Information Release

CAT 2007-01 - Commercial Activity Tax: Rule Estimation and Statutory Estimation Procedures, Compared - Issued January, 2007; Updated May, 2011

This is version 2 of this release. For purposes of the commercial activity tax (“CAT”), taxpayers are required to calculate their taxable gross receipts and pay the tax due by the date proscribed in R.C.5751.051. Ohio Adm. Rule 5703-29-09 allows quarterly taxpayers to estimate their taxable gross receipts for a calendar quarter. Alternatively, taxpayers may follow a statutory-based estimation procedure to estimate their taxable gross receipts for a quarter pursuant to R.C. 5751.051(A)(2)(b). Because there is some confusion concerning the differences between these two methods, the Tax Commissioner is issuing this release to explain each method in detail and to provide spreadsheets for calendar years prior to 2010 that can be used to calculate a taxpayer’s taxable gross receipts using each method. Additionally, all statutory-based estimators must complete and print or e-mail the corresponding spreadsheet in order to properly file their annual reconciliation return for calendar years prior to 2010. For calendar year 2010 and thereafter, the annual reconciliation return should be filed using the Ohio Business Gateway. (Note: Footnoted information in this release is indicated by italics; footnotes are located at the bottom of the text.)

Rule-Based Estimation Procedure

In response to feedback from taxpayers and practitioners about being required to calculate receipt figures in a short period of time, Ohio Adm. Code 5703-29-09 provides an estimation procedure designed to allow taxpayers (and practitioners) additional time to comply with the time constraints of the statute. A taxpayer checking the “rule estimation” box on the Ohio Business Gateway when filing its return may estimate its taxable gross receipts for the current quarter using 95% of its taxable gross receipts from the previous quarter.(1) In no event, however, may a taxpayer’s estimated tax payment be less than 70% of its actual tax liability for that quarter. Once the taxpayer makes the estimated payment, it has an additional quarter to reconcile its taxable gross receipts for that quarter and to pay any additional tax due.

For example, if a taxpayer has $1,000,000 of actual taxable gross receipts in the first quarter of 2007 and elects to use the rule estimation procedure in the second quarter of 2007, the taxpayer’s estimated taxable gross receipts would be $950,000. Applying the tax rate in effect for the second quarter of 2007 (.00156), the taxpayer would make an estimated payment of $1,482. The taxpayer has an additional quarter to calculate its actual taxable gross receipts for that quarter and to file a reconciliation return. The taxpayer will avoid the imposition of interest and penalty as long as the taxpayer’s estimated tax payment of $1,482 was at least 70% of its actual tax liability for that quarter.

The rule-based estimation procedure provides quarterly taxpayers with more flexibility than the statutory-based estimation procedure. Taxpayers may elect to use rule estimation on a quarterly basis, as each quarter stands on its own (versus statutory estimation, where taxpayers that estimate for only one quarter are required to reconcile each quarter at the end of the year). Because the rule provides safe harbors based on the previous quarter, the taxpayer does not have to guess at its liability. Instead, a taxpayer can easily and quickly complete its return using the previous quarter’s liability and be confident that it will not be subject to a penalty for an underpayment.

In most situations, taxpayers will likely find this procedure to be easier to use than the statutory- based estimation procedure, discussed below.

Statutory-Based Estimation Procedure

R.C. 5751.051(A)(2)(b) allows a taxpayer to estimate its taxable gross receipts for a calendar quarter and then to reconcile its actual taxable gross receipts at the end of the year. As long as the taxpayer’s estimated taxable gross receipts fall between 95%-105% of its actual taxable gross receipts for each quarter, the taxpayer will avoid the imposition of interest and penalties on any additional tax due. However, it is important to note that any difference between a taxpayer’s estimated taxable gross receipts and its actual taxable gross receipts will be reconciled to 100%. Such difference will be carried forward to the fourth quarter and will be included in the taxpayer’s taxable gross receipts for that quarter. To use the statutory-based procedure, taxpayers should check the “statutory estimation” box when filing a return via the Ohio Business Gateway.

Please note that taxpayers underestimating their taxable gross receipts such that the estimate falls outside of the 95% threshold will likely be subject to a 10% penalty pursuant to R.C. 5751.06(H). That penalty is in addition to any statutory interest imposed on the underpayment. Additionally, taxpayers using the statutory-based estimation procedure are required to file annual reconciliation returns even if the taxpayer only estimated for one quarter out of the year. That return must reconcile all quarters in the year and reflect all receipts in the correct quarter(s). Lastly, a taxpayer electing to estimate using the statutory estimation procedure is precluded from filing using the rule estimation procedure at any time during the tax year.

Rule Estimation

Statutory Estimation

Figure used to estimate

Previous quarter’s TGR

Actual TGR

Safe harbor percentage

95% of previous quarter's TGR and 70% of actual tax liability

95%-105% of actual TGR

Due date of reconciliation

Due date of subsequent quarter

February 9th of the next year

Tax rate in effect on reconciliation

Rate in effect for the quarter for which the estimate was made

If within 95%-105%: 4th quarter rate.
If outside 95%-105%: Tax rate in effect for the quarter in which the receipts should have been reported and penalties and applicable interest.

Penalties Imposed

None if within the safe harbor

10% of under/overestimate

 

Example of the Rule Estimation Procedure

For this example, please refer to the spreadsheet entitled "Rule Estimation Procedure (xls) ".

First Quarter

For the first quarter of 2006, Taxpayer does not elect to estimate using the rule estimation procedure and therefore reports its actual taxable gross receipts after exclusion as $1,950,000.

Second Quarter

In the second quarter of 2006, Taxpayer elects to use the rule estimation procedure to calculate its taxable gross receipts. Therefore, Taxpayer calculates 95% of its taxable gross receipts from the first quarter after exclusion ($1,950,000) to be $1,852,500. Taxpayer checks the “rule estimation” box on the Ohio Business Gateway and enters its estimated taxable gross receipts on the first line of the return. Taxpayer calculates the tax on its estimate to be $1,927, makes the corresponding tax payment, and exits the Gateway system.

Taxpayer will be required to reconcile its actual taxable gross receipts before the due date of the third quarter return.

Third Quarter

Before Taxpayer may file its third quarter return for 2006, it must reconcile its actual taxable gross receipts from the second quarter.(2)

Reconciling the Second Quarter

Taxpayer determines that its actual taxable gross receipts after exclusion for the second quarter of 2006 after exclusion were $2,300,000. In order to properly complete its reconciliation, Taxpayer must enter its total actual taxable gross receipts, rather than the difference between its actual receipts and its previous estimate. Taxpayer enters $2,300,000 on the first line of the reconciliation return on the Ohio Business Gateway, and the Gateway determines a total tax due of $2,392. In order for Taxpayer to avoid the imposition of interest and penalty, Taxpayer’s estimated tax payment ($1,927) must have been at least 70% of its actual tax liability ($2,392), or at least $1,674. As reflected on the spreadsheet, Taxpayer’s estimate is within the 70% safe harbor and therefore was proper and Taxpayer will not be assessed interest and penalties.

The Gateway calculates an outstanding tax liability of $465 ($2,392 - $1,927). Taxpayer makes the additional tax payment and completes its reconciliation report.

Third Quarter Estimation

At the time Taxpayer files its third quarter return, Taxpayer may choose whether or not to estimate its taxable gross receipts for that quarter.(3) Taxpayer again elects to estimate using the rule estimation procedure, checks the “rule estimation” box on the Ohio Business Gateway, and uses its actual taxable gross receipts from the second quarter after exclusion ($2,300,000) to make its estimated tax payment for the third quarter. Taxpayer multiplies its second quarter actual taxable gross receipts by 95% to arrive at an estimate of $2,185,000 ($2,300,000 * .95) and the Gateway calculates the tax due to be $2,272. Taxpayer makes the corresponding tax payment and exits the Gateway system.

Fourth Quarter

Before Taxpayer may file its fourth quarter return for 2006, it must reconcile its actual taxable gross receipts from the third quarter.

Reconciling the Third Quarter

Taxpayer determines that its actual taxable gross receipts for the third quarter of 2006 after exclusion were $2,500,000. In order to properly complete its reconciliation, Taxpayer must enter its total actual taxable gross receipts, rather than the difference between its actual receipts and its previous estimate. Taxpayer enters $2,500,000 on the first line of the reconciliation return on the Ohio Business Gateway, and the Gateway determines a total tax due of $2,600. In order for Taxpayer to avoid the imposition of interest and penalty, Taxpayer’s estimated tax payment ($2,272) must have been at least 70% of its actual tax liability ($2,600), or at least $1,820. As reflected on the spreadsheet, Taxpayer’s estimate is within the 70% safe harbor and therefore was proper and Taxpayer will not be assessed interest and penalties.

The Gateway calculates an outstanding tax liability of $328 ($2,600 - $2,272). Taxpayer makes the additional tax payment and completes its reconciliation report.

Fourth Quarter Estimation

At the time Taxpayer files its fourth quarter return, Taxpayer may choose whether or not to estimate its taxable gross receipts for that quarter. Taxpayer again elects to estimate using the rule estimation procedure, checks the “rule estimation” box on the Ohio Business Gateway, and uses its actual taxable gross receipts after exclusion from the third quarter ($2,500,000) to make its estimated tax payment for the fourth quarter. Taxpayer multiplies its third quarter actual taxable gross receipts by 95% to arrive at an estimate of $2,375,000 ($2,500,000 * .95) and the Gateway calculates the estimated tax due to be $2,470. In addition to its fourth quarter estimated payment, Taxpayer must also pay the annual minimum tax payment of $150. Taxpayer makes the corresponding tax payment and exits the Gateway system.

Taxpayer is required to reconcile its fourth quarter actual taxable gross receipts by the due date of the first quarter return for 2007. If Taxpayer’s estimated tax payment ($2,470) was at least 70% of its actual tax liability, Taxpayer will not be assessed interest or penalties.

Example of the Statutory-Based Estimation Procedure

For this example, please refer to the spreadsheet entitled "Statutory Estimation - Annual Reconciliation Return". Taxpayers using this method should note that this spreadsheet serves as the annual reconciliation return for statutory estimation for calendar years prior to 2010. When completing this spreadsheet, please be advised that all taxpayers must fill in the taxpayer’s CAT account number, federal identification number, and company name, as well as sign and print the spreadsheet in order for the return to be deemed complete. Failure to properly complete the form will result in a delinquency, as well as interest and penalties for the delinquency. After completing the form, please follow the instructions included with the spreadsheet to either print and mail or save and e-mail the information to this Department.

For this example, please assume Taxpayer elects to estimate using the statutory procedure.

Taxable Gross Receipts as Originally Reported

For the first quarter of 2006, Taxpayer checks the “statutory estimate” box on the Ohio Business Gateway and estimates its taxable gross receipts to be $2,000,000. Taxpayer files the return, makes a corresponding tax payment of $1,196 ($2,000,000 * .000598), and exits the Gateway system.

At the time the second quarter return is due for 2006, Taxpayer again checks the “statutory estimate” box and estimates it taxable gross receipts to be $2,500,000. Taxpayer files the return, makes a corresponding tax payment of $2,600 ($2,500,000 * .00104), and exits the Gateway system.

At the time the third quarter return is due for 2006, Taxpayer checks the “statutory estimate” box once again. Taxpayer knows that the third quarter will be bigger than the second, and therefore estimates its taxable gross receipts to be $3,000,000. Taxpayer files the return, makes a corresponding tax payment of $3,120 ($3,000,000 * .00104), and exits the Gateway system.

Actual Taxable Gross Receipts for All Quarters

The fourth quarter return also serves as a statutory estimator’s annual reconciliation return. When Taxpayer files for the fourth quarter of 2006, Taxpayer provides the actual figures for its taxable gross receipts for each of the first three quarters, as well as its actual taxable gross receipts for the fourth quarter. In so doing, Taxpayer calculates its actual taxable gross receipts for the first three quarters as follows: Quarter 1: $2,200,000; Quarter 2: $2,550,000; Quarter 3: $2,750,000. Taxpayer also calculates its actual taxable gross receipts for the fourth quarter to be $2,500,000.(4)

TGR as Originally Reported Between 95%-105% of actual TGR? (Y/N) and Under/(Over) Reported TGR

In order to determine whether the taxpayer properly estimated using the statutory estimation procedure, the spreadsheet shows whether Taxpayer’s taxable gross receipts as reported were at between 95% and 105% of its actual taxable gross receipts for each quarter. Please refer to the spreadsheet row entitled “TGR as originally reported between 95% - 105% of actual TGR? (Y/N)” to determine whether the statutory estimate was made properly.

As referenced in the spreadsheet, Taxpayer determines that its second quarter estimate is within the range of 95% and 105% of its actual figure (98%), even though it did not include an additional $50,000 in its taxable gross receipts as originally reported. Because Taxpayer falls within the range of 95% and 105% of its actual taxable gross receipts, Taxpayer will not be assessed interest or penalty on the underreported taxable gross receipts. Instead, the underreported taxable gross receipts will be included on Taxpayer’s fourth quarter annual reconciliation return, as referenced in the spreadsheet.

However, Taxpayer’s first quarter estimate of $2,000,000 was less than 95% (91%) of its actual taxable gross receipts for that quarter (a difference of $200,000 between Taxpayer’s actual taxable gross receipts and its taxable gross receipts as reported for that quarter). Additionally, Taxpayer’s third quarter estimate of $3,000,000 was more than 105% (109%) of its actual taxable gross receipts for that quarter (a difference of $250,000 between Taxpayer’s actual taxable gross receipts and its taxable gross receipts as reported for that quarter).

Interest and Penalty on Underpayment and Consequence for Overreporting

For the first quarter, Taxpayer is subject to interest and a 10% penalty on the underpayment of tax due. The spreadsheet automatically calculates the interest and applicable penalties on the underpayment and populates both figures for Taxpayer.

Taxpayer is also allowed to deduct the amount of tax overpaid on the overpayment in the third quarter on the fourth quarter annual reconciliation return.

Additional Taxable Gross Receipts to be Reported in the Fourth Quarter

Taxpayer also has to pay the additional tax due on those receipts that were within 95% and 105% of the actual taxable gross receipts in the second quarter. In making that calculation, the spreadsheet calculates the difference between the actual taxable gross receipts for the second quarter ($2,550,000) and the estimated taxable gross receipts the taxpayer originally reported for the second quarter ($2,500,000) to be $50,000. Therefore, on its statutory annual reconciliation return, Taxpayer will include the additional $50,000 in taxable gross receipts in its calculation for the fourth quarter.

Penalty Calculation

In calculating the penalty, the spreadsheet helps Taxpayer to determine the underpayment by taking the difference between its taxable gross receipts as originally reported for the first quarter in which the taxpayer is outside the 95%-105% range ($2,000,000) and the actual taxable gross receipts for that quarter ($2,200,000) to be $200,000. The tax on the discrepancy equals the difference ($200,000) multiplied by the tax rate in effect for the quarter in which the estimate was made (.000598) to be $120.(5) The spreadsheet multiplies that amount by 10% to calculate a penalty of $12. Taxpayer also calculates the interest on the underpayment to be $1.19.

In addition, Taxpayer is responsible for paying the $150 minimum tax for 2007 with the fourth quarter 2006 return.(6)

Taxpayer must remit a total of $2,415.19(7) with the return for the fourth quarter of 2006.

Questions and Amended Returns

Please direct any questions regarding these two methods to the CAT Division of the Ohio
Department of Taxation at 1-888-722-8829.

FOOTNOTES:

(1) Please note that for the first quarters of 2007, 2009, and 2011, taxpayers electing to use the rule estimation procedure must estimate using at least 100% of the previous (fourth) quarter’s actual taxable gross receipts in order to avoid the imposition of interest and penalties. Those quarters mark the periods in which the Department is required to apply a pre-determined formula to the total CAT revenue to figure out whether a rate change is necessary.

(2) It is important to note that even if Taxpayer estimated its taxable gross receipts exactly to its actual taxable gross receipts, Taxpayer is still required to reconcile its taxable gross receipts before it may file for the following quarter.

(3) Please note that in order for a taxpayer to follow the rule estimation procedure, all returns must be timely filed and all tax liability timely paid. If a taxpayer does not file its return for any quarter by the actual due date of the return, the taxpayer will be precluded from following the rule estimation procedure.

(4) The spreadsheet shows the total exclusion amount available to the taxpayer for each quarter.

(5) The original value of $119.60 is rounded to $120.

(6) The Department has received many inquiries from taxpayers confused about the $150 minimum payment. It is important to remember that the annual minimum tax is due on February 9th of each year for calendar years prior to 2010. For tax year 2006, the annual minimum tax was due May 10, 2006 because of the 2005 semi-annual period. Beginning in 2007, all taxpayers are required to pay the $150 annual minimum tax on or before February 9th. For example, the 2007 annual minimum tax is due on or before February 9, 2007. The minimum tax covers tax year 2007 (January 1, 2007 through December 31, 2007). Additionally, beginning with tax year 2010, the annual minimum tax is due on May 10th each year.

(7) Please note that in situations where interest is included in a taxpayer’s payment, the total amount will not be rounded to the nearest whole dollar.