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Ohio made a drastic change to one of it's key revenue sources last year. The corporate franchise tax will be phased out over a 5-year period beginning with tax year 200 (taxable year 2005) and is being replaced by the Commercial Activity Tax ("CAT").

The CAT is an annual privilege tax that is measured by the taxable gross receipts from most business activities. The tax is due in taxable gross receipts that are sourced to Ohio. For example, gross receipts received from the sale, lease or rental of property in Ohio along with services performed in Ohio would be subject to CAT. Gross receipts include the total amount realized, without deduction for cost of goods sold or other expenses incurred in a transaction that contribute to the production of gross income, including the fair market value of any property and any services received, and any debt transferred or forgiven.

The CAT applies to most businesses including but not limed to retail, wholesale, service, manufacturing and other businesses regardless of type of business organization. Sole proprietorships, partnerships, LLCs, S corporations, C corporations, disregarded entities (SMLLC, QSSS, etc.), trusts, and all other type of associations with taxable gross receipts of more than $150,000 in the calendar year are subject to the CAT.

The CAT began on July 1, 2005. The first return is for the period of July 1, 2005 to December 31, 2005 for both quarterly and annual taxpayers and is due February 10, 2006. A minimum tax of $75 is due with the first return if a taxpayer has at least $150,000 in taxable gross receipts for the last 6 months of 2005. In addition, a tax rate of .06% (.00006) is due on taxable gross receipts over $500,000 (the first $500,000 in taxable gross receipts is excluded). The method used to report gross receipts for federal purposes (cash or accrual) controls what receipts must be reported for each tax period.

For calendar year 2006 and thereafter, the first $1,000,000 in taxable gross receipts are taxed at $150. Receipts above $1,000,000 are taxed at the following phased-in rates:

Tax Period	Base Tax Rate	Phase-in Percentage	*Effective Rate**
7/1/2005 to 12/31/2005	.06%	N/A	.0600%
1/1/2006 to 3/31/2006	.26%	23%	.0598%
4/1/2006 to 3/31/2007	.26%	40%	.1040%
4/1/2007 to 3/31/2008	.26%	60%	.1560%
4/1/2008 to 3/31/2009	.26%	80%	.2080%
after 3/31/2009	.26%	100%	.2600%

*The tax rate is subject to adjustment based on the tax collections.

Quarterly Taxpayers - Returns are due 40 days from the end of each calendar quarter as follows:

Annual Taxpayers - Returns are due 40 days from the end of the calendar year (i.e. February 9th)