Landowners across Ohio may be surprised to learn the bonus lease and royalty dollars received for their Marcellus or Utica Shale leases will be subject to the Ohio commercial activity tax (CAT) if payments of over $150,000 are received.
What is it?
The CAT was enacted in House Bill 66, which was passed by the 126th General Assembly in 2005. The CAT is an annual tax imposed on “the privilege of doing business in Ohio,” measured by taxable gross receipts from most business activities.
Most receipts generated in the ordinary course of business are included in a taxpayer’s CAT base. This tax applies to all types of businesses: e.g., retailers, service providers (such as lawyers, accountants, and doctors), manufacturers, and other types of businesses.
The CAT applies to all entities regardless of form, (e.g., sole proprietorships, partnerships, LLCs, and all types of corporations). The tax does have limited exclusions for certain types of businesses, such as financial institutions, dealers in intangibles, insurance companies and some public utilities if those businesses pay specific other Ohio taxes.
A person with taxable gross receipts of more than $150,000 per calendar year is subject to this tax, which requires such person to register with the Department of Taxation as a taxpayer.
The term “gross receipts” is broadly defined to include most business types of receipts from the sale of property or in the performance of a service. Please note that certain receipts are not taxable receipts, such as interest income.
The following are some other examples of receipts that are excluded from a taxpayer’s CAT base: dividends, capital gains, wages reported on a W-2, interest (other than from credit sales), or gifts.
Oil and gas income
Internal Revenue Code section 1231 provides guidance on why the oil and gas receipts are included in a taxpayer’s CAT base. Specifically, the Code states that timber, coal, and iron ore are considered property used in the trade or business, assuming they are contained in the ground.
Once the mineral is removed from the ground, however, it is no longer an asset used in the trade or business, and therefore receipts from the sale of this mineral are included in a taxpayer’s CAT base.
$150 and 0.26%
So what are the tax rates for the CAT? The rate for the first $1 million in taxable gross receipts (from $150,000 to $1 million) is a flat $150. The rate for receipts above $1 million is 0.26 percent.
The $150 annual minimum tax is due by May 10 of each year with the annual tax return for calendar year taxpayers or with the first quarter return for calendar quarter taxpayers.
A calendar year taxpayer who will have over $1 million in taxable gross receipts for a calendar year is required to switch to a quarterly taxpayer in the subsequent year and, if it elects to, can switch to a quarterly taxpayer at any time during the current calendar year.
John B. Landowner owns 400 acres in northeastern Ohio and is a teacher at the local high school. He leases his land for $3,000 per acre, which totals a bonus payment of $1.2 million. To calculate his CAT obligation, Mr. Landowner would pay $150 for the first million dollars and then apply the .26% tax rate for the remainder ($200,000), which equals $520.
He has no other commercial business activity so his total CAT obligation would be $150 + $520 =$670.