City deals with state-mandated tax changes

By Michael Seffrin - [email protected]

SIDNEY — For officials in Sidney and any other Ohio town with an income tax, state-mandated changes are creating a big headache.

That seemed to be Sidney City Council’s conclusion as it reviewed the impact of House Bill 5 Monday night.

The Ohio General Assembly in December 2014 enacted House Bill 5 into legislation that amended the Ohio Revised Code concerning the municipal income tax. HB 5 requires all municipalities to adopt an ordinance before Jan. 1, 2016, to incorporate the changes.

The city will begin working with area companies on the changes to the withholding that will impact them immediately in 2016, Renee DuLaney, assistant finance officer, told council in a city staff report summarizing the changes. The staff reviewed HB 5, and with additional guidance of the Ohio Municipal League, wrote new tax ordinance. Council will consider adoption of the ordinance at a future meeting.

City Manager Mark Cundiff said it may be a matter of “misery loves company,” but all municipalities in the state who have an income tax will have to deal with the changes. He estimated Sidney will lose $95,000 a year because of the changes. He said the impact on Sidney is not as bad as some other cities because Sidney has long-standing fiscal policies to protect it.

Mayor Mike Barhorst, who testified before the state Legislature when that body was considering HB 5, said he believes term limits have made legislation such as HB 5 possible. He said the legislators who pass laws are not around to deal with their consequences years later.

Councilman Darryl Thurber said the new law will hurt business growth. “The state is actually encouraging industry to leave Ohio,” he said.

DuLaney’s report summarized the changes in terms of impact on income tax revenue, penalty and interest changes, and procedural and administrative changes.

The impact on income tax revenue includes:

• Net operating loss phase-in. This bill requires a phase-in of the five-year net operating loss (NOL) carryforward starting in 2017 for all municipalities. Sidney already permits a five-year NOL carryforward, but this provision requires only allowing 50 percent of carryover to be applied against each future year through year 2022.

• Change from “12-day rule” to “20-day rule.” Nonresident employers who have nonresident employees working in Sidney will not be required to withhold tax on 20 or fewer days in a calendar year. Also, small employers with less than $500,000 total revenue are not required to withhold in nonresident municipality. HB 5 imposes a “20-day rule” verses the current “12-day rule,” with a requirement to start withholding on the 21st day and thereafter. HB 5 also addresses principal place of work and base of operations which try to clarify so called “occasional entrant.”

Penalty and interest changes are:

• Reduction of interest rate charged for late payment of taxes. The city of Sidney currently charges 1.5 percent monthly (annualized rate of 18 percent) on late payment of taxes. HB 5 would require the use of the “federal short-term interest rate plus 5 percent.”

• Late-filing penalty for individual or corporate returns of $25 per month up to $150 per return. Currently, the city charges a $25 penalty for returns filed less than 60 days after the filing due date and a $50 penalty for any return filed thereafter.

• HB 5 states the late-payment penalty for unpaid income tax and estimated tax is 15 percent of the tax. Also, estimated tax payments are not required if under the $200 limit (equates to less than $11,428 of taxable income). The city’s current late-payment penalty is 1.5 percent per month up to 50 percent of the tax. Estimated taxes are taxed at 10 percent of the amount unpaid currently with no minimum requirement.

• Withholding tax untimely paid is now subject to a one-time penalty of 50 percent. The city currently charges withholding penalty of 3 percent per month.

Procedural and administrative changes include:

• Optional semimonthly withholding remittance reporting for employers whose withholdings exceed $11,999 per year. Also, optional electronic submission of payments following federal requirements. Currently these employers remit monthly.

• Federal extension shall not be required until taxpayer files their extended return. Th city of Sidney requires a copy of the extension filed by the initial due date. This change would affect the language on the city’s current delinquency letters.

• Timing of withholding payments and estimated tax payments will change.

• Assessments require either certified mailing or secure electronic mail (if authorized by taxpayer); excludes letters for math errors, statements of amounts owed, or request for additional information. Also, person-to-person audits require additional procedures to be performed. Currently, all mailings are sent regular mail. These additional audit procedures will be required for the city’s current subpoenas.

By Michael Seffrin

[email protected]

The writer may be contacted at 937-538-4823 and on Twitter @MikeSeffrinSDN.

The writer may be contacted at 937-538-4823 and on Twitter @MikeSeffrinSDN.