Ohio Sales and Use Tax & Audit Guide
This guide is for businesses that need straightforward answers on the following Ohio Sales and Use Tax subjects:
- Do I need to be collecting Ohio sales tax?
- Should I be collecting or paying Ohio use tax?
- What do I do if I should have been collecting Ohio sales and use tax but haven’t?
- I received an audit notice from the Ohio Department of Taxation, what should I do?
- Guidance on fighting a sales tax assessment in Ohio.
Who Needs to Collect Ohio Sales and Use Tax?
Like most states, to be subject to Ohio sales tax collection and its rules, your business must:
1) have nexus with Ohio, and
2) sell or use something that is subject to Ohio sales tax.
How Is Nexus Established in Ohio?
According to the Ohio Department of Taxation, sales tax nexus is created in Ohio if a business has a physical presence in Ohio, such as:
- Having employees, agents, representatives, solicitors, installers, salespeople or independent contractors for the purpose of taking orders, making sales or deliveries, or installing or assembling tangible personal property in Ohio.
- Maintaining an office or other place of business in Ohio, even if operated by a member of an affiliated group or by a franchisee using the trade name of the seller.
- Assembling, installing, servicing, or repairing products in Ohio.
- Owning, renting, or leasing real property or tangible personal property in Ohio, including the use of a computer server in Ohio.
- Delivering goods to Ohio customers using your company-owned or leased truck.
- Maintaining inventory in Ohio using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).
NOTE: Ohio has recently targeted bar and restaurants and motor vehicle and watercraft dealers for sales tax audits. If you are a seller in either of these industries, there is even a higher likelihood of receiving that dreaded audit notice from the Ohio Department of taxation.
Economic Nexus (Wayfair Law) And Internet Sales in Ohio
Effective August 1, 2019, businesses located outside of Ohio may also be subject to its sales and use tax laws. Specifically, Ohio’s Wayfair law requires that a purely out of state business register with the Ohio Department of Taxation to collect and remit sales and use tax if the business has sales of tangible personal property delivered into Ohio exceeding $100,000 or 200 or more separate transactions during the preceding or current calendar year.
Which Sales Are Subject to Ohio Sales Tax?
If you have nexus in Ohio, the next step is to determine whether the products or services you sell are subject to Ohio sales and use tax. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to Ohio sales tax.
While the general rules seem straightforward, the application of Ohio’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.
Common exemptions from Ohio sales and use tax:
- Groceries and food sold for off premises consumption
- Prescription medicines
- Housing related utilities, such as gas, electric, water and steam
- Many items used in farming or manufacturing.
Generally, services are not subject to sales tax in Ohio, but there’s exceptions to every rule. For example, some taxable services in Ohio include:
- Landscaping or Lawn Care Services
- Private Investigative or Security Services
- Exterminating Services
- Repair and installation of taxable tangible personal property
- Personal care services including skin care, cosmetic, manicure, hair removal, body piercing, tattoos, and other similar services
- Snow removal services
Ohio generally imposes sales tax on software, digital products, and software as a service (SaaS), irrespective of its method of delivery.
Shipping & Handling
Ohio has straightforward rules with respect to shipping charges. If the item being shipped is taxable, the corresponding shipping charges are taxable. If the item is nontaxable, the shipping charges are also not subject to sales tax. If both taxable and nontaxable items are sold, the shipping associated with the taxable item is subject to Ohio sales tax.
Determining Local Sales and Use Tax Rates in Ohio
Ohio’s base or statewide sales tax rate is 5.75%. However, most counties charge a local/district surtax on top of the 5.75%, increasing the total sales tax that must be collected and remitted by the seller. Those local taxes range from 0% to 2.25% and sometimes an additional .5% special rate.
Ohio is an origin-based sales tax state, meaning that the amount of sales tax to apply to a sale is determined based on the vendors location. However, if you are an out-of-state seller, the sales tax rate is determined based on the delivery address. Local taxes are remitted to the state as part of your Ohio sales and use tax return. The combined Ohio + local sales and use tax rates for the largest 30 cities as of January 2021 are listed below. A comprehensive list can be found here.
I Should Have Collected Ohio Sales Tax, But I Didn’t
Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.
If you determine your business has nexus but you have not collected Ohio sales tax, the primary options are to:
- Register and pay back taxes, penalties, and interest, or
- Enter into a VDA to eliminate penalties (and in some cases reduce your tax liability and avoid interest).
Here is what you need to know about each option to make the best decision for your business:
Option 1: Register to Pay Back Taxes, Penalties, and Interest
Sometimes the best solution for a business is simply to register with Ohio and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.
When to consider registration and payment:
- If you established nexus less than 3 years ago.
- The sales tax penalty is LESS than the professional fees charged for the VDA.
- Your business does NOT have a sales tax collected issue.
Beware: registering does not generally eliminate past liabilities
Option 2: Voluntary Disclosure Agreement (VDA)
Ohio’s VDA lookback period: 3 years
In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 3 years. As a result, the benefit of doing a VDA often turns on:
- Whether the VDA limits lookback period. i.e. – you established nexus more than 3 years ago.
- The sales tax penalty savings is MORE than the professional fees charged for the VDA.
- You have a sales tax collected but not remitted issue.
I Received an Ohio Sales and Use Tax Audit Notice, What Should I Do?
Ohio regularly audits businesses that are required to charge, collect, and remit various taxes to the state. Businesses that receive a sales and use tax audit notice should consider the following:
- Unless you have experience handling Ohio sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
- How will you know when to provide documents or when to push back?
- Do you have a thorough understanding of your sales and use tax areas of exposure?
- Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?
If you are unsure of the answer to these questions and you do not have experience handling Ohio sales tax audits, hiring a professional might be right for you. Please contact us for any questions.
Additionally, these resource pages are full of detailed information to help you evaluate critical decisions during your Ohio sales and use tax audit.
- The Audit Overview & Selection Process
- The General Audit Process
- Statute of Limitations Extensions & Issues
- Managing the Sales Tax Auditor
Ohio Sales Tax Audit Process
Ohio sales and use tax audits usually follow the process laid out in the following flowchart. See the detailed guidance for each stage of the process in the sections below.
What to Expect After You Receive an Ohio Sales and Use Tax Audit Notice
Many audits begin with an unexpected call from a CDTFA sales tax auditor. Shortly after the call, your business will receive an audit notice confirming that your business was selected for a (field or desk) Ohio sales and use tax audit. Lucky you!! But before you celebrate too much, it’s a good idea to prepare for the audit. We highly recommend you start by getting a state and local tax professional involved.
What to Expect From an Ohio Sales Tax Auditor
- Auditor will conduct pre audit research.
- Auditor will often schedule and perform an entrance conference.
- Records will be requested (many of which the auditor is not entitled to and does not need).
- Usually, the auditor will tell you that, as part of the audit, they are looking for any areas where your business is entitled to a sales tax refund. While it is technically their job to look for this, they very seldom (if ever) do.
What to Expect During The Audit
Once the necessary records are received, the auditor will:
- Conduct the sales tax audit by comparing your Ohio sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your Ohio sales tax return(s).
NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.
- Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.
Conduct a use tax audit – the auditor will request a detail of certain
documents / accounts to make sure use tax was properly paid on applicable
purchases. Common areas audited include:
- Advertising Expense
- Auto & Truck Expense
- Repair and Maintenance
- Rent (including related party rent)
- Office Expense
- Miscellaneous Expense
Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to Ohio. This often leads to shocking results for the unsuspecting taxpayer during an audit.
After the Audit – Understand and Defend Your Businesses Rights
Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding workpapers to support the Ohio sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied Ohio’s sales tax laws.
We recommend businesses refrain from agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their Ohio sales tax liability.
The process of challenging an Ohio sales tax audit assessment is discussed in detail in the following sections.
Ohio Sales Tax Audit Protest Flow Chart
Contesting Audit Findings with the Auditor
After an audit, the auditor will issue an Ohio Notice of Assessment (AKA the audit report). This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:
30 days to contest findings with the auditor.
- Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
- Legal interpretations of sales tax law are often not resolvable at this stage.
- If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue to the Ohio Department of Taxation.
Appeal / Protest to The Ohio Department of Taxation
Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed by the auditee. This is done after the Ohio Department of Taxation issues the Notice of Assessment.
- A protest / appeal must be done within 30 days of the Notice of Assessment issuance.
If you have received a Notice of Assessment and have not at least talked to someone experienced in Ohio State and Local tax, now is the time before these deadlines are missed. For more information about your audit assessment click here.
Settling an Ohio Sales Tax Liability
Along the way, or even after one the critical notices are issued, there is the possibility to settle your Ohio sales tax case by negotiating with the Ohio Department of Taxation. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced Ohio state and local tax lawyer or other professional.
Contest an Ohio Jeopardy Assessment
Ohio may issue a Notice of Jeopardy Determination in certain situations. The jeopardy assessment gives Ohio accelerated rights and it may immediately begin to try and collect. Due to the jeopardy nature, the taxpayer only has a short period of time to contest the assessment and must place a security deposit to fight the issue.
Ohio Administrative Court
If you cannot get your audit resolved within the agency or your deadlines have been missed, you still have one last shot to fight your Ohio sales tax assessment by going to Ohio administrative court, which is known as the Ohio Board of Tax Appeals. Likewise, and generally not recommended, along the way you always have the option to skip the agency protest and file in administrative court. That said, because neither party wants to spend the time and resources on the uncertainty of administrative court, continuing to challenge the assessment is often an effective way to maximize your settlement potential.
If your case is filed in administrative court, and the case proceeds to hearing, it is heard and decided by a neutral board. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.
If your case cannot be resolved at this level, the next appeal is to judicial court.
Other Ohio Sales Tax Resources
Q:What triggers a tax audit?
A:You inadvertently waived a red flag or your company landed in the small percentage selected for a random sales tax audit. These red flags include: Cash-based businesses, prior audits that resulted in owed sales tax, your sales reported to the state didn’t match what you reported to the IRS, a high volume of exempt sales, filing a refund claim, or a high number of credits. There’s also a possibility that your business happens to be in an industry that your state suspects rampant under-reporting. Often times, they will target industries effected by complex sales tax laws.
Q:How do I prepare for a sales tax audit?
A:1. RESPOND to the notice; 2. Get organized; 3. Identify/hire your audit manager; 4. Notify your auditor of who they will be corresponding with; 5. Compare your sales tax returns against the federal tax return; 6. Test at least 1 month of exempt sales; 7. Reconcile your sales tax payable account versus your sales tax payments; 8. Review your fixed assets purchased — did you pay sales tax on them?; 9. Review your purchases on your key expense accounts to ensure tax was paid on your purchases.
Q:How long do sales tax audits last?
A:Audit duration can vary dramatically from state to state and from business to business. Waiver issues aside, an audit generally takes 3-7 months to complete. Surprisingly, some audits can drag on for a few years. Time factors usually swing on the size of the company, the ability to produce reliable and organized documentation, and the level of sophistication of the business.
Q:Can I do this myself or should I hire a sales tax lawyer or a sales tax consultant?
A:We all enjoy the occasional DIY project, especially when it saves us money. Before opting to go that route, consider the risk vs. rewards involved. Avalara recently conducted a study and found that the average sales tax audit costs around $115,000. When facing a sales tax audit, it is beneficial to have someone with knowledge of the financial implications on your side. That is where sales tax professionals, such as those at Sales Tax Helper LLC, can save you a lot of heartache and money by avoiding a few missteps.
Q:What accounting software and services do you work with?
A:TaxJar, Vertex O Series, Avalara, Vertex Cloud, Quickbooks, Proconnect Tax Online, Canopy, ONESOURCE, Sovo Intelligent Compliance Cloud, Intuit Lacerte, CCH SureTax, SS&C Advent Axys, Vertex Payroll Tax Q Series, Bloomberg Tax Advantage, VATBox, CSC Corptax Compliant, Oracle Tax Reporting Cloud, TaxCloud, Fast Enterprises, GenTax, Fast Enterprises FastUI, SAP Tax Compliance, Taxify, and ESKORT Compliance Solution.