ST 2003-01 - Direct Payment Authority Program - December,
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
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
- 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.
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,
- 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
- 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.
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
- 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
- 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.
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
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
- 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
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
- 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
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
- 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
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
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:
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.