HB 510 as enacted should be a big benefit
Ohio House Bill 510 (“HB 510”) has been signed by Governor Kasich and is effective March 27, 2013. This legislation changes the current franchise tax on financial institutions and eliminates the Ohio “dealer in intangibles” tax that historically applied to certain businesses (i.e. finance and loan companies) not otherwise classed as Ohio financial institutions. The bill also expands the definition of businesses subject to the new franchise tax. The new tax regime applies to tax years beginning on or after January 1, 2014.
Overall, the changes could result in significant Ohio tax savings for the community banking industry while larger multistate banks are expected to incur additional liabilities. Below we have highlighted some of the major changes and how they might affect you.
Current Ohio law imposes a flat 1.3% rate of tax on the net equity of the bank. Net equity includes stock, additional paid in capital, retained earnings, etc. reduced by deductions for unrealized gains, certain intangible assets and deferred tax assets.
HB 510 changes franchise tax rates. Financial institutions would be taxed at 0.8% on the first $200 million in Ohio-apportioned equity, 0.4% on Ohio-apportioned equity between $200 million and $1.3 billion, and 0.25% on Ohio-apportioned equity over $1.3 billion. Deductions mentioned above would be eliminated, thus widening the tax base, but reducing the overall tax rate.
To illustrate the potential benefit, a bank with $25 million of taxable equity would currently pay $325,000 in franchise tax. Under the new law the bank would pay $200,000 of franchise tax.
Note HB 510 contains provisions that could increase or decrease the rate if actual tax receipts collected are more or less than predicted “target” amounts after the first and third years of the tax; hence, the rates noted above are subject to change.
Currently, financial institutions apportion their equity based on three factors; revenue, property, and payroll. HB 510 changes the apportionment to a single factor, based entirely on revenues. Whether revenues are considered to be apportioned to Ohio will be based on where the customer receives the benefit of the service (or loan). In other words, if the property securing the loan is located in a state other than Ohio, the interest on that loan would not be considered Ohio interest. To determine where the benefit is “received”, the physical location of where the customer ultimately receives the benefit will control.
Change in Filing
Previously, the Ohio franchise tax return was filed only at the bank level, and was based on the equity of the bank. HB 510 requires equity to be determined by the amount reported on the institutions FR Y-9 report, or call report, and filed by the entity filing the FR Y-9. If the FR Y-9 is filed on a consolidated basis, equity reported on the Ohio franchise tax return will also be consolidated.
HB 510 as enacted should be a big benefit for community banks. Tax rates will decrease from 1.3% to .8% for smaller institutions while larger banks are expected to pay more.