Are you an entrepreneur starting a new Ohio business? If so, have you investigated your Ohio sales and use tax obligations? The following story gives you a glimpse at the broad array of businesses and transactions Ohio sales tax applies to.
Mark, Hasan, Lexi, and Tre—all startup entrepreneurs—filed into the presentation area and took seats. They were frequents at the local business workshops where experts were invited to share their experience and knowledge on a particular topic, and after the presentation the attendees could network and share their own stories.
After graduating three years ago, each had started their own business. Mark and his wife opened a restaurant downtown. By day it was a juice bar/lunch place; by night it was an exotic-looking martini bar.
During college, Hasan had developed relationships with several businesses around the city providing freelance IT consulting. When he graduated, he was generating enough income to support himself, so he made a business out of it. He had just hired a part-timer and was sending him to a client to help develop code.
Lexi and a friend started an applique business. Her friend had a relationship with a women’s clothing retailer in town. Now, nearly all of the retailer’s casual attire applique requests were going to Lexi Co.
Tre had majored in city and regional planning with a focus on public transportation. During school, he noticed that while the number of businesses locating in the suburbs had exploded, there was limited public transportation there. He started a transportation company to fill the gap and to capture other hidden opportunities—like the pods of professionals commuting several times per week from one major city to another losing several hours of work time per day.
Today’s topic was taxes. Ann Margaret—a partner at a local CPA firm—was the presenter.
She began, “Show of hands…How many of you believe that federal income tax is the tax that will have the greatest impact on your business?” [Nearly everyone raised their hand.]
“What about sales and use tax?” [No one raised their hand.]
“How many of you have investigated your sales and use tax responsibilities?” [A few hands showed.]
“I think after today, you’ll have a different opinion of which tax you should be most concerned about. I’m going to pick on someone here.” [She pointed to Hasan.] “Sir, what business are you in?”
“I’m an IT consultant, so sales tax doesn’t really affect me,” Hasan said. “It doesn’t apply to services, right?”
“Actually,” Ann said, “it applies to many services. You’re right, though, that IT consulting is not taxable, but as a consultant you might actually be providing a different, taxable service. Have you ever sent an employee to customer’s location to help them with a project?”
“Yes,” said Hasan. “Actually, I just sent my part-timer over to a client to help with code development.”
“In general, providing an employee to supplement a customer’s workforce is taxable employment services,” Ann explained. “In effect, you’re providing a temp. If you fail to collect tax, and you’re audited, you’ll be liable for the tax, and to maintain your good customer relations, you’re probably not going to be able to ask your customer to reimburse you. So, that money’s coming right out of your pocket when it should have come from your customer.”
[Ann walked over to Lexi.]
“What about you? What do you do?”
“I have an applique business,” said Lexi. “I do mostly contract work for F Brands.”
“Pretty much everything you sell is going to be exempt because you’re selling it to another company that’s going to sell it to an end consumer, but you better make sure you have their exemption certificate on file,” Anne advised. “If you don’t, and you’re not charging tax, you could be on the hook if you’re audited. More importantly, though, because you’re attaching appliques to clothing, you’re engaged in manufacturing, and generally all of your equipment and raw materials are exempt from tax. You should make sure you didn’t pay tax on your equipment, and you’re not being charged tax on your supplies. If you have been, you could be entitled to a refund with interest.”
[She pointed to Tre.] “How about you?”
“I own Tri City Shuttle,” he said.
“Ahh, I use your services,” Ann said. “I commute regularly from Cleveland to Cincinnati and got tired of losing eight hours behind the wheel. I love that your vehicles have wifi. If you’re transporting persons exclusively within the state (which you are), those are generally taxable too. Every time you take a customer from point A to point B within Ohio, you must collect sales tax.”
[Ann continued…] “Do we have any restaurant owners here?”
[Mark raised his hand.] “I own the Juicy Martini,” he said.
“Your situation is probably the most complicated,” Ann explained. “Because you’re a restaurant, pretty much all of your equipment and customer seating is exempt for one reason or another. Whether your sales are taxable, however, depends on whether the food is eaten on premises or not and, for your to-go juices, the percentage of the drink that is actual fruit juice.”
There was more.
“Also, bars and restaurants are notorious for keeping inadequate records, so you better make sure you keep current and accurate accounting records,” Ann continued. “If your records are insufficient, in an audit the Ohio Tax Department will estimate the amount of sales tax you should have collected and remitted, and you can bet they’ll estimate high.”
Ann had a key takeaway for all business owners.
“Regardless of the business you’re in, you will likely have use tax obligations, particularly if you purchase business equipment over the internet or from out-of-state vendors,” said Ann. “If the vendor doesn’t charge you sales tax and it’s a taxable transaction, you owe use tax and you have to self-report.”
“Wow,” said Hasan. “Sounds like sales and use tax permeates all of our businesses.”
“It really does,” Ann replied. “And it’s like a leaky faucet—the amount at issue for each transaction is a drop in the bucket, but over time it can add up and cause a huge mess.
She asked her opening question again.
“Now, who thinks sales tax is the tax that will have the greatest impact on your business?”
[Everyone raised their hand.]