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As a small business owner, there are three types of state taxes that should concern you. Sales tax is fairly obvious, but the other two you may not have even heard of. Let’s explore those two, and how you can strategically deal with them:
Use Tax: To understand Use Tax, let's look at a scenario where you bought equipment or supplies for your business on the Internet, and the supplier did not charge you sales tax. Dodged a bullet there, right? Not so fast.
Ohio still wants what it considers its fair claim to sales tax — charged or not. Under the Ohio use tax model, you register your business for a use tax account. After doing that, the state will give you information on your rate and how to pay.
This system depends heavily on the business’ honesty, so collection of this tax has been a challenge. During state budget crunches, the state will use new vendor license registrations as a “hit list” to go fishing for unpaid use tax. The state uses a “guilty until proven innocent” method to collect from vendors who have not created a use tax account or filed a use tax return. You can (and should) petition in protest any unfair “estimate.” However, it is another worry until the matter is resolved — and you don’t need more worries, correct?
CAT Tax: This tax has nothing to do with felines! In this case, CAT stands for Commercial Activity Tax. This tax is levied to cover business use of state resources — roads, bridges, water, air and so on.
But wait — you own a small restaurant and you don't use that many resources. Well, the good news is, if your gross revenue per year is less than $150,000 — you are off the hook. If your gross revenue tops $150,000, then you must register for a CAT tax account on the Ohio Business Gateway, and pay the minimum $150 admin fee. Once you reach the $1M gross revenue plateau for a year, then a percentage tax kicks in. Note the tax is contingent on gross revenue, not net income (profits).
This is one of the few taxes you will have to pay even if you are losing money. So you paid the $150 CAT admin fee tax last year because you were at $167,000 in gross revenue, but now you are $125,000 gross at the end of the current year. Can you “cancel” your CAT registration now, as you are now under the threshold? Technically, yes. However, the state is not set up to handle that very well. If you try to cancel the CAT account, you may find the state sending you a form to complete, asking why you went out of business and closed up. No, it does not make a whole lot of sense, but that’s the way things happen sometimes. It can be very frustrating. Be firm and always respond to any tax correspondence from the state in a swift and clear manner.
Have a question for Mark Lankford of the Butler County Small Business Development Center? Email questions to laura@hamilton-ohio.com for possible inclusion in an upcoming column.
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