Information Release

ST 2003-01 - Direct Payment Authority Program - December, 2004

This Information Release replaces Information Release ST 2003-01. In summary, this Information Release adds the following to the Information Release ST 2003-01:

  • The direct payment permit holder is required to provide (1) a schematic/diagram of the business operations; (2) information necessary to complete the Taxpayer Information Report (Form ST807B); and (3) the names and home addresses of the corporate officers/responsible parties. Additionally, if this information changes, the permit holder is required to update the information on file with the Department.
  • Permit Holders are required to provide, under audit, requested information electronically and complete the audit using statistical sampling for expenses.
  • Minimum penalties will be applied under audit as follows: compliance between 80% and 90% ----7.5% and compliance under 80%----15%.

Effective February 2003 this Department implemented a new “direct payment authority” sales and use tax program. This program has several key features:

  • Availability to any business which purchases goods or services under circumstances normally making it impossible at the time of the purchase to determine if the goods or services are exempt from taxation.
  • Availability to any business (i) whose number of purchase transactions of goods or services exceeds five thousand annually and (ii) whose Ohio state sales and use tax paid on these purchases exceeds $250,000 annually.
  • Requires the taxpayer to enter into a procedural agreement that sets forth compliance and record keeping requirements, penalties for noncompliance, and revocation procedures.
  • A listing of all “direct payment permit holders” on our Web site.
  • A “grandparent” provision for existing direct payment permit holders as of February 1, 2003.

Direct payment authority for paying sales and use tax is a privilege, which can be granted to a business to promote the efficient administration of Ohio’s sales and use tax law. This program will provide to previously ineligible businesses the opportunity to participate in an efficient and cost savings mechanism for paying Ohio sales and use tax.

The following question and answer format provides general information, describes the application process, sets forth compliance requirements, and explains how direct payment authority can be relinquished or revoked.

General Information

Q1. What is direct payment authority?

  • Ohio Revised Code (R.C.) section 5739.031 authorizes the Tax Commissioner to allow “direct payment permit holders” to forego paying state and local sales and use tax at the time they make purchases. These direct payment permit holders must accrue and pay the state and local sales and use tax directly to the Ohio Department of Taxation.

Q2. Who is a “direct payment permit holder”?

  • A “direct payment permit holder” is a taxpayer whom the Tax Commissioner has authorized to make direct payment of state and local sales and use tax to the Ohio Department of Taxation rather than paying the tax to the seller at the time the direct payment permit holder purchases goods and services subject to state and local sales and use tax.

Q3. What is Ohio “use tax”?

  • R.C. section 5741 imposes on all Ohio residents and Ohio businesses the requirement to pay Ohio “use tax” when the Ohio resident or Ohio business purchases goods and services from an out-of-state seller which does not collect the Ohio and local sales tax. Use tax is also due when the proper amount of sales tax has not been paid to an in state vendor, seller or service provider. The use tax applies only if the Ohio sales tax would apply had the sale been made from a location in this state.

Q4. Who is eligible for direct payment permit authority?

  • A manufacturer, contractor, or other consumer who purchases goods or services under circumstances normally making it impossible at the time of the purchase to determine if the goods or services are exempt from taxation,

or

  • A consumer (i) whose number of purchase transactions of goods and services exceed five thousand annually and (ii) whose Ohio state sales and use tax paid on these purchases exceeds $250,000 annually.

Q5. How does the “grandparent” provision work?

  • Businesses having direct payment authority as of February 1, 2003 can continue to operate under that current direct payment authority, provided the businesses meet all the requirements set forth in this information release. The Tax Commissioner will revoke any previously issued direct payment authority if the Department finds these requirements are not being met. Effective December 1, 2004 an existing direct payment permit holder will also be subject to all the terms of this information release.

Q6. Why does the Ohio Department of Taxation list all direct payment permit holders on its web site?

  • The Department frequently receives requests from vendors to confirm that a taxpayer has direct payment authority. Placing the list on our web site will allow vendors to obtain this information more quickly, at any time, and on any day.
  • R.C. section 5703.21 permits the Department to place on our website the following information:
    • The name of the business,
    • The business’s direct payment permit number, and
    • The effective date of the direct payment authority.

Application Process

Q1. How does a business apply for direct payment authority?

  • A business desiring direct payment authority must complete an application form.

Q2. What information must be provided for the direct payment authority to be granted and is a written direct payment procedural agreement required?

  • The business must execute a written direct payment procedural agreement with this Department, which the business must state it understands and agrees to fulfill the duties and responsibilities commensurate with direct payment authority as set forth in this information release. The direct payment procedural agreement must also provide a written description of the business’s accounting system and demonstrate how the accounting system will record and reflect the proper amount of sales and use tax due.
  • A detailed diagram/schematic of the operations must be provided.
  • Requires information necessary to complete the Taxpayer Information Report and Responsible Party Questionnaire, in particular the names and home addresses of the corporate officers/responsible parties must be provided. If an audit results in an assessment this information may be used to generate a responsible party assessment against the responsible party or parties.

Q3. What review procedure does the Ohio Department of Taxation follow after the business submits the application form?

  • This Department’s Audit Division will review all applications and will assist qualified applicants in filing with us a direct payment procedural agreement. The Department will notify the applicant of the approval or the denial of the use of direct payment authority within 120 days after the Department receives the application. If the applicant needs to submit additional documentation to support the Department to grant direct payment authority, the Department will schedule a conference with the applicant within 120 days after receiving the application. If a conference was necessary, then the Department will notify the applicant of approval or denial within sixty days after the conference.

Q4. How will I know if the Ohio Department of Taxation has granted direct payment authority to me?

  • You will be notified by mail that the Tax Commissioner has granted to you direct payment authority.

Q5. If the Tax Commissioner decides not to grant my business direct payment authority, can I appeal?

  • No. Current law does not provide for any appeal, but the Tax Commissioner’s goal is to allow direct payment authority to all qualified applicants.


Compliance Requirements

Q1. What are a direct payment permit holder’s responsibilities and duties?

  • A direct payment permit holder must furnish either (i) a copy of the direct payment authorization or (ii) the name and address of the direct payment permit holder, the direct payment permit number, and the date the Tax Commissioner issued the direct payment authority, to each supplier, from whom the direct payment permit holder purchases tangible personal property or services.
  • If a direct payment permit holder has a contract with a construction contractor and certifies that a portion of a construction contract relates to personal property which remains as personal property after installation, then R.C. section 5739.03(C) allows the direct payment permit holder to claim, and the construction contractor to accept, the direct payment authority with respect to the certified tangible personal property portion of the contract.
  • A direct payment permit holder does not have to provide to its suppliers any exemption certificates and does not have to pay any Ohio sales and use tax to its suppliers who receive either (i) a copy of the direct payment authority or (ii) the name and address of the direct payment permit holder, the direct payment permit number, and the date the Tax Commissioner issued the direct payment authority.
  • R.C. section 5739.01(B)(5) explains that the Ohio sales and use tax does not apply to construction contracts. The law states that a construction contract is the transfer of property for the repair, modernization, or new construction of real property under a construction contract. Because such contracts are not subject to Ohio sales and use tax, a direct payment permit holder must not claim, nor should a construction contractor accept, direct payment authority for any construction contract work performed in connection with real property.

Q2. What are a supplier’s/seller’s responsibilities when a business informs the supplier/seller that the business has direct payment authority?

  • If the direct payment permit holder provides to the supplier/seller either (i) a copy of the direct payment authority or (ii) the name and address of the direct payment permit holder, the direct payment permit number (8 digit number beginning with 98), and the date the Tax Commissioner issued the direct payment authority, then the supplier/seller should not collect any Ohio or local sales and use tax from the customer. However, the supplier/seller must maintain adequate records which detail the amount involved and the identity of the holder of the direct payment authority (see (i) and (ii) above). The supplier/seller is not required to confirm with the Department that the customer possesses direct payment authority.

Q3. What are the record keeping requirements for a direct payment permit holder?

  • A direct payment permit holder must maintain all records that are necessary for a determination of the correct tax liability. The direct payment permit holder must make the required records available to the Department upon request as required under R.C. section 5739.031(D).
  • Required records include but are not limited to purchase invoices, bills of lading, asset ledgers, project folders and authorizations, depreciation schedules, transfer journals, accounts payable ledgers, and any other such primary and secondary records and documents created in the course of business. The permit holder must maintain records in an electronic format and when under audit provide the electronic records to the Department. Additionally, the permit holder agrees to complete the audit using statistical sampling for expenses.
  • A taxpayer granted a direct payment authority must maintain a record keeping system in a manner that allows the Department to efficiently and effectively identify the values upon which tax is reported and the amount of tax reported thereon. In addition, whenever a taxpayer has a direct payment authority covering more than one facility, the taxpayer must keep its records in a manner that allows the Department to identify the purchases and tax reported for each facility.

Q4. How and when does a taxpayer file a direct payment sales and use tax return?

  • The direct payment permit holders will file the return with the Department.
  • Depending upon the extent of the direct payment permit holder’s purchases, some direct payment permit holders file monthly returns while others file quarterly returns. When you receive your direct payment authority, the Department will inform you if you are a monthly or quarterly filer.
  • All returns are to be received by the twenty-third of the month following the close of the filing period (either monthly or quarterly).
  • A direct payment permit holder should include with the return a check for the tax due. Some direct payment permit holders are required to make payment by electronic funds transfer (see R.C. section 5739.032). The Department will notify those direct payment permit holders who must pay by electronic funds transfer.

Q5. How do I pay local sales and use taxes?

  • Whenever the direct payment permit holder files its return, the direct payment permit holder must calculate the local sales and use tax based upon the rate imposed by the local tax jurisdiction where the direct payment permit holder received the tangible personal property or service. If the direct payment permit holder subsequently moves tangible personal property to another part of the state having a higher combined state and local sales and use tax rate, then the direct payment permit holder must pay the additional local sales and use tax.

Q6. Are some transactions excluded from being reported under a direct payment authority return?

  • A direct payment permit holder may elect not to claim its direct payment authority status in connection with the purchase of certain types of transactions. Examples of such transactions includes purchases of taxable lodging, meals, and beverages, the washing and waxing of motor vehicles, purchases of telecommunications services and purchases made with a purchasing card. The transactions for which the permit holder elects not to use the direct payment authority must be indicated in the direct payment permit procedures filed by the permit holder.

Q7. What is the direct payment permit holder required to do if the name, structure or operations of the business changes?

  • If only the business name changes, the direct payment permit holder must notify the Ohio Department of Taxation, Audit Division (by certified mail) of the name change within thirty days after the effective date of the change.
  • If there is a change in the legal entity (e.g. a business converts from a partnership to a corporation) but the taxpayer’s business and operations remain the same, the new entity must submit a written request to the Ohio Department of Taxation, Sales Tax Division for a continuation of direct payment authority status. This request must be sent to the Department (by certified mail) within sixty days after the status change and must set forth the name of the old entity and the name of the new entity, the effective date of the change and the permit number issued to the non surviving entity. Generally, the Department will issue new direct payment authority and a new permit number to the surviving entity. The new entity will also need to sign a new procedural agreement for direct payment authority.
  • If the new entity receives new direct payment authority with a new permit number, the new entity must provide its supplier/sellers with notification of the new permit number. Of course, the new entity must report its taxable purchases under its new direct payment authority and new permit number.
  • If the operations change (including, but not limited to, new line of operations, change in accounting systems, change in responsible party, or any other change causing the method of reporting to change), the permit holder is responsible for updating the direct payment permit procedures to reflect the new information and forward the new procedures to the Department.

Q8. What happens if you audit my business and you determine I did not pay the correct amount of tax?

  • If you paid too much tax, the Department shall refund the overpayment and pay you any applicable interest.
  • If you paid less tax than you should have paid, you will have to pay the balance due plus applicable interest.
    • If the balance due is no more than 10% of the total tax previously paid for the audit period, you may have to pay some penalty—depending on your particular facts and circumstances.
    • If the balance due is more than 10%, but less than 20% of the total tax previously paid for the audit period, you will have to pay a minimum penalty of 7.5%. Additional penalty may be added based on the Department’s non-automatic penalty worksheet criteria.
    • If the balance due is more than 20% of the total tax previously paid for the audit period you will have to pay a maximum penalty of 15% and the direct payment authority will be revoked.

Relinquishing or Revoking Direct Pay Permit Authority

Q1. What is the difference between “relinquishing” and “revoking” a direct pay permit?

  • A direct payment permit holder can relinquish (give back) a direct pay permit by informing the Ohio Department of Taxation, Sales Tax Division (by certified mail) of the effective date of cancellation. Any cancellation shall be effective as of the last day of the reporting period in which the cancellation is requested.
  • On the other hand, the Tax Commissioner will revoke (cancel) the direct pay permit if upon audit it is determined that for the audit period you paid less than 80% of the tax you should have paid unless the Tax Commissioner determines there is a legitimate legal dispute over the imposition of the tax. The Tax Commissioner may also revoke direct payment authority for other reasons. Other reasons for revocation include, but are not limited to: not providing electronic records, not providing responsible party information, not filing returns accurately and on a timely basis, not remitting the tax due, not updating the procedures as required, and not completing audits using statistical sampling for expenses. Generally, you will then have to wait at least three years before you can apply for another direct payment permit.

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If you have any questions regarding this information release, please contact our Taxpayer Service Center at 1-888-405-4039, or e-mail us through our web site: www.state.oh.us/tax/ (Ohio Relay Services for the Hearing or Speech Impaired: 1-800-750-0750).1

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1See the Department’s “home page”, select “E-Mail-Us” (in the upper right hand corner of the screen), and then send in your question.