Construction work crosses jurisdictions. Municipal tax collectors are catching on.
We got a call last week from RITA, the Regional Income Tax Agency. The caller already had the name of our client’s business. She wanted to know about every project near a major development site. Where did she get the information? The city handed over a list of contractors.
Here’s what struck us: This wasn’t just about our client. RITA was using information from one contractor to identify others who might owe taxes. Every contractor on that development site could become a lead for municipal tax discovery.
Ohio municipalities are looking for unregistered businesses before potential state reform impacts their revenue stream. If you are in construction or a related service business, you are in the crosshairs. You can expect more notices, more questions, and more scrutiny from municipalities eager to preserve revenue streams. Even if it hasn’t happened yet, it is likely coming.
Why You’re a Target
Your business model creates municipal tax exposure many contractors don’t see coming. Projects can cross city boundaries. Ohio has more than 600 taxing jurisdictions. How many do you have projects in? Tracking them manually can be impossible.
Your work leaves a paper trail. Permits, inspections, and job site records tell cities exactly where you’ve been. And when cities request the 1099s you issue to subcontractors, they’re mapping your entire network. They are looking for both net profits tax as well as payroll withholding liabilities. One form can trigger discovery efforts against multiple businesses.
State lawmakers are debating whether to replace Ohio’s local tax system with a single, state-administered approach. If that happens, municipal tax departments may have a much smaller role to play and municipal income may be impacted. Until then, they’re collecting aggressively.
How They’re Finding You
Cities aren’t waiting for you to report. They’re using sophisticated tactics to identify non-filers:
- Requesting your 1099s directly. Cities are sending letters demanding copies of every Form 1099 you issue to subcontractors. They’re not asking for these with your tax return – they’re making separate, direct requests. When you comply, you’re inadvertently providing a roadmap to every business you work with. Those businesses then become targets for discovery, even if they don’t think they owe anything. Some cities use this data specifically to fund their discovery departments.
- Cross-referencing data. Some cities use data-sharing agreements with the Ohio Department of Taxation. If your state return shows income from a city where you didn’t file municipally, expect a letter.
- Handing lists to collection agencies. Cities compile contractor lists from permit records and provide them directly to agencies like RITA. This isn’t passive monitoring. It’s an active pursuit with your name already on file.
The result is more letters, more calls, more audits aimed at construction businesses working across multiple locations.
What This Could Cost You
Here’s a potential scenario: A contractor did a three-week job in a municipality two years ago. He moves on to the next project and forgets about it. The city doesn’t. They pull the permit records, cross-reference state filings, and discover unreported income. Now that contractor faces not just the original tax owed, but penalties and interest that can significantly increase the bill . The administrative cost of resolving it after the fact, responding to audits, and tracking down old records compounds the problem.
It can be expensive and time intensive to track every jurisdiction where your crews work. But cities expect you to know, and ignorance isn’t a defense. Discovery letters that go unanswered . And the time spent managing compliance across hundreds of municipalities can pull you away from running your business.
Protect Yourself
- Map where you’ve worked. Identify every jurisdiction where your crews operated in the past three years. Make sure your filings match reality.
- Keep consistent records. Your federal, state, and municipal filings need to tell the same story. Mismatched data between 1099s, payroll withholdings, permits, and tax returns
- Respond immediately. Many non-filer letters resolve quickly if you address them early. Wait, and
- Work with people who know construction and State and Local Tax (SALT). You didn’t get into construction to become a municipal tax specialist. At Rea, our Construction and State & Local Tax teams work together to help clients identify filing obligations, respond to discovery efforts, and handle audits. We know what cities are looking for and how to keep you compliant without overpaying.
The Reality
Ohio cities will keep pushing until reform happens. If you want to assess your exposure before cities come calling, reach out to our advisors to look at your specific situation.
