2025 Ohio Legislative Update

On June 30, 2025, Ohio Gov. Mike DeWine signed the state’s biennial budget bill into law, but not without making significant modifications – including 67 line-item vetoes. The new legislation includes sweeping tax changes, particularly to the personal income tax and sales and use tax systems. While the majority of the income tax provisions are favorable to taxpayers, the legislature appears to have offset these reductions by narrowing sales and use tax exemptions, modifying refund policies, and capping the vendor discount.

Key Income Tax Reforms

Individual Income Tax Rate Reductions

Perhaps the most notable change is the overhaul of Ohio’s individual income tax structure. The state approved the transition from a graduated bracket system to a flat tax rate of 2.75%, effective for tax years beginning in 2026. Additionally, the top marginal rate for tax year 2025 has been retroactively reduced from 3.5% to 3.125%, applicable to income earned on or after Jan. 1, 2025.

While overall rates are decreasing, high-income individuals should be aware that the personal, spousal, and dependent exemptions will be eliminated starting in tax year 2025. Taxpayers impacted by this change should review their withholding and estimated tax payments as soon as possible – ideally by the third quarter of 2025 – to avoid underpayment penalties or unexpected tax liabilities when filing 2025 returns.

PTET Changes

Beginning with tax years ending on or after Jan. 1, 2025, electing pass-through entities (PTEs) may now claim refundable credits directly on the Form IT 4738 when calculating their pass-through entity tax (PTET) liability. This marks a significant change from prior law, which prohibited such credits at the entity level. This update is expected to simplify compliance, particularly for tiered ownership structures.

Additionally, the legislature clarified that the amount of credit a PTE may pass through to its investors is the lesser of:

1. The investor’s proportional share of the tax liability reported on the PTE’s return, or
2. The actual amount of tax the investor paid

Updated Payment Deadlines

Effective for tax years beginning on or after Jan. 1, 2026, the due dates for nonresident withholding and PTET estimated payments (for calendar-year taxpayers) will change to:

• April 15
• June 15
• Sept. 15
• Jan. 15 (of the following year)

For tax year 2025, taxpayers will continue to follow the current quarterly deadlines:

• April 15
• July 15
• Oct. 15
• Jan. 15 (of the following year)

Municipal Net Profits Tax – Statute of Limitations

The legislation also extends the statute of limitations for filing refund claims related to the Municipal Net Profits Tax. Under the revised rules, a taxpayer may file a refund claim within three years of the later of:

1. The original due date of the return (including any valid extensions), or
2. The date the return was actually filed

This change aligns refund claim deadlines with those applicable to federal and state returns. Likewise, the same extended timeline now applies to municipal tax administrators and the Ohio Tax Commissioner when issuing income tax assessments.

Key Sales and Use Tax Reforms

Repealed Sales and Use Tax Exemptions

Beginning Jan. 1, 2026, the following exemptions will be eliminated:

• Replacement rental vehicles: Tax exemption will no longer apply to rental motor vehicles provided to owners or lessees whose own vehicles are being serviced or repaired, even if the cost is reimbursed by the service provider.
• Refrigerated vending machines: Sales from refrigerated food vending machines
  will no longer be exempt from sales tax.
• Advertising materials: Printed advertising materials or catalogs that include pricing and descriptions of retail products will lose their tax-exempt status.
• Qualified call center services: Telecommunications services used directly and primarily in the operation of a qualified call center will no longer be exempt.
• Electronic publishing equipment: Tangible personal property used in the electronic publishing process – such as data acquisition, formatting, editing, storage, and dissemination – will become taxable.
• Electronic information services refund: The 25% refund of sales and use taxes for equipment and property used in providing electronic information services will be repealed.

Eliminated exemptions that were line-item vetoed by Gov. DeWine and are expected to be overridden by the Ohio Legislature in the coming months:

• Sale of newspapers
• All copyrighted motion picture films, including those transferred for use solely for advertising
• Machinery, equipment, and material used in the production for sale of printed material

Clarification to Casual Sale Exemption

Effective in 2026, the definition of a “casual sale” is clarified to include both in-person and online transactions. The exemption does not apply to sales made by auctioneers at their permanent physical place of business but continues to apply to sales conducted online.

Changes to Interest Policies on Refunds

• Direct pay permit users: For refund claims filed on or after the effective date of the bill, taxpayers using direct pay permits will no longer receive interest on their sales and use tax refunds.
• No interest on county-level sales tax refunds In alignment with the above policy, interest on county sales and use tax refunds will also be disallowed starting 90 days after the Bill’s effective date. This change applies to all taxpayers, not just those using direct pay permits.

Vendor Discount Cap Imposed

Starting Jan. 1, 2026, a new monthly cap of $750 per vendor’s license will apply to the vendor discount retailers receive for collecting and remitting sales tax. This cap does not apply to motor vehicle dealers, who are exempt from this limitation.

Key Procedural and Administrative Changes

• Mailing of assessments: The requirement that taxpayers submit petitions for reassessment through personal service or certified mail has been eliminated.
• Tax notices: The Bill establishes a new process for handling tax notices and orders that are sent by ordinary mail, but returned as undeliverable, aligning it with the current process used for undeliverable tax notices and orders sent by certified mail.
• Refund denial notices: The ODT may provide electronic notification rather than using ordinary mail notice to inform a person that the approved refund amount is less than requested, provided the person has consented to receive electronic notification.

KSM’s State & Local Tax Group closely follows state and local tax activity throughout the country. Thus, if you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or fill out the form below.