The purpose of this information release is to explain, in
question and answer format, the corporation franchise tax
(CFT) sales factor situsing provisions following the adoption
of the business/nonbusiness concept enacted by Amended
Substitute House Bill 95 (H.B. 95) of the 125th General
Assembly and to explain the subsequent amendments to the
sales factor situsing provisions enacted by Substitute House
Bill 127 (H.B. 127) of the125th General Assembly1.
As defined in Ohio Revised Code section (R.C.) 5733.04(Q) and
used in this information release the term "business income'
means income arising from transactions, activities, and
sources in the regular course of a trade or business and
includes income from real property, tangible personal
property, and intangible personal property if the
acquisition, rental, management, and disposition of the
property constitute integral parts of the regular course of a
trade or business operation. 'Business income' includes
income, including gain or loss, from a partial or complete
liquidation of a business, including, but not limited to,
gain or loss from the sale or other disposition of goodwill.”
As noted below, for taxable years ending on or after the June
26, 2003 effective date of H.B. 95, the Department of
Taxation, in general, will presume that all income, gain,
loss, and expense is business income. The term “nonbusiness
income” is defined in R.C. 5733.04(R) as “all income other
than business income.” Business income is apportioned (R.C.
5733.05(B)) and nonbusiness income is allocated (R.C.
5733.051). You can view the text of these new laws by
visiting the Ohio General Assembly’s web site at:
The CFT amendments to the sales factor computation enacted by
H.B. 95 are effective for taxable years ending on or after
June 26, 2003, and the CFT amendments to the sales factor
computation enacted by H.B. 127 are effective for taxable
years ending on or after December 11, 2003. As a result of
the effective date of the amendments enacted by each bill,
there are three distinct sales factor provisions for tax year
2004. The sales factor law that applies to each franchise
taxpayer for tax year 2004 depends on that taxpayer’s taxable
year end:
1. If the taxpayer’s taxable year ended prior to the June 26,
2003, then the amendments enacted by H.B. 95 and by H.B. 127
do not apply to the taxpayer’s 2004 report.
2. If the taxpayer’s taxable year ended on or after the June
26, 2003 effective date of H.B. 95 and prior to the December
11, 2003 effective date of H.B. 127, then the amendments
enacted by H.B. 95 apply to the taxpayer’s 2004 report, but
the amendments enacted by H.B. 127 do not apply to the
taxpayer’s 2004 report.
3. If the taxpayer’s taxable year ended on or after the
December 11, 2003 effective date of H.B. 127, then the law as
amended by H.B. 127 applies to the taxpayer’s 2004 report.
This information release does not apply to Ohio corporation
franchise taxpayers that are financial institutions. The
apportionment of a financial institution’s net worth is
covered under R.C. 5733.056. If you have questions please
call 1-800-282-1780 (Ohio Relay Services for the Hearing or
Speech Impaired: 1-800-750-0750), or access the department’s
website
and e-mail your questions to us.
The responses to the questions in the table that follows
reflect the law as it applies to taxpayers whose taxable year
ended in each period.
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Question
For taxable years ending in this period:
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Period 1
Taxable years ending
prior to 6/26/03
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Period 2
Taxable years ending
on or after 6/26/03 and
prior to 12/11/03
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Period 3
Taxable years ending
on or after 12/11/03
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Does Ohio franchise tax law distinguish
business income from nonbusiness income?
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No. The statute does not distinguish business income
from nonbusiness income. The following income is
allocable whether or not earned in the regular course
of business: (i) net rents and royalties from real
property and tangible personal property, (ii) capital
gains and losses (including recapture income), (iii)
dividends, (iv) net rents and net royalties from
intangible property, and net technical assistance fees
not representing the taxpayer’s principal source of
gross receipts, and (v) lottery income.
All income not listed above is apportionable even when
not earned in the regular course of business.
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Yes. The statute distinguishes business income from
nonbusiness income. Business income is apportioned and
nonbusiness income is allocated.
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Yes. Same as taxable years ending in period 2.
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Is all income presumed to be business
income?
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Not applicable. The statute does not distinguish
business income from nonbusiness income.
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Yes. All income (including interest and dividend
income), gain, loss, and expense is presumed to be
apportionable business income or expense; the taxpayer
must show otherwise.
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Yes. Same as taxable years ending in period 2.
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Is rental property included in the property
factor of the owner-lessor?
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Case law generally provides that rental property is
excluded from the property factor. See Illinois
Tool Works (1982), 70 Ohio St. 2d 175,
(for the exception, see Columbia Properties, Inc.
v. Limbach (1989), 42 Ohio St. 3d 75).
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Yes. The statute specifically includes in the property
factor real property and tangible personal property
that the taxpayer rents to others unless the income
from such rental property is nonbusiness income.
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Yes. Same as taxable years ending in period 2.
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Does the law specifically exclude from the net
income base apportionment factors property, payroll and
sales to the extent that the property, payroll, and
sales generate allocable nonbusiness income?
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Not applicable.
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Yes.
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Yes.
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Are gross rents included in the sales
factor?
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No. Because rental income is allocable, gross rents are
not included in the sales factor.
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Yes. Gross rents are included in the sales factor
unless the rental income is nonbusiness allocable
income.
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Yes. The statute specifically includes gross rents in
the sales factor unless the rental income is
nonbusiness allocable income.
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For gross rents included in the sales factor,
how does the statute situs such amounts within and
without Ohio?
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Not applicable.
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Although the statute does not specifically address this
question, the Department maintains that (i) rents and
royalties from real property located in Ohio are
sitused to Ohio, and (ii) rents and royalties from
tangible personal property are sitused to Ohio to the
extent that the property was used in Ohio.
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The statute specifies that (i) rents and royalties from
real property located in Ohio are sitused to Ohio, and
(ii) rents and royalties from tangible personal
property are sitused to Ohio to the extent that the
property was used in Ohio.
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Is interest included in the sales
factor?
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No. Although the statute does not specifically address
this question, case law excludes interest from the
sales factor. See Incom International v.
Limbach, BTA No. 84-D-1149 (1-11-88).
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No. Same as taxable years ending in period 1.
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No. The statute specifically excludes interest from the
sales factor whether the in-terest is business income
or nonbusiness income.
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Are dividends included in the sales
factor?
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No. Because dividends are allocable, dividends are not
included in the sales factor.
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No. The Department maintains, based on the Board of Tax
Appeals’ decision in Incom International v.
Limbach, BTA No. 84-D-1149 (1-11-88), that
dividends are not included in the sales factor.
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No. The statute specifically excludes dividends from
the sales factor whether the dividends are business
income or nonbusiness income.
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Are receipts from sales of services included in
the sales factor?
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Yes.
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Yes.
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Yes.
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How does the statute situs receipts from the
sale of services within and without Ohio?
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Receipts from services are receipts from “sales other
than sales of tangible personal property.” The statute
provides that such receipts are sitused within and
without Ohio based on “cost of performance.”
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Same as taxable years ending in period 1.
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The statute specifies that receipts from sales of
services are sitused to Ohio in proportion to the
purchaser's benefit, with respect to the sale, in Ohio
to the purchaser's benefit, with respect to the sale,
everywhere. The physical location where the purchaser
ultimately uses or receives the benefit of what was
purchased is paramount in determining the proportion of
the benefit in Ohio to the benefit everywhere.
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Are receipts from the sale, exchange, or other
disposal of capital assets and IRC section 1231 assets
included in the sales factor?
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No. The statute specifically excludes from the sales
factor receipts from the sale or other disposal of
capital assets and IRC section 1231 assets.
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No. Same as taxable years ending in period 1.
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(1) The statute excludes from the
sales factor receipts from the sale of tangible
personal property and receipts from the sale of real
property where such property is a capital asset or a
1231 asset (determined without regard to the holding
period).
(2) The statute excludes from the
sales factor receipts from the sale of intangible
personal property other than trademarks, trade names,
patents, copyrights, and similar intellectual property
whether or not the intangible property is a capital
asset or an ordinary asset.
(3) The statute includes in the sales
factor receipts from the sale of trademarks,
trade names,
patents, copyrights, and similar intellectual
property whether or not such intellectual
property is a capital asset or an ordinary asset.
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Are receipts from the sale of patents,
copyrights, and similar intellectual property included
in the sales factor?
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No. The statute specifically excludes from the sales
factor receipts from the sale or other disposal of
capital assets and IRC section 1231 assets.
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No. Same as taxable years ending in period 1.
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Yes. The statute includes in the sales factor receipts
from the sale of patents, copyrights, and similar
intellectual property.
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For receipts from the sale of patents,
copyrights, and similar intellectual property that are
included in the sales factor, how does the law situs
such receipts within and without Ohio?
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Not applicable.
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Not applicable.
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The statute specifies that receipts from the sale of
patents, copyrights, and similar intellectual property
are sitused to Ohio to the extent that the receipts are
based on the amount of use of the intellectual property
in Ohio.
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Are patent and copyright royalties included in
the sales factor?
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Gross receipts from patent and copyright royalties are
included in the sales factor only if the royalties are
apportionable income. Patent and copyright royalties
and technical assistance fees are apportionable income
if they are the principal source of the taxpayer’s
gross receipts, and they are allocable income if they
are not the principal source of the taxpayer’s gross
receipts.
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Yes. Patent and copyright royalties and similar amounts
received for granting the right to use intellectual
property are included in the sales factor unless they
are nonbusiness income.
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Yes. The statute includes in the sales factor receipts
from the sale, exchange, disposition, or other grant of
the right to use trademarks, trade names, patents,
copyrights, and similar intellectual property unless
the receipts are for nonbusiness income.
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For patent and copyright royalties that are
included in the sales factor, how does the law situs
such amounts within and without Ohio?
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Patent and copyright royalties, when included in the
sales factor, are “sales other than sales of tangible
personal property” and are sitused within and without
Ohio based on “cost of performance.”
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Patent and copyright royalties and similar amounts
received for granting the right to use intellectual
property are sitused to Ohio to the extent that the
receipts are based on the amount of use of the
intellectual property in Ohio.
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The statute specifies that receipts from granting the
right to use trademarks, trade names, patents,
copyrights, and similar intellectual property are
sitused to Ohio to the extent that the receipts are
based on the amount of use of the intellectual property
in Ohio.
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Are receipts from the sale of real property
inventory included
in the sales factor (for example, lots developed and
sold by a real estate developer)?
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Yes. Receipts from the sale of real property inventory
are included in the sales factor.
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Yes. Same as taxable years ending in period 1.
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Yes. The statute includes in the sales factor receipts
from the sale of real property inventory.
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How are receipts from the sale of real property
inventory sitused within and without Ohio?
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Although the statute does not specifically address this
issue, the receipts from the sale of real property
inventory are sitused to Ohio when the real property is
located in Ohio.
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Same as taxable years ending in period 1.
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The statute specifies that receipts from the sale of
real property inventory are sitused to Ohio when the
real property is located in Ohio.
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Are technical assistance fees included in the
sales factor?
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Gross receipts from technical assistance fees are
included in the sales factor only if the fees are
apportionable income. Patent and copyright royalties
and technical assistance fees are apportionable income
if they are the principal source of the taxpayer’s
gross receipts, and they are allocable income if they
are not the principal source of the taxpayer’s gross
receipts.
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Yes. Technical assistance fees are included in the
sales factor as “sales, other than sales of tangible
personal property.”
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Yes. The statute includes in the sales factor receipts
from the sale of services and receipts from the grant
of the right to use intellectual property.
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For technical assistance fees that are included
in the sales factor how does the law situs such amounts
within and without Ohio?
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Technical assistance fees, when included in the sales
factor, are “sales other than sales of tangible
personal property” and are sitused within and without
Ohio based on “cost of performance.”
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Technical assistance fees are included in the sales
factor and sitused within and without Ohio based on
“cost of performance.”
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The statute specifies that receipts from the sale of
services are sitused to Ohio in proportion to the
purchaser's benefit, with respect to the sale, in Ohio
to the purchaser's benefit, with respect to the sale,
everywhere. The physical location where the purchaser
ultimately uses or receives the benefit of what was
purchased is paramount in determining the proportion of
the benefit in Ohio to the benefit everywhere.
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For taxable years ending on or after December
11, 2003 H.B. 127 amended the statute to specifically
ex-clude from the sales factor dividends, interest, and
receipts, along with the related gains or losses, from
the sale or other disposal of “excluded assets.” For
those taxable years, can the taxpayer allocate the
income associated with the receipts that are excluded
from the sales factor?
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Not applicable.
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Not applicable.
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No. The statute specifies that only nonbusiness income
is allocated. The statute also specifies that
income from receipts that are excluded from the sales
factor is not presumed to be allocable nonbusiness
income.
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