UNDERSTANDING THE “NEW ORC 718”Changes to Withholding

Residency / DomicileEffective Date / Authority to Levy a Tax

Local Board of Tax Review

Ohio Municipal LeagueIncome Tax SeminarFriday, July 10, 2015

Dennis Bernaciak, Tax ManagerMichelle Jordan, Tax Manager, Dayton Branch Office

Michael Ryba, Chief of Audit

City of Cleveland Central Collection Agency (CCA)

For purposes of this presentation, line numbers from the “As Passed by the Senate” version of Am. Sub. HB 5, in addition to section references, will be used.

RESIDENCY / DOMICILE

718.012 RESIDENCY / DOMICILEOld Rules – Use Common Law definition:• The domicile of a person is where he has his true, fixed, permanent home and principal establishment, and to which, whenever he is absent, he has the intention of returning.

New Rules (HB 5): 718.012: Lines 1370-1465• Presumption is a change from current law, however,Sample Ordinance provides the common law definition of “domicile,” since “domicile” was not defined in the legislation.

718.012 RESIDENCY / DOMICILE718.012(A)(1): Lines 1370-1376• “An individual is presumed to be domiciled in a municipal corporation for all or part of a taxable year if the individual was domiciled in the municipal corporation on the last day of the immediately preceding taxable year or if the tax administrator reasonably concludes that the individual is domiciled in the municipal corporation for all or part of the taxable year.” (see factor 19)

718.012(A)(2): Lines 1377-1381• Individual may rebut the presumption of domicile by a preponderance of the evidence.

718.012 RESIDENCY / DOMICILE718.012 (B): Lines 1382-1465• For determining domicile, only the following factors shall apply. (25 factors

listed)• The tax administrator can exercise reasonable judgment (using the 25

factors) to determine if the taxpayer was domiciled for all or part of tax years.• Taxpayer and Tax Administrator must use the same factors.

FACTORS DO NOT INCLUDE: • Address on State or Federal tax return, address on another municipal tax

return where taxpayer is claiming residency / domicile.

FACTORS DO INCLUDE:• LINE 1445 – CONTACT PERIODS. While they do not provide a minimum number of contact periods to establish residency, this test is similar to the State’s bright line test for residency.

718.012 RESIDENCY / DOMICILE

IMPORTANT NOTE718.012(A)(2): Lines 1377-1381• states that a “preponderance of evidence…” NOT “preponderance

of factors” may be used to determine residency / domicile.• When examining factors, those that do not apply are neutral and

can be ignored.• Factors 1-12 and 14-17 may be neutral for deciding domicile

between Ohio communities. These may have more impact in determining domicile inside v. outside Ohio.

EXAMPLE: When trying to decide if taxpayer is domiciled in your municipality or Fort Myers, FL, these factors may be significant.

718.012 RESIDENCY / DOMICILE

• Factors 13, and 18-25 are most likely to apply in deciding domicile between Ohio communities.

EXAMPLE: When trying to determine if taxpayer is domiciled in your town or ABC Township, factors 1-12 and 14-17 will

probably be neutral. Factors 13, 18-25 are similar to those you would have looked at prior to HB 5.

• Factor #22 – The location of real estate for which the individual claimed a property tax exemption or reduction allowed on the basis of the individual’s residence or domicile.

EXAMPLE: Did the taxpayer get the deduction on property tax for an “owner occupancy credit?”

718.012 RESIDENCY / DOMICILEFactor #23 – The location and value of abodes owned or leased by the individual.• Pay close attention to the value of property

owned in another state, where taxpayer may be claiming domicile.

MANY OF THE FACTORS PROVIDED MAY NOT BE RELEVANT. Most people do not live where they got married, where their burial plot is located, location of “issuers” of credit cards, etc.

718.012 RESIDENCY / DOMICILE

NOTE: MANY OF THE FACTORS LISTED ARE INCLUDED IN OHIO ADMINISTRATIVE CODE SECTION 5703-7-16 AS FACTORS THAT MAY NOT BE USED FOR STATE PURPOSES TO DETERMINE DOMICILE.

These include factors 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 (with 5% ownership), 11, 12, 13 (with slightly different scenario), 14, 15, 16 and 17.

5703-7-16. Personal Income tax: determination of resident status.(A) The following factors shall not be considered in making a determination of an individual's domicile under division (C) or (D) of section 5747.24 of the Revised Code :(1) The location of financial institutions in which the individual or the individual's spouse have any accounts, including, but not limited to, checking, savings, certificates of deposit, or individual retirement accounts. (2) The location of issuers of credit cards to the individual or the individual's spouse or any other persons making installment loans to the individual or the individual's spouse. (3) The location of institutional lenders which have made loans to or loans which are guaranteed by the individual or the individual's spouse. (4) The location of investment facilities, brokerage firms, realtors, financial advisors or consultants used by the individual or the individual's spouse.(5) The location of either the insurance company that issued or the insurance agent that sold any policy of insurance to the individual or the individual's spouse including, but not limited to, life, health, disability, automobile, or homeowner's insurance. (6) The location of law firms, accounting firms, and similar professionals utilized by the individual or the individual's spouse for legal, tax, accounting, financial, or retirement services. (7) The location of physicians, dentists, osteopaths, optometrists, or other health care providers, or veterinarians utilized by the individual or the individual's spouse. (8) The location of organizations described in section 501(c) of the Internal Revenue Code , except organizations described in paragraphs (2), (7), and (10) of that section, to which the individual or the individual's spouse make contributions or other payments or in which they participate as a congregant, member, board member, committee member, adviser, or consultant provided that participation does not exceed attendance at more than twelve meetings or functions of any one such organization during a calendar year. (9) The location of funeral facilities or the burial plot of the individual or the individual's spouse.

(10) The location of business ventures or business entities in which the individual or the individual's spouse hold board membership unless the individual or the individual's spouse exercise significant control, either individually or jointly, over the affairs of the entity. An individual or individual's spouse exercises significant control, either jointly or individually, over the affairs of a corporation if he or she owns more than five percent of the stock in or five percent of the value of such corporation including constructive ownership as defined in section 1563(e) of the Internal Revenue Code . An individual or individual's spouse exercises significant control, either individually or jointly, over the affairs of a partnership or limited liability company or other business entity or business venture if he or she owns more than a five percent interest in the capital or profits of the partnership, limited liability company, or other business entity or business venture applying constructive ownership principles parallel to those in section 1563(e) of the Internal Revenue Code . (11) The location, place of business, or place of organization or incorporation of a corporation, partnership, limited liability company, or other business entity or business venture in which the individual or the individual's spouse is a shareholder or limited partner unless the individual or the individual's spouse exercises significant control, either individually or jointly, over the affairs of the corporation, partnership, limited liability company, or other business entity or business venture as defined in paragraph (A)(10) of this rule. (12) The recitation of residency or domicile in a will, trust, or other estate planning document. (13) The location of the individual's friends, dependents as defined in section 152 of the Internal Revenue Code , and family members other than his or her spouse, if not legally separated from his or her spouse under a decree of divorce or separate maintenance as provided in section 7703(a)(2) of the Internal Revenue Code . (14) The location of educational institutions attended by the individual's dependents as defined in section 152 of the Internal Revenue Code , unless those dependents pay tuition at that educational institution based on the residency of the individual or the individual's spouse in the state where the educational institution is located. (15) The location of trustees, executors, guardians, or other fiduciaries named in estate planning documents of the individual or the individual's spouse. (16) The location of a business at which the individual or the individual's spouse makes purchases of tangible personal property. (17) The location where the individual married. (18)The location or identity of recipients of political contributions made by the individual or the individual's spouse.

WITHHOLDING

718.01 DEFINITION OF “QUALIFYING WAGES”

718.01(R): Lines 952-954• Qualifying Wages means wages, as defined in

section 3121(a) of the IRC, without regard to any wage limitations, with adjustments.

718.03 WITHHOLDING718.03(A)(1): Lines 1750-1763• Each employer, agent of an employer, or other payer

located or doing business in a municipal corporation that imposes a tax on income in accordance with this chapter shall withhold from each employee an amount equal to the qualifying wages of the employee earned by the employee in the municipal corporation multiplied by the applicable rate of the municipal corporation’s income tax, except for qualifying wages for which withholding is not required under section 718.011 of the Revised Code or division (D) or (F) of this section.

718.03 WITHHOLDING

718.03(D): Lines 1835-1841• “An employer, agent of employer, or other payer is not required to

withhold municipal income tax with respect to an individual’s disqualifying disposition of an incentive stock option if, at the time of the disqualifying disposition of an incentive stock option if, at the time of the disqualifying disposition, the individual is not an employee of either the corporation with respect to whose stock the option has been issued or of such corporation’s successor entity.”

718.03(F): Lines 1852-1856• Division (F) – Line 1852 – Compensation deferred before June 26, 2003,

is not subject to any municipal corporation income tax or municipal income tax withholding requirement to the extent the deferred compensation does not constitute qualifying wages at the time the deferred compensation is paid or distributed.

718.03 WITHHOLDING718.03(A)(2): Lines 1764-1768• In addition to withholding amounts required under division (A)(1), an

employer may also deduct and withhold resident tax at the request of the employee.

Confusion with:

718.011(B)(1): Lines 1249-1255• An employer is not required to withhold……unless one of the following

conditions apply:

718.011(B)(1)(c): Lines 1272-1275• The employee is a resident of the municipal corporation and has requested

that the employer withhold tax from the employee’s qualifying wages as provided in section 718.03 of the Revised Code.

Does this refer to employment or resident tax?The question has already been raised.

718.03 WITHHOLDING

718.03(C): Lines 1824-1834• An employer must file a return showing the amount of

tax withheld from each employee.

718.03(E)(1) & (2): Lines 1842-1851• An employee is not relieved of their tax liability if their

employer fails to withhold.• The failure of the employer to remit the taxes

withheld relieves the employee from liability unless there was collusion between the two.

718.03 WITHHOLDING718.03(G): Lines 1863-1868• LINE 1863 – Employer, agent of employer, or

other payer required to withhold is liable for payment, whether or not taxes have been withheld. The amount is deemed to be held in trust.

• In conjunction with 718.03(E)(1) this empowers the municipal corporation to pursue both parties for any taxes due, however, does not allow municipal corporation to collect the same amounts twice.

718.03 WITHHOLDING

718.03(I): Lines 1884-1893• Individual with control or direct supervision of or charged with responsibility for withholding the tax or filing reports and making payments shall be personally liable for failure to file a report or pay the tax due. • Dissolution of employer, agent of employer, or other payer does not discharge the officer’s or employee’s liability for a failure of the employer, agent of employer, or other payer to file returns or pay any tax due.

718.03 WITHHOLDING

718.03(J): Lines 1894-1902• Employers are required to deduct and

withhold tax on tips and gratuities on those qualifying wages that are under the employer’s control (ie payments by debit, credit, or other electronic means).

718.03 WITHHOLDING

718.03(B)(1)(a): Lines 1775 – 1786 • Monthly withholding look back: If previous calendar year exceeded $2,399. or if total in any month of preceding calendar quarter exceeded $200.

• Monthly withholding due date is 15 days after the last day of each month.

•Note that the payment must be “received” by the tax administrator by the due date (all of the other periods also show this as a “received by” date).

718.03 WITHHOLDING

718.03(B)(1)(b): Lines 1787-1791• Quarterly Withholding: Any employer, agent of an employer, or other payer not required to make monthly withholding shall make quarterly withholding payments.

• Quarterly withholding is due 15 days after the end of each calendar quarter.

718.03 WITHHOLDING718.03(B)(2)(a): Lines 1796-1813

• Optional Semi-monthly withholding look back: If previous calendar year exceeded $11,999, or if the total in any month of the preceding calendar year exceeded $1,000.

• Semi-monthly withholding due dates: For first 15 days, 3rd banking day after the 15th. For 16th through end of month, 3rd banking day after the last day of the month.

718.03 WITHHOLDING718.03(B)(2)(b): Lines 1814-1823

• Optional requirement of withholding payments made by electronic funds transfer

• If the employer, agent of the employer, or other payer is required to make payments electronically for purpose of paying federal taxes withheld (under section 6302 of the IRC, 26 C.F.R.), the municipality can require electronic funds transfer of taxes withheld from employees.

718.03 WITHHOLDING

NOTE: 718.05(I): Lines 2270-2272“This division shall not apply to payments required to be made under division (B)(1)(a) or (2)(a) of section 718.03 of the Revised Code.”718.03(B)(1)(a) refers to MONTHLY WITHHOLDING.718.03(B)(2)(a) refers to SEMI MONTHLY WITHHOLDING.

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718.03 WITHHOLDING• 718.05(I)(1) – “the date of the postmark stamped on the

cover…..shall be deemed to be the date of delivery or the date of payment.”

• 718.05(I)(2) – “electronic funds transfer….payment is considered to be made when the payment is credited to an account designated….for receipt of tax payments.” (with exception for delayed payments stated).

THIS MEANS THAT, for purposes of withholding, the MONTHLY and SEMI-MONTHLY payments must be RECEIVED by the due date. The postmark date and the electronic funds transfer designated date paid DO NOT APPLY.THE POSTMARK AND ELECTRONIC FUNDS TRANSFER DATE PAID as shown above will apply to QUARTERLY payments.

718.03 WITHHOLDING - RECONCILIATION

718.03(H): LINE 1869-1883• Annual Reconciliation due by last day of February of each year.• Must include names, addresses, SSN, of all employees with tax

withheld (or should have been withheld) for preceding calendar year; amount of tax withheld from each employee, amount of qualifying wages paid, and other information required for federal income tax reporting purposes on form W-2.

• Any other information as may be required by Tax Administrator. (LINE 1882)

• LINE 1877 – Reconciliation must show amount withheld or should have been withheld for every other municipal corporation.

718.031 CASINO AND VLT718.031: Lines 1908-2085• Provides rules and guidelines for withholding tax on

winnings from casinos and video lottery terminals (VLT).• Provides reporting requirements by casino and VLT

operators on withholding from winnings.• Provides a similar penalty for failure to timely pay as

other withholding tax – 50% of amount not timely paid.• Provides a late filing or failure to file penalty of $500 for

each return not filed or filed late. Interest is calculated at the same rate as the rate prescribed in 5703.47 of the Revised Code.

EFFECTIVE DATEAND

AUTHORITY TO LEVY TAX

EFFECTIVE DATEUncodified Section 3: Lines 4991 - 4997“This act applies to municipal taxable years beginning on or after January 1, 2016. For municipal taxable years beginning before January 1, 2016, tax administrators may continue to administer, audit, and enforce the income tax of a municipal corporation under Chapter 718 and ordinances and resolutions of the municipal corporation as that chapter and those ordinances and resolutions existed before January 1, 2016.”

Authority to Levy a TaxORC 715.013: Line 451 • Provides the restriction that a municipal income

tax must be levied in accordance with the Chapter 718 of the Revised Code.

“This section does not prohibit a municipal corporation from levying an income tax or withholding tax in accordance with Chapter 718 of the Revised Code or a tax on any of the following…….”• A municipal income tax that does not comply with the provisions

of ORC 718 places the ability to administer the tax in possible jeopardy, per drafters of the language. Adding this language to ORC 715.013 implies that a municipal income tax cannot be levied unless it complies with the provisions of ORC 718.

Authority to Levy a TaxORC 718.04: Line 2086-2156 “A municipal corporation may levy a tax on income and a withholding tax if such taxes are levied in accordance with the provisions and limitations specified in this chapter.”By 1/1/16, Ordinance or Resolution must include:1. Statement that tax is an annual tax levied on income of

every person residing in or earning or receiving income in the municipal corporation.

2. The tax shall be measured by “municipal taxable income.”3. Statement that municipal corporation is levying tax in

accordance with the limitations specified in 718, and that the resolution or ordinance incorporations the provisions of 718.

4. Rate of the tax.5. Whether, and extent to which, credit is

allowed against the tax.6. Purpose(s) of tax.7. Any other provision necessary for

administration of the tax, provided that the provision does not conflict with any provision of 718.

Other provisions included in 718.04 require the compliance of the municipal corporation.

718.04 AUTHORITY TO TAXOther provisions include, but are not limited to:718.04(B): Lines 2109-2114• A municipal corporation that levied a tax in excess of

1% prior to 1/1/16 may continue to tax at the rate specified in the original ordinance or resolution, provided that such rate continues in effect as specified in the original ordinance or resolution.

718.04(C ): Lines 2115-2116• May only tax at a uniform rate.

718.04 AUTHORITY TO TAX

718.04(F): Lines 2151-2156

•“Nothing in this chapter authorizes a municipal corporation to levy a tax on income, or to administer or collect such a tax or penalties or interest related to such a tax, contrary to the provisions and limitations specified in this chapter. No municipal corporation shall enforce an ordinance or resolution that conflicts with the provisions of this chapter.”

718.04 AUTHORITY TO TAX

718.04(D): Lines 2136-2143

• “A municipal corporation “may” by ordinance or resolution, grant credit to residents for all or portion of the taxes paid to any municipal corporation, in this state or elsewhere, by the resident or by a pass-through entity…….”• Ordinance should specify if tax is not permitted for tax paid to

municipality in another state, however, you should consider the recent Maryland v Wynne case.

• Ask your law director to review this recent decision, and determine the impact it might have in deciding to not allow credit for tax paid to a municipality in another State.

718.04 AUTHORITY TO TAX718.04(E): Lines 2144-2150

• “Except as otherwise provided in this chapter, a municipal corporation that levies an income tax in effect for taxable years beginning before January 1, 2016 may continue to administer and enforce the provisions of such tax for all taxable years beginning before January 1, 2016, provided that the provisions of such tax are consistent with this chapter as it existed prior to the effective date of the enactment of this section.”• Where a prior municipal ordinance may have conflicted with ORC 718, in order

to continue to administer and collect the tax for years prior to 1/1/16, you must do so only in a manner that is consistent with ORC 718 as it existed at that time.

• Provisions of your current Ordinance that conflict with current ORC 718 must be enforced effective 1/1/16 under only the provisions as they exist in current ORC 718.

LOCAL BOARD OF TAX REVIEW

718.11 LOCAL BOARD OF TAX REVIEW

718.11(A)(2): Lines 2932-2943

• Local Board of Tax Review shall consist of three members. Two appointed by legislative authority (council or commission), but may not be employees, elected officials, or contractors with the municipal corporation at any time during their term or in the five years immediately preceding date of appointment. One member shall be appointed by top administrative official (city manager, mayor), and this member may be an employee but cannot be director of finance or equivalent officer, or the tax administrator or other similar official or an employee directly involved in municipal tax matters, or any direct subordinate.

718.11 LOCAL BOARD OF TAX REVIEW

• This section is silent on residency / domicile of Board members. Sample Ordinance will provide some options regarding residency / domicile of Board members.

718.11(A)(3): Lines 2944-2950• For members appointed by legislative authority, term

for each member is two years, and there is no term limit. For member appointed by top administrative official, member shall serve at the discretion of the administrative official.

718.11 LOCAL BOARD OF TAX REVIEW718.11(A)(4): Lines 2951-2959 • Provides guidelines for removal of member.

718.11(A)(6): Lines 2963-2970• Explains how an unexpired term is filled, and the new members

are appointed in the same manner as the original appointment. Vacancies are to be filled within sixty days.

718.11(A)(7): Lines 2971-2978• If a member is temporarily unable to serve due to conflict of

interest, illness, absence, etc, an appointment will be made for another individual to temporarily serve in the Board member’s absence. Appointment is subject to the same requirements as the original appointment.

718.11 LOCAL BOARD OF TAX REVIEW

718.11(B): Lines 2979-2987• Whenever a tax administrator issues an ASSESSMENT regarding an

underpayment of municipal income tax or denies a refund claim, the tax administrator shall notify the taxpayer in writing of the taxpayer’s right to appeal, the manner in which the taxpayer may appeal the assessment or denial, and the address to which the appeal should be directed.

718.11(C): Lines 2988-2998• Any person who has been issued an assessment may appeal the

assessment to the board. Request shall be in writing, shall specify the reason or reasons why the assessment should be deemed incorrect or unlawful, and must be filed within sixty days after the taxpayer receives the assessment. (NOTE: ONLY AN ASSESSMENT MAY BE APPEALED TO THE BOARD OF TAX REVIEW.)

718.11 LOCAL BOARD OF TAX REVIEW

• LINE 2999 – Board shall schedule a hearing to be held within sixty days after receipt of the appeal. The taxpayer may request additional time to prepare, or waive the hearing. The taxpayer has the right to appear before the board and may be represented by an attorney at law, CPA, or other representative.

• LINE 3005 – The board may allow a hearing to be continued as jointly agreed by the parties. But, the hearing must be completed within 120 days after the first day of the hearing, unless the parties agree otherwise.

• LINE 3010 – Board may affirm, reverse or modify the assessment by the tax administrator, or any part of that assessment. Board will issue a final determination within 90 days, and send copies to all parties within 15 days by ordinary mail. Final determination may be appealed by either party as provided in section 5717.011 of the Revised Code.

• LINE 3020 – Board will adopt rules and keep record of transactions. Sample Ordinance will address confidentiality of information and documents. Hearings are not meetings of a public body, and are not open to the public.

QUESTIONS??

FOR FUTURE QUESTIONS:Dennis Bernaciakdbernaciak@city.cleveland.oh.us216-664-2070, Ext 1774

Michelle Jordanmichellejordan.cca@gmail.com937-227-1359

Michael Rybamryba@city.cleveland.oh.us216-664-4416

Please feel free to call us with questions!