Tuesday & Wednesday, January 23‐24, 2018 Hya …

1 27th Annual Tuesday & Wednesday, January 23 24, 2018 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop OO Basic: Ohio CAT .. Common Audit Issues & Developments Wednesday, January 24, 2018 2:00 to 3:00 Biographical Information Geoffrey A. Frazier, Tax Director - State and Local Tax Services, Grant Thornton LLP 3825 Edwards Road, Suite 430, Cincinnati, OH 45209 513-345-4620 Fax 513-241-6125 Geoffrey Frazier specializes in state and local tax matters and tax planning. He has more than 25 years of experience in federal and state & local taxation. Geoff has experience in both public accounting and industry. In industry, he was tax manager at a large public retail company which had department stores located in eighteen states . In public accounting, he has focused on state and local tax consulting. Geoff helps large and midsize multi-state organizations manage their state and local tax liabilities.

2 He has experience in numerous industries including retail, manufacturing, consumer products, construction, and services. He has broad experience in the areas of state income and franchise tax, municipal income tax, personal and real property tax, sales and use tax, payroll taxes including unemployment tax, procuring tax credits and incentives, gross receipts, and other miscellaneous taxes. He has assisted clients with state & local tax compliance and planning, nexus determinations and related voluntary disclosure and amnesty filings, tax audits, incentive negotiations, business acquisition/disposition due diligence and tax accounting issues. Geoff is a member of the AICPA, the Indiana CPA Society and the OSCPA, as well as the Indiana CPA Society Tax Resource Advisory Council and the Indiana Chamber of Commerce Tax Committee.

3 Geoff is a graduate of the University of Cincinnati with a Bachelor of Business Administration Accounting. John R. Trippier, CPA, Director (non-attorney professional), Zaino Hall & Farrin LLC 41 South High Street, Suite 3600, Columbus, OH 43215 614-349-4815 Fax: 614-754-6368 John is Director of Multistate Tax and serves clients with more than 25 years of experience in government, public accounting/law firm and industry. He assists clients with evaluating current multistate tax positions to identify refund opportunities and to mitigate potential exposures. John also uses his previous Dept. of Taxation experience to defend clients throughout the audit process, which helps to ensure the client pays the minimum due. John is a certified public accountant who served as the Administrator of the Ohio Department of Taxation s Audit Division for over eight years beginning in 2003.

4 At the Ohio Department of Taxation, John was responsible for developing and implementing audit policy for the sales, use and commercial activity taxes. He was the architect for the commercial activity tax audit process and the audit tools that are used by auditors and managers to research taxability issues. John also spent two years as an income/franchise tax and sales/use tax auditor in the Department s Chicago office. John has worked over 10 years in public accounting as a state and local tax consultant for Coopers & Lybrand, KPMG Peat Marwick and RSM McGladrey, Inc. As a consultant, John assisted clients with multistate sales/use, income/franchise, personal/real property, intangible and unclaimed property tax audits and appeals. John also assisted clients with multistate refund reviews, corporate restructuring, compliance studies, nexus studies, voluntary disclosures and sales tax software implementations.

5 John also worked 9 months for the law firm of McDonald Hopkins where he was director of Multistate Tax Services. John worked in industry as a state and local tax manager of a telecommunications company responsible for audits, appeals and state and local sales/use, personal/real property and income/franchise tax compliance. John is a frequent presenter on Ohio sales, use and commercial activity taxes for the Ohio Society of CPAs, Ohio Tax Conference and various other associations throughout Ohio. 2018 Ohio Tax Conference: Workshop OOJanuary 24, 2018 Geoffrey A. Frazier, Grant Thornton LLPJohn R. Trippier, Zaino Hall & Farrin LLCOhio CAT: Common Audit IssuesAnd DevelopmentsAgenda Statute of Limitations Amnesty and Voluntary Disclosure Audit Selection Criteria and Approach Filing Methods Gross Receipts, Cash Discounts Agency Situsing2 Statute of Limitations Statute of limitation is 4 years after the later of the due date or date filed for the return.

6 Am. Sub. 181 (Effective September 13, 2010) permits ODT and taxpayer to waive statute of limitations. Statute of Limitations Audit practice: if no filing, then audit period starts with 7 year look back or tax liability start date3 Statute of Limitations Polling question facts: A, B and C are all owned 100% by D. D has no one owner that owns more than 20%. A has filed returns including only A s taxable gross receipts since the enactment of the CAT. B, C and D all have taxable gross receipts back to 7/1/2005. Does the 4 year statute of limitations apply to B, C and D?4 Statute of Limitations A. No, the Department will be able to go back as far as 2005 since B, C and D s taxable gross receipts have not been reported. B. No, the Department will be able to go back 10 years since limits the Department to only assess for 10 years. C. Yes, since A filed a return, the statute applies to all taxable gross receipts of the of Limitations Polling question link6 Amnesty and Voluntary Disclosure If you haven t filed or have underreported, how can you resolve the liability?

7 Tax Amnesty Voluntary Disclosure7 CAT Audit Selection Historical Audit selection criteria Various system queries & comparisons Nexus leads Random selection Common areas of noncompliance Auditor Input8 CAT Audit Selection Current Audit selection criteria Predictive and Trending Analytical Models Cross tax comparisons Peer group comparisons Tax filing trends Pre audit Research by the Department Review Registration Type of entity Ownership filing method Schedule B CAT registration members of a group NAICS Review Returns estimation vs. actual Audit Period Typical look back period 2 3 years (nexus discovery audit would have a 7 year look back) Statute waiver may be needed VDA may be available to taxpayers who have not been previously contacted by the department10 Audit Activity related to Substantial Nexus ( (H)) Audit Division is pursuing companies who exceed the bright line nexus thresholds and are not registered.

8 List of registered taxpayers can be found on the Ohio Department of Taxation website There are 184,656 registered taxpayers 160,104 Separate 7,583 Consolidated 16,969 Combined Continuing to look at Non Ohio and Non companies selling into Ohio 2016 Supreme Court Decisions (Crutchfield, Mason, Newegg)11 CAT Audit Selection Managed CAT Audit Can work similar to a VDA No penalties Great for follow up audits or catch up periods12 Filing method requirements/electionsCombined GroupConsolidated ElectedOpt Out Member Automatic if more than50% common ownership Include entities with Ohio CAT nexus only Doesnotallow for elimination of inter company receipts At least 50% (or 80%) common ownership Must include allentities regardless of nexus with Ohio Option to include or exclude non US entities Gross receipts between members are excluded Combined Group member may request to file separately from the group Separate member not entitled to $1M annual exclusion.

9 Member remainsjointly and severally liable Information Release 2005 1213 Common Ownership ExampleAB60%60%C Partnership A owns 60% of Corporation B, which in turn owns 60% of Corporation C Partnership A, Corporation B, and Corporation C are all members of the same taxpayer group This is because corporation B s 60% ownership of Corporation C continues the vertical chainto include Corporation C It does not matter that Partnership A only owns 36% of Corporation C constructively through Corporation B14 Common Ownership Audit ExampleAfter Audit Review1. Entire group is combined except for K2. Result could be different depending on consolidation electionTaxpayer initial groupsGroup 1 J, E, M, TGroup 2 S, OGroup 3 Y, Z, AJMEKYZ100%100%75%25%A100%100%ST100%75%2 5%O100%15 Common Ownership Polling Question If J makes the election to file at 80% CET, how many groups are there and who is in the group?16 Common Ownership A.

10 1 group and everyone but K is in the group. B. 2 groups 80% CET JEMTSO, Combined JYZA. C. 3 groups 80% CET JEMT, Combined #1 YZA, Combined #2 SO. D. 1 Group and everyone is in the more the merry!17 Statute of Limitations Polling question link18 Combined / Consolidated Ownership Audit Issues Individuals (human beings) can be common owners Constructive ownership Vertical ownership and control test for consolidated elected and combined taxpayer groups section 318 (family) attribution rules do NOT apply Election to file consolidated what to do with the other potential Ohio filers foreign entities19 Combined / Consolidated Ownership Audit Issues Requests for retroactive consolidation generally not allowed Original election correction of group election or potential invalid election?20 Combined / Consolidated Ownership Equity Group Audit Issues Equity ownership group issues Ohio looks principally at the control (voting rights) for determination of the combined group GP has control, LLC managing member has control LLC and LP ownership addressed in OAC 5703 29 02(D)(3) Trace the ownership up to the partners (Human Beings) The real exclusion amount for each entity or the minimum tax and the inter member exclusion21 Combined / Consolidated Ownership Equity Group Audit Issues Possible solutions Request to file separate Portfolio group consolidated group opt out NOT an option Challenges Portfolio companies added and sold What if you do not know the ownership structure22 Audit Issue Statute v.