Ohio Department of Taxation Information Release

CFT 2006-01 - Questions Regarding Ohio’s Manufacturing Machinery and Equipment Tax Credit and Subsequent Grant - R.C. 122.172. 122.173, 5733.33 & 5747.31 – Issued September, 2006

 

Note: The filing deadline for the notice of intent mentioned in this release has expired.

This information release addresses questions the Ohio Department of Taxation (“ODT”) has received regarding: (1) Ohio’s tax credit and grant for pre-July 1, 2005 purchases of new manufacturing machinery and equipment for use in Ohio following the U. S. Supreme Court’s decision in DaimlerChrysler Corp. v. Cuno 547 U.S. (2006); and (2) the Ohio Revised Code section (R.C.) 5733.33(E) and R.C. 122.173(E) manufacturer’s credit/grant “notice of intent” requirements enacted by Amended Substitute House Bill (“HB”) 66, 126th Ohio General Assembly, effective June 30, 2005. With respect to the Cuno decision, this release replaces information release CFT 2004-03.

1. The Effects of Cuno

The U.S. Supreme Court held in its decision in Cuno that the plaintiffs had not established their standing to challenge Ohio’s 7.5% - 13.5% new manufacturing and machinery tax credit under R.C. 5733.33.(1) However, the Court’s decision does not convert the grant back to a credit. The credit continues to apply to taxable years ending before July 1, 2005 (see R.C. 5733.33 as amended by HB 66). The grant applies to taxable years ending on or after July 1, 2005 (see R.C. 122.172(B)(1) as enacted by HB 66). The State of Ohio and Daimler-Chrysler petitioned the U. S. Supreme Court for a writ of certiorari which the Court issued.

Note: Taxpayers claiming the grant must file the grant request form with their tax return or with an amended return filed within the refund statute of limitations. The current grant request form is available on ODT’s Web site under “Tax Forms.”

2. Notice of Intent Requirements

The remainder of this information release addresses the changes to the “notice of intent” requirements provided for under R.C. 5733.33(E) and R.C. 122.173(E) made by HB 66, effective June 30, 2005 to continue to claim the manufacturing credit/grant. Specifically, the remaining portion of this information release addresses the following issues: 

A. With respect to the credit/grant claimed for new manufacturing machinery and equipment purchased by a pass-through entity (a partnership, LLC treated as a partnership, or S corporation) in which the taxpayer has an ownership interest, who is required to file the notice of intent: (1) the pass-through entity-purchaser or (2) each equity investor in the pass-through entity?

B. If the pass-through entity is required to file the notice of intent with respect to new manufacturing machinery and equipment purchased by a pass-through entity, then what timely filed return and whose timely filed return determines timeliness of the notice?

Statute

The relevant statute is as follows:

R.C. 5733.33(E). A taxpayer purchasing new manufacturing machinery and equipment and intending to claim the credit shall file, with the department of development, a notice of intent to claim the credit on a form prescribed by the department of development. . . . No credit may be claimed under this section for any manufacturing machinery and equipment with respect to which a notice was not filed by the date of a timely filed return, including extensions, for the taxable year that includes September 30, 2005.

R.C. 122.173(E). A taxpayer purchasing new manufacturing machinery and equipment and intending to claim the grant shall file, with the department of development, a notice of intent to claim the grant on a form prescribed by the department of development. . . . No grant may be claimed under this section for any manufacturing machinery and equipment with respect to which a notice was not filed by the date of a timely filed return, including extensions, for the taxable year that includes September 30, 2005, but a notice filed on or before such date under division (E) of section 5733.33 of the Revised Code of the intent to claim the credit under that section or section 5747.31 of the Revised Code also shall be considered a notice of intent to claim a grant under this section.

Discussion

While a pass-through entity that purchased qualifying new manufacturing machinery and equipment does not directly compute the credit/grant for such purchases(2) (unless the pass-through entity files a composite return, form IT-4708, on behalf of its investors that are individuals, estates, or trusts), ODT’s position is that the pass-through entity is the “taxpayer” that should be filing the notice of intent to claim the credit for all its investors. That is, from the inception of the credit/grant the ODT’s position has been that the pass-through entity-purchaser of qualifying equipment (rather than each of the pass-through entity's investors that claim the credit) must file the notice of intent (see page 6 of the ODT's September 22, 1995 information release). In any event, prior to the enactment of H.B. 66, ODT's position gave little reason for concern because failure to file the notice of intent was not grounds for disallowing the credit. The above quoted statute changes all of that:  the new law provides that no credit/grant may be claimed for any manufacturing machinery and equipment “with respect to which a notice was not filed by the date of a timely filed return, including extensions, for the taxable year that includes September 30, 2005.” 

The new law’s disallowance of the credit/grant for any manufacturing equipment with respect to which a notice was not filed by the date of a timely filed return when coupled with (i) the statute’s apparent presumption that the purchaser of the qualifying equipment and the taxpayer claiming the credit/grant are one and the same and (ii) ODT’s long-standing position that the pass-through entity (rather than the investors in the pass-through entity) must file the notice of intent gives rise to the issues presented above.

ODT’s Interpretation

• The notice of intent informs the Department of Development (and ODT through the Department of Development) of the intent to claim the credit/grant for new manufacturing machinery and equipment purchased during a calendar year within the credit/grant’s qualifying purchase period. The notice of intent filing requirement applies to each purchase year within the qualifying purchase period – not to the years in which the 1/7 credit/grant amounts are claimed. For example, if during calendar years 1999 and 2002 a taxpayer corporation purchased qualifying new manufacturing machinery and equipment for which it claims or intends to claim the credit/grant, it must file a separate notice of intent for each of the years 1999 and 2002 by the date of a timely filed return, including extensions, for the taxable year that includes September 30, 2005. The notice of intent requirement does not apply to each of the seven years in which the taxpayer will claim the 1/7 credit/grant amounts with respect to its 1999 and 2002 qualifying purchases.
• A pass-through entity that during a calendar year within the qualifying period purchased new manufacturing machinery and equipment for which the pass-through entity’s investors will claim the credit/grant should file the notice of intent on behalf of all of its investors who claim the credit/grant with respect to such purchases. However, if an investor in the pass-through entity is uncertain whether the pass-through entity filed the notice, then the investor should visit the Department of Development’s Web site at: <www.odod.oh.us> where the investor can confirm whether such notice was filed. Click on: (1) “Forms”, (2) “Manufacturers’ Credit-Notice of Intent 1997-Present”, and (3) “Search if Notice of Intent has been file with the Ohio Department of Development”. If such notice was not filed by the pass-through entity, the investor may act on its own behalf and timely file the notice on-line from that Web site. Please note, if the investor files on its own behalf, the notice of intent applies only to that investor and not to any other investors in the pass-through entity.                       
• If with respect to a particular purchase year the notice of intent was not filed on or before the deadline by either the pass-through entity on behalf of all of its investors or by the taxpayer-investor on the taxpayer-investor’s own behalf, then the taxpayer is not entitled to any 1/7th credit/grant amounts with respect to the taxpayer’s proportionate share of qualifying equipment purchased during that year by the pass-through entity.          

With respect to equipment purchased by a pass-through entity in which the taxpayer has an interest, the statutory "timely filed return" requirement applies to each investor in the pass-through entity – not to the pass-through entity itself. The notice of intent, whether filed by  the pass -through entity on behalf of all its investors or by the investor on the investor’s own behalf, must be filed by the due date or extended due date of the income tax return or franchise tax report of the taxpayer-investor that claims the credit/grant. So, it is possible that a notice filed by the pass-through entity on behalf of all of its investors can be timely with respect to some investors and not timely with respect to others. For example, notices of intent filed after April 17, 2006 and before October 16, 2006 by pass-through entity for the pass-through entity’s qualifying purchases in 1999 and 2002 are timely with respect to a calendar year end individual investor (investor A) that has an extension to file individual A’s 2005 federal income tax return, but not timely with respect to another calendar year end individual investor (investor B) that does not have a federal extension. So, unless investor B filed notices of intent on or before April 17, 2006 on its own behalf for investor B’s proportionate share of the pass-through entity’s 1999 and 2002 purchases, the notices are not timely and B may not claim the 1/7th credit/grant  amounts with respect to the pass-through entity’s purchases during years 1999 and 2002 on any tax return.

• Because the taxable year that includes September 30, 2005 varies depending on the ending date of taxpayer’s taxable year and because the extended due date of the tax report depends on the taxpayer’s taxable year and on whether the taxpayer has valid federal and Ohio extensions, the franchise tax filing deadline for the notice of intent varies as set out in the table below.

Notices of Intent Filing Deadlines for Franchise Taxpayers

        (Assuming the Taxpayer Has Valid Ohio and Federal Extensions*)

Taxable year ending	Taxable year that includes 09/30/05	Franchise tax report for the taxable year that includes 09/30/05	Last possible date for filing the notices of intent (assuming that the taxpayer has valid Ohio and federal extensions)
01/31	02/01/05 to 01/31/06	2007	05/31/07
02/28	03/01/05 to 02/28/06	2007	05/31/07
03/31	04/01/05 to 03/31/06	2007	05/31/07
04/30	05/01/05 to 04/30/06	2007	05/31/07
05/31	06/01/05 to 05/31/06	2007	05/31/07
06/30	07/01/05 to 06/31/06	2007	05/31/07
07/31	08/01/05 to 07/31/06	2007	05/31/07
08/31	09/01/05 to 08/31/06	2007	06/15/07
09/30	10/01/04 to 09/30/05	2006	07/15/06
10/31	11/01/04 to 10/31/05	2006	08/15/06
11/30	12/01/04 to 11/30/05	2006	09/15/06
12/31	01/01/05 to 12/31/05	2006	10/15/06

 

*  If the taxpayer does not have valid federal and Ohio extensions, then the last possible date for filing the notices of intent must be adjusted accordingly.

The notice of intent is available and can be filed on line at the Department of Development’s Web site:<www.odod.state.oh.us>. Click on: (1) Forms (2) Manufacturer’s Credit – Notice of Intent 1997 – Present, and (3) the applicable year. (Note: this link is inactive, as the filing deadline for the notice of intent has expired).

Footnotes:

(1) In September, 2004 the U. S. Court of Appeals for the Sixth Circuit held that the R.C. 5733.33 and 5747.31 tax credit for purchases of new manufacturing machinery and equipment violated the Commerce Clause of the U. S. Constitution.   Cuno v Daimler-Chrysler 386 F.3d 738 (6th Cir. 2004).  As a result of the Supreme Court’s decision, the U.S. Court of Appeals for the Sixth Circuit was effectively overturned as the plaintiffs had no standing to challenge the credit in federal court.

(2) Pass-through entity’s investors do not claim a distributive share of the credit computed at the pass-through entity level. Instead, each pass-through entity investor computes the credit/grant at the investor level based on the investor's proportionate share of the pass-through entity's qualifying purchases and base investment after those amounts are aggregated with (i) the investor's proportionate share of the purchases and base investment of all other pass-through entities in which the investor has an interest and (ii) the investor's purchases and base investment on a stand-alone basis. See R.C. 5733.057 and pages 8 and 9 of the tax commissioner’s September 22, 1995 information release entitled “Second Credit for New Manufacturing Machinery and Equipment.”