Surprisingly, Ohio has a Rule that has the potential to be very costly to non-Ohio residents. Specifically, the Rule applies to the sale of debt or equity in certain Ohio businesses. The non-Ohio resident who sells either a closely-held pass-through entity or closely-held C corporation is expected to pay a hefty tax to Ohio on the capital gain in Ohio. The Rule, which is partially contained in Ohio Revised Code Section 5747.212, is the subject of much debate among Ohio tax practitioners. There are many details to the Rule, which is described in this Alert, but suffice it to say, the Rule should be thoughtfully considered by any non-resident who is considering the sale of an Ohio entity that is a "section 5747.212" entity.

The following example demonstrates how the Rule works:

Assume you are a Florida resident who owns 100% of an S corporation that is doing business in Ohio. You, as an individual, have never set foot into Ohio. Your S corporation, however, generates income that is treated as Ohio-sourced income because some of the S corporation’s property, payroll, and sales are in Ohio. For purposes of this example, assume that the S corporation’s income, on average, for the last three years was sitused 80% to Ohio and 20% to other states.