As discussed in an earlier alert, Ohio Governor John Kasich’s proposed budget bill broadly subjects previously untaxed business activities to sales tax. The bill seeks to expand sales tax to include most “services.” While the bill itself is well over 4,000 pages in length, the good news is the definition of what is a taxable “service” is relatively short. Unfortunately, the definition’s brevity is due to it mainly listing the excluded activities.
Under the bill, “service” means “an act performed for another person for a fee, retainer, commission, or other consideration, including any fee or other amount charged for access to a physical fitness facility or recreation and sports club.”
One of the items explicitly excluded from “services” is payments for residential leases (i.e., for a person’s primary residence). However, such exclusion implies that other leases – such as commercial leases – would be directly in the purview of the sales taxes imposed under this proposed bill. This implication would be significant to any lessee or owner of commercial real estate. Effectively, this new sales tax would increase the cost of lease payments by five percent for the lessee and require the owner to collect and remit sales tax on such lease.
Other than its significance for every lessee of commercial real estate in the State of Ohio, this proposed tax may be significant for owners of commercial real estate, real estate developers and REITS, as well as other related companies that conduct business between one another. For example, sales tax would now be imposed on a lease between separate but related business entities where one company owns real estate and leases it to a related operating company.
Another exclusion from “services” worth noting is services rendered by an employer’s employee. However, the fact that something seemingly obvious needs to be excluded shows how far this bill reaches. Again, going back to the related company example, in situations where related companies perform services for another, such services could be subject to sales tax.
While this bill presents both positives and negatives for businesses, some taxable activities may be avoidable with adequate planning. An assessment of your business and its operations prior to the enactment of the proposed bill would be advisable to ascertain the impact on your overall operations.