Generally, in Ohio, sales of tangible property are taxable unless an exemption exists, whereas services are generally nontaxable unless specifically enumerated as taxable under the Ohio Revised Code. However, Ohio has many exemptions available. Your business may be paying tax on goods or services that are exempt from tax, creating opportunities to claim a refund of taxes erroneously paid and perpetual future tax savings. On the other hand, if your business has not been paying Ohio sales tax on taxable purchases, Ohio can audit or assess your business for taxes, penalties, and interest for unpaid taxes. Because of this, all Ohio businesses should know Ohio’s available sales and use tax exemptions.
Tax exemptions for businesses provide opportunities to legally reduce tax liabilities by exempting certain transactions or purchases from Ohio sales tax obligations, ultimately contributing to cost savings and improved financial efficiency. Buckingham, Doolittle & Burroughs previously addressed common exemptions including the manufacturing exemption, packaging exemption, resale and casual sale exemption. In this post, we’ll address lesser known exemptions that may be available for your business.
Distribution Center Exemption
The Distribution Center Exemption applies to any property that is used primarily to store, transport, mail, or handle “purchased sales inventory” in a warehouse, distribution center, or similar facility when the inventory is primarily distributed outside Ohio to related retail stores or by means of “direct marketing.” R.C. 5739.02(B)(42)(j). This exemption only applies where the owner of the distribution center or similar facility is supplying acquired inventory to commonly owned retail stores outside of the state. Accordingly, the exemption is generally not available to owners of warehouses who supply inventory to unrelated third parties.
For example, if a major retail store has a warehouse in Ohio it uses to supply inventory to retail stores in throughout the United States or in the Midwest region, its purchases of equipment used to store, transport, mail, or handle the inventory would not be subject to sales or use tax.
Transportation for Hire Exemption
When a business transports goods belonging to others, vehicles, items incorporated into those vehicles, and repairs and maintenance for those vehicles are exempt from tax. This exemption, referred to as the Transportation for Hire Exemption, is available for companies who use the motor vehicles to primarily transport property owned by another party for consideration. For example, a business that moves household goods for others can make tax-free purchases of vehicles and equipment that is “attached to or incorporated in” the vehicles, such as logistic straps, decking bars, tie down straps, walk boards, and padlocks. See O.A.C. 5703-9-24.
If structured properly, related parties may also take advantage of this exemption by creating a separate but related entity that owns vehicles and transports property on behalf of a related taxpayer. In that case, the fleet owner transports property on behalf of the related taxpayer, and the purchase of vehicles used to provide the transportation services (and repair and replacement parts) are exempt from tax.
Sales to Non-Profit Organizations
Business sales to charitable nonprofit organizations are generally exempt from sales tax (excluding motor vehicles). For the exemption to apply, the sale must be made to church, 501(c)(3) organization, or any other nonprofit operating exclusively for “charitable purposes.” R.C. 5739.02(B)(12). “Charitable purpose” is defined broadly and includes purposes such as relief of poverty, improving health, promoting arts, science, and education, and operating homes for the elderly, among others. If your business is making sales to charitable organizations organized for similar purposes, they are most likely exempt from tax.
Sales of Services
Sales of services are generally exempt from tax unless Ohio specifically identifies the services as taxable. Taxable services in Ohio include landscaping and lawn care services, private investigation and security services, building maintenance and janitorial services, repair and installation of taxable tangible personal property, personal care services such as manicures, hair removal, and tattoos, towing services, and laundry services. Professional services such as accounting, legal, medical, and insurance services are nontaxable services.
In order to be taxable, the services provided must fit within the definition for taxable services in Ohio’s statute. For example, janitorial services are taxable but are narrowly defined to include only janitorial-type cleaning such as mopping, sweeping, collecting trash, etc. Accordingly, specialized cleaning services that are not “janitorial” in nature are nontaxable.
Compliance and Documentation
If you are making both taxable and nontaxable sales in Ohio, it is important to keep accurate records to support the exemptions being claimed. For each exempt transaction, the seller should collect an exemption certificate from the buyer identifying the specific exemption claimed. As long as the seller obtains a properly completed exemption certificate, it is relieved from any obligation to collect tax. If a business is audited and cannot provide sufficient documentation that the examined transactions are exempt, the business may risk additional payments to Ohio for tax, penalties and interest.
Ohio accepts different types of exemption certificates depending on the nature of the sale, including:
Each certificate must: (a) state the name of the vendor and customer; (b) recite an exemption; (c) be dated; and (d) signed by the customer.
How to Maximize Tax Exemptions for Business
Businesses may be able to maximize tax exemptions by structuring their business or purchases in a manner that complies with the exemptions, such as having a separate company for a trucking fleet. Other exemptions depend on the proper documentation and tracking of property to support the desired exemption, such as tracking the use of manufacturing equipment or raw materials.
It’s important for the business to regularly review and assess their operations to maximize tax savings and avoid adverse consequences, including an audit and additional assessment of taxes, penalties and interest.
While Ohio sales tax compliance may seem intimidating, it provides an opportunity for businesses to take advantage of Ohio tax exemptions for long-term savings and growth. Manufacturers can leverage the exemption for manufacturing equipment and raw materials and businesses involved in transporting goods may reduce their tax with the transportation-for-hire exemption.
