The Cleveland Plain Dealer (March 3, 2013)
Different rates, forms for each community mean multiple filings
Teresa Dixon Murray
If you think your income tax returns are a headache, CPA Amy Gibson in Mayfield says you have nothing to complain about. She has seen clients who have to submit federal and Ohio returns - and 20 or 30 different returns for different Northeast Ohio cities.
The reason: Ohio is the only state that allows every municipality to set its own tax rates, establish its own rules about income and deductions, and issue its own tax forms.
So if you're a salesperson or contractor or consultant who has meetings or does work in communities from Euclid to Cleveland to Macedonia to Medina, you could be liable for filing municipal income tax returns for a slew of different cities.
Likewise if you run a business, you may be expected to file tax returns in various cities, some of which collect tax based on whether you ship there, drive through the city or have meetings there.
"It places a huge compliance burden on local businesses," said Gibson, a principal in the tax planning and preparation department of Skoda Minotti.
A proposed change in Ohio law would overhaul some aspects of municipal income tax collection, primarily by requiring cities to unify some of their definitions for income and deductions and also by not counting anything less than a half-day as a work day for income tax purposes.
It also would expand the number of days that someone must work in a community before he is liable for any income tax there. Currently, the threshold is 12 days per year. The proposal would expand that to 20 days.
Changes such as these would mean less tax revenue for some communities. At issue is some of the $4 billion taken in annually by Ohio's cities and villages and how it's collected.
Supporters of the reform say it would make life easier for residents and businesses and also make Ohio more attractive to companies that may avoid moving here because of the municipal tax headaches.
Opponents of the reform -- including 30 Northeast Ohio mayors who rallied against the legislation last week -- say it will drastically reduce the income that municipalities collect to provide valuable services, such as fire and police protection. And they fear the new law would be a first step toward prohibiting communities from setting their own income tax rates and handling their own tax collection.
Ohio is deemed most complicated
It all started in the 1940s, when the first Ohio city started its own income tax. Now, Ohio has 600 municipalities using 300 different forms and each with their own rates, definitions of tax, filing requirements, deadlines and reciprocity amounts.
"Ohio has the most complicated local income tax system in the United States," said state Rep. Cheryl Grossman, a Republican from Grove City, who co-sponsored the latest overhaul effort, House Bill 5, which was introduced in January.
"It is a deterrent to doing business in Ohio," Grossman said.
Amy Mignogna, director of tax policy for the Ohio Society of CPAs in Columbus, said municipal tax reform has been a top priority for more than 20 years, for two big reasons.
First, the group believes it hurts Ohio's economy. "What we hear from national site selectors who are not in Ohio is that this state's municipal tax system is the No. 2 barrier to companies locating or relocating here," she said. "Businesses, when they don't choose Ohio, that doesn't make headlines."
Ohio is the only state with the "patchwork" of different laws in different cities, she said. While 10 states allow municipalities to assess income taxes, most allow it only for certain cities, such as Baltimore in Maryland. Or the tax is assessed based on where you live, not where you work. This is the case in Michigan. So individuals and companies don't have to worry about whether they do business in different cities; they reside in only one place.
Second, the spaghetti mess of 600 sets of laws and 300 different forms is difficult for accountants to manage and keep up with. "It's a liability issue," Mignogna said.
While people might think accountants would oppose the reform because more complicated income tax returns mean more revenue for accounting firms, accountants actually want simpler rules, said Gibson, the Mayfield CPA.
For example, the client who is a small contractor may have supervisors visit 20 job sites in a day. "They've created a filing requirement" in those cities, she said.
At the end of the year, Gibson might charge that company $5,000 total for its federal and Ohio tax returns, but have to charge an additional $6,000 to calculate revenues for those 20 different cities and handle all of those 20 tax returns.
"It has become very costly for them," she said. "I hate charging somebody that much to do it but it's a lot of work."
Daniel Navin of the Ohio Chamber of Commerce said the compliance is such a pain and is so ridiculous for many businesses that they might spend $75 to get a return prepared in a city where they owe only $10 in tax.
"It doesn't make for good tax policy," said Navin, assistant vice president of tax and economic policy. "If it were an anomaly, that would be one thing. But there are too many instances of this."
Other supporters of the bill include Associated General Contractors of Ohio, National Federation of Independent Business, Ohio Manufacturers' Association, Ohio Restaurant Association, Ohio State Medical Association, Ohio Trucking Association, Ohio Contractors Association and the Ohio State Bar Association.
Opponents are made up primarily of the state's cities and villages, who say their finances would be crushed. They also say tales of the extra workload is overblown.
Bratenahl Mayor John Licastro, who is president of the Northeast Ohio Mayors and City Managers Association, said that 73 percent of businesses file only one or two local returns. That figure includes businesses under the Regional Income Tax Agency and Central Collection Agency, which together collect taxes for about half of the state's municipalities.
Meanwhile, the reform would cripple some municipalities that depend heavily on income tax revenue, Licastro said.
Cities favor some changes, oppose other
Some of the changes proposed in the bill involve complicated accounting issues. One part of the bill aims to expand how companies can claim tax deductions that exceed its taxable income, resulting in negative taxable income. Others would treat revenue differently if it were generated by an online sale.
Cities are in favor of many of the proposed changes but vehemently oppose others.
Kent Scarrett, director of communications for the Ohio Municipal League, said his group favors making people's lives easier, such as by not counting time spent in a city as a day of work unless it is the majority of that day. That way, a person wouldn't have tax liability in multiple cities for the same day - she could have only worked the majority of the day in one city.
Scarrett acknowledged that some communities get overzealous and send out assessments to companies that could do nothing more than just drive through their communities. "Currently, a day is not defined," he said. "That needs to be cleaned up."
The league is also in favor of uniform filing dates and a uniform statute of limitations.
But he believes some of the changes aren't aimed at uniformity, they're aimed at helping some businesses pay less tax.
The league also fears the law would be a first step toward taking away cities' rights to set many of their own laws. The bill calls for a new Municipal Tax Policy Board to oversee what communities are doing.
"That is taking away local control," he said.
Communities fear the next step in a future bill would be eliminating cities' abilities to set different tax rates and collect their own taxes.
CPA Beth D'Arcy, owner of Hupp Tax Service in Willowick, said income taxes assessed by local communities is confusing for many, including new residents who never had to worry about it in another state. Her firm does about 3,500 returns a year; about 85 percent are for individuals and the rest are for small businesses.
"I've talked to people who've gotten notices from RITA and they've thrown them away. They didn't know what they were."
Even if municipalities kept their own rates, D'Arcy would love to see one form used by all municipalities and agencies like RTA and CCA.
"Oh gosh, that would be crazy easy," she said. "That's a pipe dream."
Twinsburg certified financial planner Darrell Claytor, who has a master's degree in taxation, said he'd like to see one collection agency because dealing with so many city tax departments is difficult. The cities would still be able to set their own rates and decide how much of a credit to give for taxes paid in other communities.
Claytor said much of the confusion will continue as long as cities have their own rates and credits, but right now, many have no choice. Many have few businesses but a lot of residents; others are sizable cities with a lot of businesses and demand for services but smaller populations. "Ohio needs to rethink its tax structure," he said.
But Scarrett of the Ohio Municipal League said Ohio's constitution is unique because communities can decide how much income is generated from income and how much comes from property taxes and sales taxes. Ohio's reliance on income taxes works well here, he said.
"No tax is fair, but income tax is the most fair," he said.
While supporters say they hope the bill is passed by June, Licastro of Bratenahl noted that there are about 48 major parts to the bill. The municipalities agree with about 20 of them and believe they can work with bill supporters on 20 more. But there are huge disagreements over the remaining eight.
Plain Dealer Columbus Bureau Chief Robert Higgs contributed to this story.