Ohio's "CAT" law might be beneficial for out-of-state businesses

March 15, 2012

The Ohio commercial activity tax law ("CAT") is an annual tax on the privilege of doing business in Ohio.

Most receipts generated in Ohio in the ordinary course of business by a drug or pharmacy supplier of products or services are subject to the CAT. The law only applies to those gross receipts that are sourced to Ohio, however, and businesses should fully understand how the CAT law treats the sourcing of sales to Ohio purchasers.

Note that an "out-of-state" entity can be required to register and pay the CAT if that person has "bright-line" presence in Ohio, which is determined by law in Ohio and should be closely reviewed.

Many drug and pharmacy suppliers sell products and services to an Ohio purchaser and such supplier may, therefore, be subject to the CAT. Recall that taxable gross receipts for purposes of the CAT only include gross receipts sourced to Ohio. Sales of tangible personal property that is shipped to a purchaser located outside Ohio would not be subject to the tax because such gross receipts would be sourced outside Ohio.

It is critical that businesses understand the special sourcing rules used for purposes of the CAT. The tax is not an income tax, so profitability is irrelevant for purposes of the measure of the CAT.

Depending on the nature of the Ohio purchaser as well as certain specific CAT statutory exceptions, the out-of-state entity could be over-paying CAT. Those taxpayers that have paid excess CAT could be entitled to tax refunds for "old years" if the refunds are filed within a proper time frame.

How it works

By way of example, a drug manufacturer located in Wisconsin sells product to a purchaser located in Ohio for a price of $3 million and ships the product to Ohio. The CAT imposes a "flat fee" for the first $1 million of Ohio gross receipts. The CAT tax rate is .0026 on those Ohio receipts in excess of the first $1 million. The Wisconsin seller will owe a CAT tax to Ohio in the amount of $5,350 for the year ($150 flat fee plus .0026 times $2 million = $5,350).

Depending on other factors, some of the $3 million in gross receipts might not need to be sourced to Ohio under a special CAT sourcing provision, and, therefore, the ultimate tax owed could be less than $5,350.

A state and local tax advisor should be contacted to determine whether a business could obtain tax relief from a special CAT sourcing provision that could reduce overall CAT tax liability.

This tax is just one example of a gross receipts tax. Other states have enacted similar taxes where similar issues are implicated.

This article is not intended as legal advice and should not be used as such. When legal questions arise, pharmacists should consult with attorneys familiar with the relevant drug and pharmacy laws.

Ned Milenkovich is a member at McDonald Hopkins, LLC, and chairs its drug and pharmacy practice group. He is also vice-chairman of the Illinois State Board of Pharmacy. Contact Ned at 312-642-1480 or nmilenkovich@mcdonaldhopkins.com