither of which is, itself,

subject to the FIT) has a jobs retention tax credit certificate, any member of the group may claim

the benefit of the credit.36

All credits must be claimed in the order set forth in R.C. 5726.98.

Miscellaneous Provisions: The new provisions are effective for tax years beginning on or

after January 1, 2014. At that time, entities that do not qualify as financial institutions, including

25 R.C. 5726.20, R.C. 5726.30 26 R.C. 5726.40, R.C. 5726.42 27 R.C. 5726.50(A) 28 R.C. 5726.50(B) 29 R.C. 5726.51 30 R.C. 5726.52 31 R.C. 5726.53 32 R.C. 5726.54, R.C. 5725.33 33 R.C. 5726.55 34 R.C. 5726.56 35 R.C. 5726.57 36 R.C. 122.171(N)

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dealers in intangibles, small dollar lenders, and captive finance companies, are subject to the

commercial activity tax.37

The legislation prohibits municipal corporations from imposing a tax that is the same as or

similar to the new FIT.38

A refundable credit against the personal income is provided for individuals, estates, or trusts that

own a pass-through interest in a financial institution that pays the FIT. The credit is equal to the

owner’s proportionate share of the lesser of the FIT due, or paid, in a taxable year. However, if

the tax is deducted in computing net income by the owner, then the amount of the deduction

must be added back to net income.39

Uncodified sections of the legislation40

provide the Tax Commissioner may not assess, or hold

liable for failing to report or pay the CAT, any person directly or indirectly owned by one or

more insurance companies for any tax periods prior to January 1, 2013, provided that the person,

if a corporation, reported and paid the franchise tax for such periods. Such person is subject to

the CAT beginning January 1, 2013.

Finally, a number of non-substantive revisions are made to various existing laws in order to

conform their terms with the FIT.

37 R.C. 5711.22, R.C. 5751.01 38 R.C. 715.013 39 R.C. 5747.65, R.C. 5747.01(A)(16), (S)(11) 40 See sections 4 and 5 of the legislation.

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Bill to Amend Municipal Income Tax Law Reintroduced

Mark A. Engel, Bricker & Eckler LLP

Last year, a bill was introduced in the Ohio General Assembly to revise Ohio law regarding

municipal income taxation. Although several hearings were held, the bill died in Committee. A

new bill, H.B. 5, has been introduced during the current session. Like its predecessor, the bill

proposes several changes to existing R.C. Chapter 718, which governs the imposition of income

taxes by municipalities. The bill is an effort to reach additional consistency and uniformity

among communities that impose an income tax. The bill, the culmination of several months of

discussions between business and municipal stakeholders, proposes some significant changes in

existing law. Many of these changes are modeled on existing state law relating to the state

personal income tax. This memorandum addresses a number of those changes as reflected in the

bill as introduced.

Net Operating Loss: Under current law, each municipality decides whether to recognize net

operating losses (NOLs), and how long to permit them to carry forward. Under the bill,

beginning with taxable years beginning after 2014 R.C. 718.01(E)(8) and (9) authorize unused

net operating losses to be carried forward up to 5 years. The provision is phased in over 5 years

in 20 percent increments, beginning with taxable years beginning after 2015. NOLs under

existing laws must be used prior to NOLs incurred beginning in 2015 and must be used prior to

NOLs incurred after 2014. NOLs may not be used to offset qualifying wages.

Income apportionment: Current law provides for the apportionment of business income

according to a three-factor formula that considers property, payroll, and sales, and provides rules

for determining when those items are within or without the municipality in question. Language

does permit variation from this formula, but it is vague and its application varies from city to

city. Under the bill, R.C. 718.02 is amended to provide more specific guidance regarding when

and how a taxpayer, or the tax administrator, may request or require deviation from the standard

three-factor apportionment formula. An alternative apportionment formula may be claimed on

an original return, or by the filing of an amended return or a petition to contest an assessment.

An election by a taxpayer to use separate accounting must be allowed if the taxpayer uses

separate accounting in all municipalities in which it is subject to tax. The bill also changes the

measure of the sales factor to mirror state income tax law, basing the location of receipts on the

location where the customer receives the goods or services in question. The existing rule that

“throws back” sales to the city of shipment if the taxpayer did not solicit the sales at the

customer’s place of business is eliminated.

Pass-Through Entities: Under current law, municipalities may elect to tax pass-through

entities (“PTEs”) and their owners either at the entity level, or at the individual level. Under the

bill, for tax years beginning on and after January 1, 2015, R.C. 718.01(L)(1) provides that except

as provided in R.C. 718.43, the term “taxpayer” excludes PTEs, resulting in taxation at the

individual owner level. Trusts, estates, and grantor trusts are not included in the definition of a

PTE. Under R.C. 718.43, the law requires PTEs to collect and remit the tax with respect to share

of net income, whether or not distributed, of all owners. Any tax that is paid by the entity on

behalf of its owners is treated as tax paid by the owners for all purposes. If the PTI is the only

source of income in a municipality for an owner, the owner shall not be required to file a return

or to pay any additional tax in the municipality. The PTE is required to make estimated

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payments of the tax by the 15th day of April, June and September of the current year, and by

January 15 of the following year. R.C. 718.01(L)(2) provides that a single-member LLC that is a

disregarded entity may be taxed as an entity separate from its single member under certain

limited circumstances.

Consolidated Returns: Under current law, each municipality may determine whether to permit

taxpayers to file consolidated returns and the terms under which such election may be made.

Under the bill, R.C. 718.06 provides that beginning with taxable years beginning on or after

January 1, 2015, a taxpayer that is a member of an affiliated group of corporations may elect to

file a consolidated return if at least one member of the affiliated group is subject to municipal

taxation and the group filed a consolidated return for federal income tax purposes for that taxable

year. All members of the consolidated group must be included in the return, and all members are

jointly and severally liable for any tax that is owed. Furthermore, once consolidated status is

elected, the taxpayer must continue to file in that manner until written permission to file

individually is obtained from the municipality.

If 80% or more of the net profit or loss of a PTE is included in the federal taxable income of a

consolidated group, then the PTE need not collect and pay the tax imposed by R.C. 718.43 to the

extent the income is included in the net profit of the consolidated group, and the apportionment

factors for the PTE must be included in those for the consolidated group. If less than 80% of the

net profit or loss of the PTE is included in the federal taxable income of the consolidated group,

then the PTE must collect and remit the tax on behalf of its members or owners and its

apportionment factors are excluded from those of the consolidated group.

Residency: Under current law, each municipality is free to determine whether a taxpayer is

domiciled within the city, regardless of whether the individual is domiciled in Ohio for Ohio

personal income tax purposes. Under the bill, R.C. 718.01(J) provides that “resident” means an

individual who is both domiciled in Ohio for purposes of the personal income tax, and within the

municipality.

Transient Taxpayers: Under existing law, other than a professional athlete or entertainer, an

individual may perform services within a municipality for up to 12 days before the individual’s

employer is required to withhold tax for that municipality. There is no guidance as to what

constitutes a day for these purposes. R.C. 718.011 is amended to extend that threshold to 20

days. Moreover, an employee is considered to have spent a day providing services within a

municipality only if the individual spends more time during the day in that municipality than in

any other; there are special rules relating to how travel time during the day is considered. If an

employee is based in a municipality that imposes a tax, the 20-day safe harbor applies only if tax

is withheld on behalf of the municipality in which the employee is based. An employer must

begin to withhold tax on the 21st day that an employee spends in a municipality that imposes a

tax, but there is no requirement to go back to withhold for the prior 20 days.

Minimum Payments: Under the bill, several provisions are revised regarding minimum

amounts. For taxable years beginning after 2014, R.C. 718.05(G) provides that no return needs

to be filed, and no tax is due, with respect to net profits if (i) the average apportionment ratio for

the year is less than 1%; (ii) but for this provision the taxpayer would owe less than $50; and (iii)

the total amount of qualifying wages paid to employees for services performed within the

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municipality during the taxable year is less than $50,000. R.C. 718.19 provides that no refund

needs to be issued, and no interest on a refund needs to be paid, if the amount of the refund is

less than $5. New R.C. 718.41 provides that if the additional amount due as a result of a federal

RAR adjustment is $5 or less, no amended return or additional tax payment is owed to the

municipality.

Winnings from Casinos and Video Lottery Terminals: New R.C. 718.031 provides that if a

person’s winning at a casino facility or video lottery terminal trigger reporting requirements for

federal income tax purposes, then the casino operator or video lottery terminal agent shall

withhold tax on the winnings for the municipality in which the facility is located. All amounts

withheld must be reported and paid to the municipality by the 10th

day of the following month.

Annual reports to both the municipality and winners from whom amounts are withheld are also

required.

Audit and Assessment Provisions: Under current law, there is no consistent period for

assessment or refund purposes. Under the bill, R.C. 718.12(B) provides for a 3-year statute of

limitations for assessments, and R.C. 718.19 provides for a similar statute for refund claims.

R.C. 718.12 also provides an absolute limitation of 10 years for any assessment not covered by

the 3-year statute, and provides for various safeguards and procedures to protest the assessment,

similar to those found in state law. Uniform penalty and interest provisions are set forth in R.C.

718.27.

Under current law, assessment appeal procedures are largely undefined. Under the bill, R.C.

718.11 provides for the issuance of written assessments; appeals to the local board of review

within 60 days of receipt of an assessment; a hearing before the local board of review within 45

days and representation by an attorney or other representative; and a written decision that must

be issued within 90 days of the hearing and can be appealed to the state board of tax appeals.

Modeled on existing state law, the bill contains provisions regarding a taxpayer bill of rights

(R.C. 718.12(D), 718.36); for a problem resolution officer for larger cities (R.C. 718.37); for

formal tax opinions (R.C. 718.38); and for taxpayer suits for violation of various provisions

(R.C. 718.39). There is also a provision for adjustments associated with federal or state income

tax audits that result in changes to items of income or expense, with the requirement of an

amended return to reflect the changes, in R.C. 718.41. In a novel twist, R.C. 718.44 provides

that the prevailing party in any assessment and appeal may recover attorney fees and litigation

expenses from the other party. In the case of a case where neither side is completely victorious,

fees and expenses are to be equitably divided.

Powers & Duties: Under current law, the authority and duties of tax administrators are

virtually undefined. Under the bill, R.C. 718.30 provides express authority to promulgate rules

of procedure; R.C. 718. 31 provides authority to inspect records; R.C. 718.23 provides for

authority to issue subpoenas; R.C. 718.24 provides a laundry list of powers and duties similar to

those found in existing law for the state tax commissioner; and R.C. 718.20 authorizes the

issuance of jeopardy assessments in specified cases.

Municipal Tax Policy Board: Under the bill, R.C. 718.42 calls for the formation of a municipal

tax policy board. The membership of the board consists of seven representatives of

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municipalities of varying sizes, each appointed by the governor for a term of three years. The

board may adopt rules regarding the administration of municipal income tax laws that are

binding upon all municipalities imposing a tax; may designate working committees; promulgate

common forms, reports, schedules and attachments; forms for signature and declarations by

taxpayers; and provide instruction booklets. The board is required to meet at least quarterly.

Implementation: Under the bill, R.C. 718.04 provides that in the case of a tax that is first

imposed after January 1, 2015, the ordinance or resolution levying the tax must include certain

language, including that the tax is being levied in accordance with the limitations specified, and

incorporates by reference the provisions of, R.C. Chapter 718. In the case of municipality that

currently imposes a tax, before January 1, 2015, the municipality must either repeal the tax; or

amend the existing law to include the provisions required of a new tax, including the references

to R.C. Chapter 718. If a municipality that currently levies a tax fails to take either action by

January 1, 2015, its tax is repealed by operation of law. Other provisions relating to the

imposition of a tax, including the rate, any credit provision, and voter approval for rates in excess

of one percent, remain similar to existing law.

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5941056v1

OHIO SUPREME COURT SKINS CAT RECEIPTS DERIVED FROM ACTIVITIES “RELATED TO”

MOTOR FUEL SALES

By Mark A. Engel

Bricker & Eckler LLP

In a much-anticipated decision, the Ohio Supreme Court today issued a decision in which it held

that the commercial activity tax (“CAT”) revenues based on gross receipts derived from

transactions involving sales of motor vehicle fuel must be expended only for the purposes

specified in the Ohio constitution. It held that its decision would be prospective, and that CAT

receipts derived from such transactions were to be held until properly appropriated by the

General Assembly. Beaver Excavating Co. v. Testa, Slip Opinion No. 2012-Ohio-5776

(December 7, 2012) [ http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-Ohio-

5776.pdf ].

Background: As part of its historic tax reform effort, in 2005 the Ohio General Assembly began

to phase out the corporation franchise tax and personal property tax and, in their place, to phase

in the commercial activity tax. The CAT is imposed upon the privilege of doing business in

Ohio and is measured by gross receipts derived from most commercial activities. Receipts from

the tax are deposited in the general revenue fund to be used for general purposes, as well as to

reimburse certain political subdivisions for lost revenue associated with the elimination of the

other two taxes.

An uncodified section of H.B. 66 suspended the imposition of the CAT on receipts related to

motor fuel transactions for two years and directed the tax commissioner to perform a study on

the issue. This suspension expired in 2007 and was not renewed; therefore, receipts from motor

fuel-related businesses became subject to the CAT.

Plaintiffs consist of a group of motor fuel dealers, road construction contractors, and county

engineers. They contended that in so far as the commercial activity tax applies to receipts from

the sale of motor fuel, the tax is unconstitutional because the proceeds of the tax, being devoted

to purposes other than highway maintenance and safety, violate Art. XII, Section 5a of the Ohio

Constitution. Art. XII Section 5a provides that any tax “relating to” motor fuel must be devoted

to specified purposes. The taxpayers claimed that the CAT is a tax that “relates to” motor fuel

and its proceeds must, therefore, be devoted to the requisite purposes. They sought a declaration

that the failure to dedicate revenues from the CAT to the requisite purposes violated Art. XII,

Section 5a. They sought prospective application of such a declaration, but whether collection of

the tax would be enjoined, or could be collected but not appropriated, was unclear.

The Department of Taxation contended that as a general tax imposed upon the privilege of doing

business in Ohio, the CAT does not run afoul of the provision because it is not sufficiently

related to motor fuel; rather, it applies to the privilege of doing business generally, regardless of

the nature of the business.

Both the trial court and the court of appeals sided with the Tax Commissioner. They held that

the CAT was not sufficiently “related to” motor vehicle fuel to fall under the proscription of Art.

XII, Section 5a. The Supreme Court allowed a discretionary appeal by the taxpayers.

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Ruling: Looking to the history behind the adoption of Art. XII, Section 5a, the Court

observed that its purpose was to prevent the diversion of revenues from taxes on motor fuel from

the construction, repair and maintenance of roads and highway safety. Looking at the history of

the provision, it noted that the phrase “related to” was intended to be interpreted broadly. It then

stated that in that context the CAT bore a “logical and close” connection to motor-vehicle fuels.

The proceeds were “(1) money (2) derived (3) from an excise (4) on motor-vehicle-fuel sales.”

Although not a tax on the individual transactions, themselves, the Court believed the CAT was

“directly based” on motor vehicle fuel sales revenue. Thus, in its view, “one is hard pressed to

deny the close connection between the tax paid (moneys derived) and the source (excise on

“fuels used”) of that tax revenue.” ¶ 33.

The Court distinguished its earlier decision in Ohio Grocers Assn. v. Levin, 123 Ohio St. 3d 303,

2009-Ohio-4872, 619 N.E.2d 446, on the basis that the key issue in that case was whether or not

the CAT was a transaction tax that fell within the proscription of such a tax on sales of food

contained in Art. XII, Sections 3(C) and 13. It also noted the phrase “relating to” was more

broad than the language used in the food provisions. Therefore, Ohio Grocers did not control the

disposition of this case.

Remedy: The Court next turned to the appropriate remedy to apply. It noted the

constitution does not prohibit the imposition of a tax on the transactions in question; rather, it

merely directed where the proceeds from that tax could be appropriated. The parties had urged

that a decision favorable to the taxpayers should be applied prospectively only. The Court

agreed that prospective application was appropriate in this case because (1) this was a case of

first impression; (2) retroactive application of the decision would neither promote, nor retard, the

purpose behind the decision; and (3) retroactive application would cause in inequitable result

with respect to revenues that had been expended in prior years. Therefore, the Court concluded

that its decision would be applied prospectively only.

The Court did not expressly state whether the tax could continue to be collected with respect to

the transactions in question. However, the language in its decision seems to invite the General

Assembly to ear-mark CAT revenues derived from these transactions for the purposes set forth in

Art. XII, Section 5a. Anecdotally, this appears to be happening.

Since the decision, it has been estimated that CAT revenues associated with this limitation

approximate $140 million annually. As the Department of Transportation budget is funded

primarily from gas tax revenues, and only minimally from GRF revenues, this results in a

windfall to that Department and creates an unexpected gap in the GRF. Discussions have been

underway regarding the situation, but at this point no resolution has been disclosed to the public.

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6087180v2

2014-2015 Budget Proposal Cuts Income Taxes, Expands Sales Tax Base,

Increases Severance Taxes on Horizontal Well Drilling

Mark A. Engel, Bricker & Eckler LLP

On February 4, 2013, Governor Kasich revealed the broad parameters of his proposed budget for

the 2014-2015 fiscal years. On the tax front, the proposal includes a 20% reduction in all

personal income tax rates; a 50% exclusion from income for owners of pass-through entities; an

extension of the sales tax to virtually all services, with a modest reduction in the state and local

sales tax rates; and an increase in the severance tax applicable to persons extracting oil and gas

using horizontal drilling.

Personal Income Tax:

The governor proposes to cut all personal income tax rates a total of 20% over three years. For

calendar year 2013, the rates would be reduced 7.5%; for calendar year 2014, all rates would be

reduced an additional 7.5%; and in calendar year 2015, a third reduction of 5% would also be

made. The lowest marginal rate would be reduced from 0.587% to 0.470%, while the top

marginal rate would be reduced from 5.925% to 4.74%.

In addition, the owners of a small business organized as a pass-through entity (i.e., partnership,

LLC, S corporation) would receive a deduction of one-half of the net income received as a

reduction. It appears that the deduction is limited to the first $750,000 of net income received by

each owner. However, it is unclear whether this cap applies to each individual owner or whether

it applies to the entire net income from a single entity.

Sales Tax:

The budget proposes to change fundamentally the manner in which services are subject to the

sales tax. Currently, it is presumed that services are not taxable and only specifically enumerated

services are subject to the tax. Under the proposal, this structure will be reversed. All services

would be subjected to the tax unless specifically exempted.

Services considered “necessities of life” will be exempt from the tax. Such services include

health care, construction, residential rentals, education, social assistance, day care, insurance

premiums, and trash removal. Professional services such as legal, accounting, engineering,

architecture, marketing, lobbying and research; administrative and support services such as

collection or credit ratings; financial and real estate services; and arts, recreation, entertainment,

and other admissions-type transactions, will all become taxable.

The state tax rate would be reduced from 5.5% to 5.0%. Local tax rates would be reduced by

means of a complicated formula that would largely negate any windfall provided by the

expansion of the tax base. However, the rates would be adjusted to permit a roughly 10%

increase in revenue to any entity imposing a local tax. Between October 2013 and June 2016, no

new additional local taxes may be imposed, as the rate adjustment is calculated and refined.

Severance Tax:

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6087180v2 2

Reprising the proposal that was made during 2012, but which was not enacted, the budget

proposes to increase the severance tax associated with the use of horizontal wells to produce oil

and gas from shale formations in the state. The changes are summarized in the following chart:

Comparison of Existing and Proposed Severance Tax Structure

Current Severance Proposed Severance Tax

All Wells Vertical Wells Horizontal Wells

Product Tax Rate Tax Rate Tax Rate

Gas* $0.03 per MCF Lesser of 1% of value

or $0.03 per MCF; no

tax if daily production

is less than 10 MCF

1% of value produced

Oil* $0.20 per barrel $0.20 per barrel 1.5% of value during

1-year cost recovery,

4% of value thereafter

NGL No separate tax No separate tax 1.5% of value during

1-year cost recovery,

4% of value thereafter

Condensate Taxed as oil Taxed as oil 1.5% of value during

1-year cost recovery,

4% of value thereafter

*Current severance tax rates include both the severance tax and the “regulatory cost recovery

assessment” that began in 2010.

Revenue from the increased tax will be directed to the general revenue fund to offset some of the

income tax reductions.

Comments:

This proposal reflects a policy decision to shift Ohio’s revenue sources from income and

investment to consumption. Although cast as an overall tax decrease (annual income tax

revenues are expected to drop $2.73 billion once the rate reductions are fully phased in), the

expansion of the sales tax base is anticipated to result in an annual revenue increase net of the

reduction in state tax rates of roughly $1.848 billion.

This information is admittedly broad and a number of questions remain. Additional changes

may also be proposed. As details become available and specific language in the form of a bill

becomes available, additional analysis will be possible.

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1

TAX REFORM: Local Sales Tax Proposal

With Ohio broadening its sales tax base to include more services, local county governments and transit authorities will now have broader sales tax bases as well and without the same sales tax rate reduction that the state is making would end up imposing significant new tax increases on their citizens and businesses simply by keeping their local rates at current levels. Though the increases would vary by county, revenue increases would average 30 percent more at current rates. To prevent 96 individual county and transit sales tax increases across Ohio – and their inevitable commensurate negative impact on job creation -- the state will statutorily adjust local sales tax rates downward from 10-30 percent. Without the adjustment, it would result in a $700 million tax increase and diminish the job-creating value of the Governor’s tax cut and reform plan. At the same time, to protect the fiscal vitality of counties and transit authorities the state is guaranteeing fair and predictable revenue growth for all recipients of the tax. Counties and Transit Authorities: Revenue Will Grow

Beginning in July, 2013, local governments will not be able to change their sales tax rates for three years. State-managed local rate reductions and hold harmless adjustments will be in effect until July, 2016. At that point, counties and transit authorities will regain responsibility for managing sales tax rates. However, the levels to which local rates will be adjusted are intended to produce a revenue increase of 10 percent over the prior year beginning with the December, 2013 distribution allowing local governments to cope with – and actually benefit from – this policy. Initial Rate Reduction As mentioned, local rates will be reduced by statute. As counties have a different mix of businesses in their sales tax base, the rate reductions among counties will vary. Generally, larger counties with more taxable service providers will have larger rate decreases than counties with fewer providers. Rates will be set at increments of .05 percent. Currently those rates are set at .25 percent increments. Regardless of the level at which the rates are set, each local government is guaranteed 10 percent revenue growth for the period from December, 2013 through November, 2014 relative to the “base year” (i.e. Dec. 2012 - Nov. 2013). If, during the two years ending in November, 2013, a local government’s average annual sales tax growth exceeded 10 percent, then that government is guaranteed to receive growth based on that higher average annual rate. As a matter of course, if the rates as adjusted fall short of the revenues promised, the state will make up the shortage with supplemental payments to the effected counties and transit authorities. If the adjusted rates end up producing more revenue than guaranteed, the local governments will retain the overage.

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2

Second Series of Tax Rates (first ‘reset’ of tax rates) Beginning in year 2 – January, 2015 – the Department of Taxation will recalculate the local rates again. This recalibration will use data from the first year in which the expanded tax base took effect. Results from this first ‘reset’ of tax rates will go into effect April, 2015. Because there is a lag before revenue from these more accurate tax rates is realized, during the period December, 2014 – June, 2015 counties and transit authorities are guaranteed to receive at least 115 percent of what was received during the December, 2012 – June, 2013 period. Revenue from the January, 2015 rate ‘reset’ will begin to be realized in July 2015. During the remainder of calendar year 2015 and the first six months of 2016, local governments will experience revenue growth to the extent their total sales tax base grows. June, 2015 will be the last supplemental guarantee payment. Final Series Tax Rates (second ‘reset’ of rates) In January, 2016, rates will again be reset, using updated actual local sales tax data. This set of rates will go into effect in April, 2016. June, 2015 will be the last supplemental guarantee payment. Impact on Vendors

Ohio’s 330,000 vendors are authorized to retain a small, fixed percentage of the sales tax they collect on behalf of the state and local governments. This is called the vendor ‘discount’. It will remain at the existing .75% of the total sales tax collected. Businesses providing services proposed to be subject to sales tax would also be eligible for the vendor discount. (Please see Table below for Local Sales Tax Rates (current & adjusted) and revenues derived from those rates (actual and estimated.)

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3

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4

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Ohio’s Jobs Budget 2.0 | Tax Reform 1

Tax Reform

Creating Jobs by Cutting Taxes and Reforming the Tax Code

Ohio’s taxes are too high and the state relies too much on counterproductive tax methods such as the income tax. Creating a jobs friendly climate in Ohio means tearing down tax barriers that keep job creators from investing, expanding and hiring new workers. This is especially true for small businesses, which employ half of Ohio’s private-sector workforce and pay personal income tax on their business earnings.

Two years ago in his first budget, Gov. John Kasich struck his first blow against Ohio’s high taxes by cutting taxes $800 million by reducing the income tax and eliminating the Death Tax altogether. In this budget, Gov. Kasich builds on that progress with a $1.4 billion tax cut package (over three years) benefiting every Ohioan, regardless of their income. He calls for cutting taxes for small business owners in half on the first $750,000 of earnings, cutting the income tax by 20 percent, cutting the state sales tax rate from 5.5 to 5.0 percent and eliminating the severance tax altogether for small, conventional natural gas producers. At the same time, the Governor’s proposal modernizes Ohio’s tax code by broadening the sales tax base to include additional services and by raising the outmoded severance tax from 20 cents on a barrel of oil to 4.0 percent—still the lowest in the region.

$1.9 Billion Small Business Tax Cut: Income taxes on virtually all Ohio small businesses will be cut in half on the first $750,000 of earnings. The total income of approximately 98 percent of small businesses falls below this level. This dramatic tax cut frees up significant amounts of new capital ($1.9 billion over three years) for small businesses to better leverage the expanding economic recovery and make new investments and increase hiring to improve their competitiveness.

$2.1 Billion Income Tax Cut: Personal income taxes will be cut for all Ohioans by 20 percent over three years as a result of new severance tax rates for oil and gas drillers, and a broadening of the sales tax base. The tax cut will be phased in, starting with an immediate reduction of 7.5 percent in year one (equivalent to a $750 million tax cut), a 7.5 percent reduction in year two (equivalent to a cumulative $1.5 billion tax cut), and an additional five percent cut in year three (equivalent to a cumulative $2.1 billion tax cut). This change lowers Ohio’s top marginal rate from 5.925 percent to 4.74 percent.

Sales Tax Rate Cut: Ohio’s state sales tax rate will be cut from 5.5 percent to 5.0 percent. This savings estimated at $2.4 billion over three years will be especially beneficial to lower and middle income Ohioans, since sales taxes hits harder on their lower income amounts. Ohio’s strong consumer products companies and retailers will be positively impacted by this reduction as well, since Ohioans will see less of their money taken by government and more available for their purchases.

Eliminating Severance Taxes on Small Producers: Ohio’s small, conventional natural gas producers will see their severance taxes eliminated altogether. This means that 90 percent of the natural gas wells in Ohio will pay no severance tax.

Comprehensive Tax Reform—More Sustainable, More Competitive: The FY14-15 budget proposes broadening the sales tax base to include additional services and increasing Ohio’s outmoded severance tax from 20 cents on a

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Ohio’s Jobs Budget 2.0 | Tax Reform 2

barrel of oil to a low fixed rate of 4.0 percent. States and cities with high income taxes are more likely than ever before to drive revenue and investment away to lower tax jurisdictions. Shifting Ohio’s tax system away from its excessive reliance on income and toward a greater reliance on consumption of services helps combat income flight, and better aligns it with the national and Ohio trend toward a more robust service sector in our economy.

This reform tracks with findings of the Ohio Legislative Study Committee on Ohio’s Tax Structure released in April 2012 that recommended the sales tax be applied to all economic activity on an equal basis. The broadening of Ohio’s sales tax base to include additional services allows Ohio’s state sales tax rate to be reduced from 5.5 percent to 5.0 percent and an adjustment in county and transit authority sales tax rates will prevent a sudden, unintended spike in county sales tax revenue. The inclusion of new taxable services would, of course, maintain exemptions for services related education, housing construction and rent, health care, and residential utilities.

Good Management Dividend: Controlling government costs and achieving strong revenue growth will allow Ohio to maximize the Budget Stabilization Fund at its statutory target of about $1.5 billion. Any surplus above that level would result in a temporary income-tax rate reduction of approximately 4 percent for all Ohio taxpayers. This tax relief would be in addition to the governor’s proposal to cut income taxes by 20 percent over three years.

BOTTOM LINE: Reducing the tax burden on small businesses and reforming our tax structure will give Ohio a more jobs-friendly, competitive economic environment, allowing our state to continue to improve on our position as a national leader in job creation.

###

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Governor John R. Kasich Lt. Governor Mary Taylor

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Cutting Taxes Through Tax Reform

Joseph W. Testa

Department of Taxation Tax Commissioner

Ohio’s Jobs Budget 2.0 Jobs. Momentum. Transformation.

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$1.4 Billion Tax Cut

to Create Jobs and Economic Growth

Ohio’s Jobs Budget 2.0 Jobs. Momentum. Transformation.

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50% Cut – Virtually All Ohio

Small Business Income Taxes Small Businesses Employ 50% of Ohio’s Private Sector Workforce

• Job Creation Opportunity

• Reinvest in Business Expansion

Ohio’s Jobs Budget 2.0 Jobs. Momentum. Transformation.

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• Cut Income Taxes 20% over Three Years • Cut State Sales Tax Rate from 5.5% to 5% • Eliminate Severance Taxes on Small,

Conventional Producers • Shift Tax Benefits to Ohioans from Oil Companies • Broaden the Sales Tax Base—Fair and More Stable • Temporary Local Sales Tax Rate Reduction

Guaranteeing a 10% Growth

Ohio’s Jobs Budget 2.0 Jobs. Momentum. Transformation.

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Personal Income Tax Cut for All Ohioans

7.5%

15.0% 20.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%Tax Year 2013 Tax Year 2014 Tax Year 2015

Cumulative Personal Income Tax Cut

Ohio’s Jobs Budget 2.0 Jobs. Momentum. Transformation.

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Good Management Dividend

7.5%

15.0% 20.0% 4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%Tax Year 2013 Tax Year 2014 Tax Year 2015

Cumulative Personal Income Tax Cut Estimated ITRF Tax Cut

Ohio’s Jobs Budget 2.0 Jobs. Momentum. Transformation.

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LegendE = Exempt from taxationGray = Remains exempt from sales taxBlue = Service already subject to sales tax

Before After Legislation Current law (R.C.) *Proposed law (R.C.)State Sales Tax Rate 5.50% 5.00%

Services currently subject to sales taxation

900 Number services (calls to 900 numbers) 5.50% 5.00% H.B. 298 (1991) 5739.01(B)(3)(i) 5739.01(X) Aircraft rental to individual pilots, long term (without operator) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Aircraft rental to individual pilots, short term (without operator) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Armored car services 5.50% 5.00% H.B. 298 (1991) 5739.01(B)(3)(h) 5739.01(X) Auto service 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(c) 5739.01(X) Automotive road service and towing services 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(s) 5739.01(X) Automotive storage 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(9) 5739.01(X) Automotive washing and waxing 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(c) 5739.01(X) Bulldozers, draglines and const. mach., long term (without operator) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Bulldozers, draglines and const. mach., short term (without operator) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Carpet and upholstery cleaning 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(j) 5739.01(X) Cellular telephone services 5.50% 5.00% S.B. 143 (2002) 5739.01(B)(3)(f) 5739.01(X) Cold storage 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(9) 5739.01(X)

Governor John R. KasichJOBS Budget 2.0Sales taxability of services

The following spreadsheet compares the taxability of services before and after Jobs Budget 2.0. The services listed here are services used in a 2007 survey on sales taxation of services among the states by the Federation of Tax Administrators (FTA) and additional services reflected in the North American Industry Classification System (NAICS) classifications. The spreadsheet is for illustrative purposes only. It does not constitute a legal opinion. Each statutory exemption has specific requirements that must be met in order to qualify for exemption. The cited statutory exemption applies only if the taxpayer meets all the requirements set forth in the referenced statute.

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Commercial linen supply (rental) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Custom fabrication labor 5.50% 5.00% H.B. 694 (1937) 5739.01(B)(5) 5739.01(B)(7) Data processing services (only if used in business) 5.50% 5.00% H.B. 291 (1983) 5739.01(B)(3)(e) 5739.01(X) Diaper service 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(d) 5739.01(X) Employment agencies 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(l) 5739.01(X) Exterminating (includes termite services) 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(m) 5739.01(X) Fur storage 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(9) 5739.01(X) Garment services (altering & repairing) 5.50% 5.00% 1935 5739.01(B)(3)(a) 5739.01(X) Health, recreation, sports clubs 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(n)+(o) 5739.01(X) Heating oil (other than motor vehicle fuel) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Hotels, motels, lodging houses 5.50% 5.00% S.B. 376 (1959) 5739.01(B)(2) 5739.01(B)(2) Household goods storage 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(9) 5739.01(X) Information services (only if used in business) 5.50% 5.00% H.B. 291 (1983) 5739.01(B)(3)(e) 5739.01(X) Installation charges - other than seller of goods 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(b) 5739.01(X) Installation charges by persons selling property 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(b) 5739.01(X) Internet Service Providers-Dialup (only if used in business) 5.50% 5.00% H.B. 291 (1983) 5739.01(B)(3)(e) 5739.01(X) Internet Service Providers-DSL or other broadband (only if used in busi 5.50% 5.00% H.B. 291 (1983) 5739.01(B)(3)(e) 5739.01(X) Interstate telephone & communications (subject to sourcing rules) 5.50% 5.00% H.B. 171 (1987) 5739.01(B)(3)(f) 5739.01(X) Intrastate chartered flights (with pilot) 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(r) 5739.01(B)(5) Intrastate telephone & communications 5.50% 5.00% H.B. 171 (1987) 5739.01(B)(3)(f) 5739.01(X) Intrastate transportation of persons 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(r) 5739.01(X) Labor charges - repairs other tangible property 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(a) 5739.01(X) Labor charges - repairs to intrastate vessels 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(a) 5739.01(X) Labor charges on repairs delivered under warranty 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(a) 5739.01(X) Labor charges on repairs to motor vehicles 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(a) 5739.01(X) Labor on radio/TV repairs; other electronic equip. 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(a) 5739.01(X) Landscaping services (including lawn care) 5.50% 5.00% H.B. 298 (1991) 5739.01(B)(3)(g) 5739.01(X) Laundry and dry cleaning services, non-coin op 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(d) 5739.01(X) Limousine service (with driver) 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(r) 5739.01(B)(5) Long term automobile lease (without operator) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Mainframe computer access and processing serv. (only if used in business) 5.50% 5.00% H.B. 291 (1983) 5739.01(B)(3)(e) 5739.01(X) Maintenance and janitorial services 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(j) 5739.01(X) Marina Service (dry docking, storage, cleaning, repair) 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(9) 5739.01(X) Massage services (without medical prescription) 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(q) 5739.01(X)

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Membership fees in private clubs. 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(o) 5739.01(X) Mini -storage 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(9) 5739.01(X) Online Data processing services (only if used in business) 5.50% 5.00% H.B. 291 (1983) 5739.01(B)(3)(e) 5739.01(X) Personal care services 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(q) 5739.01(X) Personal property, long term (generally) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Personal property, short term (generally) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Photo finishing 5.50% 5.00% S.B. 376 (1959) 5739.01(B)(4) 5739.01(X) Photocopying services 5.50% 5.00% S.B. 376 (1959) 5739.01(B)(4) 5739.01(X) Printing 5.50% 5.00% S.B. 376 (1959) 5739.01(B)(4) 5739.01(X) Private investigation (detective) services 5.50% 5.00% H.B. 298 (1991) 5739.01(B)(3)(h) 5739.01(X) Rental of hand tools to licensed contractors. 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Rental of video tapes for home viewing 5.50% 5.00% 5739.01(B)(1) 5739.01(B)(1) Repair labor, generally 5.50% 5.00% H.B. 694 (1981) 5739.01(B)(3)(a) 5739.01(X) Repair material, generally 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Satellite TV & radio (direct to consumers) 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(p) 5739.01(X) Security services 5.50% 5.00% H.B. 298 (1991) 5739.01(B)(3)(h) 5739.01(X) Service contracts sold at the time of sale of TPP. 5.50% 5.00% H.B. 298 (1991) 5739.01(B)(7) 5739.01(X) Shoe repair 5.50% 5.00% 1935 5739.01(B)(3)(a) 5739.01(X) Short term automobile rental (without operator) 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Sign construction and installation 5.50% 5.00% 1935 5739.01(B)(3)(b) 5739.01(X) Software - pre-written 5.50% 5.00% Administrative rule 5739.01(B)(1) 5739.01(B)(1) Software - pre-written & downloaded 5.50% 5.00% Case law 5739.01(B)(3)(e) 5739.01(X) Swimming pool cleaning & maintenance **5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(j) 5739.01(X) Tanning parlors 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(q) 5739.01(X) Taxi operations 5.50% 5.00% H.B. 95 (2003) 5739.01(B)(3)(r) 5739.01(B)(5) Taxidermy 5.50% 5.00% 1935 5739.01(B)(1) 5739.01(B)(1) Temporary help agencies 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(k) 5739.01(X) Tire recapping and repairing 5.50% 5.00% 1935 5739.01(B)(3)(a) 5739.01(X) Window cleaning 5.50% 5.00% H.B. 904 (1993) 5739.01(B)(3)(j) 5739.01(X)

Services subject to exemptions including health and well-being Adult and child day care services E E 5739.01(X)(6) Carpentry, painting, plumbing and similar trades (real property) E E 5739.01(X)(3) Consumer lease/rental of consumer's primary residence E E 5739.01(X)(4)

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Custom meat slaughtering, cutting and wrapping E E 5739.01(B)(42)(n) Dentists E E 5739.01(X)(1) Electricity E E 5739.02(B)(7) Food storage E E Ohio Const. XII § 3 Funeral services E E Interstate air courier (billed in-state) E E 5739.02(B)(10) Labor - repairs or remodeling of real property E E 5739.01(X)(3) Labor - repairs to commercial fishing vessels E E 5739.02(B)(42)(d) Labor charges - repairs to interstate vessels E E 5739.01(B)(10) Labor charges on repair of aircraft E E 5739.02(B)(49) Labor charges on repairs to railroad rolling stock E E 5739.02(B)(14) Local transit (intra-city) buses E E 5739.01(B)(3)(r) 5739.01(B)(5) Medical and health care services E E 5739.01(X)(1) Medical test laboratories E E 5739.01(X)(1) Metal, non-metal and coal mining services E E 5739.01(X)(8) Natural gas (sold by public utility) E E 5739.02(B)(7) Nursing services out-of-hospital E E 5739.01(X)(1) Oil Field Services E E 5739.01(X)(8) Personal instruction (dance, golf, tennis, etc.) E E 5739.01(X)(2) Physicians E E 5739.01(X)(1) Preschool through twelve, post-secondary, and tutoring E E 5739.01(X)(2) Radio & television, national advertising E E 5739.02(B)(10) Real property construction services E E 5739.01(X)(3) Residential trash pick-up and disposal E E 5739.01(X)(9) Seismograph & Geophysical Services E E 5739.01(X)(8) Services used directly in producing oil and gas E E 5739.01(X)(8) Social assistance services E E 5739.01(X)(7) Soil prep., custom baling, other ag. services E E 5739.02(B)(42)(n) 5739.02(B)(42)(n) Transactions by which consumer obtains insurance E E 5739.01(X)(5) Typesetting & platemaking for the print trade E E 5739.02(B)(42)(f) 5739.02(B)(42)(f) Veterinary services (livestock) E E 5739.02(B)(42)(n) 5739.02(B)(42)(n) Water (including sewer) E E 5739.02(B)(7) Water well drilling (real property) E E 5739.01(X)(3)

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Services added as taxable services

Accounting E 5.00% 5739.01(X) Accounting and bookkeeping E 5.00% 5739.01(X) Admission to cultural events E 5.00% 5739.01(X) Admission to professional sports events E 5.00% 5739.01(X) Admission to school and college sports events E ***5.00% 5739.01(X) Advertising agency fees (other than ad placement) E 5.00% 5739.01(X) Amusement park admission & rides E 5.00% 5739.01(X) Architects E 5.00% 5739.01(X) Architectural, engineering, and related services E 5.00% 5739.01(X) Attorneys E 5.00% 5739.01(X) Bail bond fees E 5.00% 5739.01(X) Billiard parlors E 5.00% 5739.01(X) Books - Downloaded E 5.00% 5739.01(B)(6) Bowling alleys E 5.00% 5739.01(X) Cable TV services E 5.00% 5739.01(X) Call center E 5.00% 5739.01(X) Check & debt collection E 5.00% 5739.01(X) Circuses and fairs -- admission and games E 5.00% 5739.01(X) Coin operated video games E 5.00% 5739.01(X) Commercial art and graphic design E 5.00% 5739.01(X) Credit information, credit bureaus E 5.00% 5739.01(X) Credit rating svc E 5.00% 5739.01(X) Cutting, coloring, styling of hair E 5.00% 5739.01(X) Data Mining Services E 5.00% 5739.01(X) Dating services E 5.00% 5739.01(X) Debt counseling E 5.00% 5739.01(X) Engineers E 5.00% 5739.01(X) Fishing and hunting guide services E 5.00% 5739.01(X) Horse boarding and training E 5.00% 5739.01(X) Insurance services (insurance policy purchases remain exempt under 5739.01(X)(5)) E 5.00% 5739.01(X) Interior design and decorating E 5.00% 5739.01(X) Intrastate courier service E 5.00% 5739.01(X)

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Investment counseling E 5.00% 5739.01(X) Land surveying E 5.00% 5739.01(X) Laundry and dry cleaning services, coin-op E 5.00% 5739.01(X) Legal services E 5.00% 5739.01(X) Loan broker fees E 5.00% 5739.01(X) Lobbying and consulting E 5.00% 5739.01(X) Magazine subscriptions E 5.00% 5739.01(X) Mailbox rentals E 5.00% 5739.01(X) Mailroom services E 5.00% 5739.01(X) Management consultant services E 5.00% 5739.01(X) Marine towing service (incl. tugboats) E 5.00% 5739.01(X) Marketing E 5.00% 5739.01(X) Movies/Digital Video - Downloaded E 5.00% 5739.01(B)(6) Music - Downloaded E 5.00% 5739.01(B)(6) Other Electronic Goods - Downloaded E 5.00% 5739.01(B)(6) Packing and crating E 5.00% 5739.01(X) Pari-mutuel racing events. E 5.00% 5739.01(X) Parking lots & garages E 5.00% 5739.01(X) Pet grooming E 5.00% 5739.01(X) Pinball and other mechanical amusements E 5.00% 5739.01(X) Process server fees E 5.00% 5739.01(X) Property sales agents (real estate or personal) E 5.00% 5739.01(X) Public Relations E 5.00% 5739.01(X) Public relations, management consulting E 5.00% 5739.01(X) Real estate management fees (rental agents) E 5.00% 5739.01(X) Real estate title abstract services E 5.00% 5739.01(X) Refuse collection (industrial) E 5.00% 5739.01(X) Rental of films and tapes by theaters E 5.00% 5739.01(X) Sales of advertising time or space: Billboards E 5.00% 5739.01(X) Magazine E 5.00% 5739.01(X) Newspaper E 5.00% 5739.01(X) Radio & television, local advertising E 5.00% 5739.01(X) Secretarial and court reporting services (excludes temporary hiring) E 5.00% 5739.01(X)

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Service charges of banking institutions E 5.00% 5739.01(X) Software - custom programs - programming E 5.00% 5739.01(X) Software - modifications to pre-written program E 5.00% 5739.01(X) Sound recording E 5.00% 5739.01(X) Stenographic services E 5.00% 5739.01(X) Tax return preparation E 5.00% 5739.01(X) Telemarketing services on contract E 5.00% 5739.01(X) Telephone answering service E 5.00% 5739.01(X) Test laboratories (excluding medical) E 5.00% 5739.01(X) Tickertape reporting (financial reporting) E 5.00% 5739.01(X) Trailer parks - overnight E 5.00% 5739.01(X) Travel agent services E 5.00% 5739.01(X)

*Sales tax is imposed on services under proposed R.C. 5739.01(B)(3) and proposed R.C. 5739.01(X) defines "service."**Indoor swimming pool cleaning and maintenance is currently taxable. ***R.C. 5739.02(B)(9)(a) + (b) concerns exemptions for sales of certain services by churches, charities, and school organizations that will continue under proposed law.

Sunday, February 10, 2013.

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