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A recent Ohio Tax Commissioner Opinion provides relief to contractors from the Commercial Activity Tax ("CAT") when they perform under a cost-of-work contract and are designated as agents of the owner. CAT is a broad based tax levied as an excise tax for the privilege of doing business in Ohio. It is designed to be at a low rate and to apply generally across-the-board to all gross receipts with few exceptions, limitations or deductions.

One of the few exceptions to the CAT is money, property or other amounts received or acquired by an agent on behalf of another in excess of the agent's commission, fee or other remuneration. See Ohio Revised Code §5751.01(E)(4). Ohio Revised Code §5751.01(F)(l) lists examples of gross receipts including "amounts realized from the taxpayer's performance of services for another." In the construction context, this raises the question about funds that the contractor receives from an owner that ultimately get passed on to its subcontractors and suppliers. Should these funds be included in the contractor's gross receipt figure when calculating its CAT? Depending on the type of contract and relationship in place between the owner and contractor, a different answer will result.

When performing under a typical lump sum contract with the owner, the answer is all funds received from the owner will be subject to the CAT. Such a result is supported by Information Release 2006-03 issued by the Ohio Department of Taxation ("Department") where the Department focused on the definition of an agency relationship. As defined in Ohio Revised Code §5751.01(P), an agent includes a person authorized by another to act on its behalf to undertake a transaction for another. But to show a distinction, the Department provided an example of a general contractor who enters into a lump sum contract with a property owner to construct an office building. There, the general contractor agreed to specified services for a fixed price and bore all risk involved in completing the project in a cost-effective manner. The general contractor was free to either perform the services itself or to subcontract all or part of that work. The general contractor did not qualify as an agent for purposes of the agency exclusion from CAT because the general contractor was not required to act in the owner's best interest with respect to cost and did not have to disclose cost details to the owner. Thus, the entire amount of that contract would be includable in the general contractor's gross receipts. See CAT Information Release 2006-3(C)(2)(a).

But if the relationship between the owner and contractor changes, so could the application of the CAT. A recent Tax Opinion analyzed the CAT application when a contractor performed under a cost-plus contract with the owner. See Tax Opinion No:08-0001. Under that contract, the owner agreed to pay the contractor for the work provided by its subcontractors and suppliers at cost plus a fixed percentage fee. Furthermore, the contract included an obligation on the contractor to act in the best interest of the owner. Lastly, the contractor included language in its subcontracts that it was acting as the agent for the owner. Under this scenario, the contractor acts as a conduit because the contractor remits monies received from the owner to its subcontractors and suppliers, provided that certain conditions are met. Because these funds received from the owner represent services provided by someone other than the contractor, the contractor could exclude those funds when calculating its CAT. However, the fixed percentage fee retained by the contractor would still be included in its calculation of gross receipts for CAT.

The relationship analyzed in Tax Opinion No:08-0001 is often times the same relationship between the owner and contractor when the contractor performs construction management services. When performing construction management-type services and after evaluating the CAT benefits with possible increased liability, contractors seeking to minimize their CAT should include the following provisions in their contract with the owner:

• The contractor is required to act in the owner's best interest;
• When bidding out the work, the contractor includes in its subcontract agreement that the contractor is acting as the owner's agent and not as an agent for the subcontractor; and
• The contractor acts as a conduit with respect to payments made to subcontractor.