July 19, 2005
FOR IMMEDIATE RELEASE

Ohio Adopts Significant Tax Reform. On February 8, 2005, during Ohio Governor Bob Taft's State of the State address "Unleashing Ohio's Economic Potential," he called for "tax reform" and stated that it was his "number-one priority." He went on to address the fact that Ohio cannot be competitive with surrounding states under its current tax structure and stated "Ohio's corporate tax is a nightmare. And we've got to fix it." After much debate in both the Ohio House and Senate, on June 30, 2005, Governor Taft signed the tax reform budget bill Am. Sub. H.B. 66 into law.

Many changes to the current tax system will be implemented over a period of time. Most of the changes will be phased-in over the next five years. Following is an overview of the significant changes to Ohio's tax structure.

Commercial Activity Tax

One of the largest changes brought about by Ohio's tax reform is the enactment of the Commercial Activity Tax ("CAT"). Most companies doing business in Ohio will be subject to the CAT, a broad based annual business privilege tax measured by a business' Ohio gross receipts. However, a few types of entities will not be subject to the CAT. They include: nonprofit organizations, financial institutions and their affiliates, insurance companies and their affiliates, and dealers in intangibles. Please note that the CAT is not a transactional sales tax.

The tax base of the CAT is business gross receipts, defined as the total amount realized in the ordinary course of business, with deductions for cash discounts allowed and taken, returns and allowances, and bad debts. Some examples of gross receipts are: Ohio sales, performance of services in Ohio, and Ohio rentals or leases. Furthermore, the following receipts are not considered gross receipts: sales to out-of-state buyers, employee compensation, interest, dividends, federally-defined capital gains, proceeds from loans, proceeds from stocks, bonds or certificates of deposit, damages received from litigation, certain receipts by public utilities already subject to the public utility excise tax, and sales of motor fuel (exempt for two years).

Although not available until 2008 or 2010, there will be a limited number of credits that businesses can tax to reduce their CAT. These credits include the following:

• First available in 2008 - a job retention credit, a job creation credit, qualified research expense credit, borrower's qualified research and development loan payment credit, and an excess CAT paid credit (based on CAT collection thresholds being met).
• First available in 2010 - credit for unused net operating losses and deferred tax assets.

The tax rate will be phased-in over five years starting on July 1, 2005. When fully phased-in, after five years, it will be levied at a rate of .26% on gross receipts in excess of $1,000,000, plus the minimum tax of $150. Businesses with Ohio gross receipts between $150,000 and $1,000,000 will pay a minimum tax of $150. Businesses with Ohio gross receipts less than $150,000 will not be subject to the tax. Ohio businesses that have over $150,000 in Ohio gross receipts will also be required to register for the CAT by November 15, 2005 and pay a one time fee of $15 (online registration) or $20 (paper registration). Combined or consolidated taxpayers pay a maximum registration fee of $200. The first CAT return will be due on February 10, 2006 based on Ohio gross receipts received during the period from July 1, 2005 through December 31, 2005.

Corporate Franchise Tax Phase-Out

During the same five year period that the CAT is being phased-in, the Ohio Corporate Franchise Tax will be phased-out; being reduced by 20% each year, until it is fully repealed in 2010. The chart below summarizes how to calculate both Commercial Activity and Corporate Franchise Tax liability at any given point over the next five years.

Tax Year	Commercial Activity Tax *	Corporate Franchise Tax**
2005	July 1 - December 31 .06%(23% x .26%)	100% x Tax Liability
2006	January 1 - March 31 .06%(23% x .26%) April 1 - December31 .10% (40% x .26%)	80% x Tax Liability
2007	January 1 - March 31 .10% (40% X .26%) April 1 - December31 .15% (60% x .26%)	60% x Tax Liability
2008	January 1 - March 31 .15% (60% x .26%) April 1 - December 31 .20% (80% x .26%)	40% x Tax Liability
2009	January 1 - March 31 .20% (80% x .26%) April 1 - December 31 .26%	20% x Tax Liability
2010	.26%	No Tax

* CAT Credits - Periodic CAT rate adjustments or credits may occur if certain target revenue thresholds are not met or are exceeded.

** Certain entities, such as financial institutions will continue to pay the full net worth tax.

Personal Income Tax Reduction

The Ohio personal income tax rate will be reduced by 4.2% for all tax brackets for 2005 taxable income and an additional 4.2% in each subsequent year through 2009. The total tax rate cut will be 21% over the five year period.

Tangible Personal Property Tax Phase-Out

Ohio's tangible personal property tax system will begin a four year phase-out starting in 2006. The phase-out will apply to most businesses with tangible personal property located in Ohio. The phase-out applies to furniture and fixtures, machinery and equipment, and inventory. For new manufacturing machinery and equipment first reportable in 2006, it will not be subject to the tax in 2006 or future years.

Tax Year	Tangible Personal Property Tax			Personal Income Tax Reductions**
Inventory	Manufacturing Machinery & Equipment*	Furniture & Fixtures
2005	23%	25%	25%	4.2%
2006	18.75%	18.75%	18.75%	8.4%
2007	12.5%	12.5%	12.5%	12.6%
2008	6.25%	6.25%	6.25%	16.8%
2009	No Tax	No Tax	No Tax	21%
2010	No Tax	No Tax	No Tax	21%

* Manufacturing machinery and equipment first reportable in 2006 and future periods are not subject to the tangible personal property tax.

** Reduction percentages represent cumulative reductions from 2004 rates.

Sales Tax

The State's sales tax increase was scheduled to expire on July 1, 2005, which would have meant that the state sales tax rate would have decreased from 6% to 5%. However, the budget included an add-back of .5%. Thus, the new state rate effective July 1, 2005, is 5.5%. No changes have been made to the locally imposed sales and use tax rates. The vendor discount of .9% for a timely filed and paid return will remain in effect until June 30, 2007.

In addition to the rate change, Am. Sub. H.B. 66 brought several definitional changes to the Ohio Sales and Use Tax Code. The new definitions include those for bundled transactions, distinct and identifiable products, term de minimus, over-the-counter drugs, telecommunications service, durable medical equipment, and mobility enhanced equipment. These definitional changes bring the Ohio Sales and Use Tax System into compliance with the Streamlined Sales Tax Project.

Tax Amnesty

Am. Sub. H.B. 66 also creates a new amnesty period. The amnesty program is applicable to corporate franchise taxes, sales and use taxes, tangible personal property taxes, personal income taxes, and school district taxes. The amnesty period applies to taxes that were not paid as of May 1, 2005 and runs from January 1, 2006 through February 15, 2006. The advantage of participation in the amnesty program is that one-half of the interest and the entire penalty applicable to the underpaid taxes will be waived.

Other Noteworthy Tax Changes:

• Starting in 2007, the public utility tangible personal property tax for long distance and local telephone companies will be phased-out over a five year time period.
• An additional $.70 of excise taxes will be due on a pack of cigarettes. The excise tax on cigarettes will increase from $.55 per pack to $1.25 per pack.
• The discount on motor fuel tax will be reduced. The tax reporting for intrastate trucking will be eliminated.
• The Ohio additional estate tax "sponge tax" is eliminated retroactively to estates of decedents dying on or after January 1, 2002.
• The 10% rollback on real property will be eliminated for property used in business. The rollback will remain in effect for property used for residential and agricultural purposes.

If you have any questions regarding the above information, please contact Mr. Nick Longo, Senior Manager in charge, or Mr. David Knuff, Manager of the Ryan & Company Cleveland, Ohio office at 216.685.9448. Mr. Longo and Mr. Knuff may also be reached by e-mail.

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