A change to the municipal throwback rule in the 2017 biennial state budget provided tax relief to certain sellers of tangible personal property whose customers were in Ohio municipalities outside their own, and who had no sales personnel or other form of “solicitation” outside their home location.

Effectively, the change means that sales of property shipped to a municipality where a business has no employees or property would not be included in the sales apportionment factor in the business’s home municipality.


For example, say a manufacturer in Elyria had revenues of $2.3 million in 2017, including the sale of $132,000 worth of goods to customers in Dayton, where the manufacturer has a sales office. Because the manufacturer has a sales office in Dayton, that portion of the manufacturer’s overall revenue is apportioned to Dayton and, therefore, subject to Dayton’s 2.5 percent tax rate, payable to the City of Dayton. The key factor in this example is that the manufacturer has a sales office and personnel in the City of Dayton.

The manufacturer also sold $250,000 worth of goods to a customer in Akron. However, there is no sales office or sales representative in Akron, and the Akron customer ordered the goods through the internet and took delivery from a third-party common carrier.

Because the manufacturer had no sales operation in Akron and did not deliver the goods with its own truck, by law it had no “solicitation” in Akron. Under the old throwback rule, that $250,000 worth of sales was apportioned to the company’s income in its hometown – Elyria – and subject to that city’s 2.25 percent income tax.

But since the throwback rule has been eliminated, that $250,000 worth of sales today would not be factored into the manufacturer’s tax liability in Elyria, saving the company approximately $5,600 in tax.

What are ‘throwback rules?’

“Throwback rules,” which exist in most U.S. states, are designed to ensure that companies pay taxes on all their profits. Traditional revenue apportionment methods base corporate taxes on a formula that considers where a company’s property, payroll and sales are located. But if a company makes a sale outside its home jurisdiction to another location where its sales are not taxed, throwback rules are designed to “throw back” that income to the home jurisdiction where it can be taxed.

In Ohio, as in many other locations, the sales factor of the apportionment formula is more heavily weighted than the payroll and property factors.

Most states have throwback rules to define the apportionment of income for tax purposes for sales of goods to out-of-state customers. Ohio does not have a state corporate tax, and hence, no state-level throwback rule. But since Ohio cities and villages levy income taxes on businesses within their borders, the throwback rule here applied to sales across municipal boundaries.

The municipal-level throwback rule required that if an Ohio business shipped goods to a customer outside of its home municipality — the city or village in which the business was physically located — the sale was taxed in the business’s home municipality.

Why was throwback rule changed?

Elimination of the municipal throwback rule in the 2017 biennial state budget was intended to give tax relief to companies and, potentially, to attract new companies to the state. Since we’re only one tax year into the new regime, there is little data to indicate whether elimination of the throwback has had the desired effect.

Since the throwback rule affected only sales of tangible personal property (service providers are treated differently), manufacturers have been among the primary beneficiaries of the rule change, particularly those with significant sales volume in Ohio.

While business owners may applaud elimination of the municipal throwback rule, they should pay close attention to where their sales occur. They also need to be aware of how often sales teams are soliciting customers in municipalities outside the company’s hometown, and by what means.

Our advisors can help you determine how and when the current Ohio municipal throwback rule may impact you and guide you in making changes that may reduce your tax burden. Contact our advisors today.