An Ohio appellate court has ruled that Cincinnati's imposition of income tax on a nonresident working from home during the COVID-19 pandemic is constitutional.
The Ohio Court of Appeals, First Appellate District, held February 7 in Schaad v. Alder that a trial court properly dismissed a challenge to the state statutory provision requiring work performed at home during the pandemic to be treated as if it had been performed at one's workplace for municipal income tax purposes.
The Buckeye Institute filed several lawsuits against Ohio cities, including this case, contending that the imposition of the municipal income tax under section 29 of H.B. 197 violates the federal and state due process requirements.
Jay Carson of Wegman Hessler, senior litigator for The Buckeye Institute, told Tax Notes February 9 that he was disappointed in the outcome.
Carson said the appellate court distinguished the Ohio Supreme Court’s decisions in Hillenmeyer v. Cleveland Board of Review and Willacy v. Cleveland Board of Review from this case because those cases dealt with out-of-state employees. But he said that under the institute’s reading of the cases, the supreme court didn't make a distinction between out-of-state nonresidents of a city and in-state nonresidents of the city.
Carson noted that the institute is also representing a Pennsylvania resident in a challenge to Cleveland’s taxation under section 29, Morsy v. Gentile, but he said they would argue that the principle is the same — that a city has the right to tax only its residents and those actively working in its jurisdiction — and that any distinction between in-state and out-of-state nonresidents is erroneous.
Diane Menashe of Ice Miller LLP, who represents Cincinnati Finance Director Karen Alder, said that they don’t comment on pending matters as a matter of policy.
H.B. 197's section 29 sets out that an employee performing personal services at a location other than the employee’s principal place of work, including the employee's home, is deemed to be performing the services at the employee’s principal place of work during the period of emergency declared in the March 9, 2020, executive order and for 30 days after the period concludes.
A budget bill (H.B. 110) signed in June 2021 by Gov. Mike DeWine (R) amended the provision to apply only to municipal income tax withholding and not for the purpose of determining the employee’s tax liability, effective January 1, 2021.
Josh Schaad worked from his home in Blue Ash, Ohio, during the period of emergency declared in the executive order, but his principal place of work is in Cincinnati. His employer continued to withhold Cincinnati municipal income tax during the period in accordance with the provision, and in January 2021 he applied for a refund of the withheld tax.
Cincinnati provided Schaad a partial refund based on the time he typically worked outside the city, but it refused to grant him a refund for the days he worked from home because of the emergency order. Schaad filed suit in the Hamilton County Court of Common Pleas, but the court concluded that section 29 was constitutional and granted the city’s motion to dismiss.
Appellate Decision
Affirming the trial court, the appellate court concluded that the terms of section 29 required Schaad to be deemed to be working from his principal place of business even though he was not physically present there and that Cincinnati had followed state law in imposing the tax on him.
The court noted that it has previously held that a municipality can tax beyond its physical borders if permitted by statute, citing its 2020 decision in Time Warner Cable Inc. v. Cincinnati that upheld a state law allowing affiliated groups to file consolidated municipal income tax returns with affiliated entities not actually doing business in the city.
In that case, the court rejected Cincinnati’s position that a company couldn't file a consolidated tax return under an ordinance restricting the affiliated group to those affiliated entities doing business in the city, finding that the General Assembly’s exercise of authority was appropriate and the state statute controlled.
In this case, the court rejected Schaad’s due process argument, concluding that he received all the due process he was required under the law because section 29 was a dictate of the Ohio General Assembly and he is a state citizen.
The court determined that Hillenmeyer and Willacy deal with interstate taxation and not intrastate taxation, noting that its decision was consistent with the finding of the Ohio Court of Appeals, Tenth Appellate District, that the cases did not apply to section 29 in a similar challenge, The Buckeye Institute v. Kilgore.
The court said it agreed with the Kilgore court’s analysis in concluding that the General Assembly acted constitutionally when it enacted section 29 given the public health emergency.
Morsy v. Gentile
In the case, Manal Morsy, a Pennsylvania resident whose employer’s usual place of business is in Cleveland, challenged Cleveland’s imposition of income tax on her under section 29, arguing in an April 2021 complaint that the legislature exceeded its state constitutional authority when it enacted the provision and that the tax violates the U.S. Constitution’s due process requirements and the federal dormant commerce clause.
Cuyahoga County Court of Common Pleas Judge Dick Ambrose denied the city’s motion to dismiss in September 2021.
In her February 7 motion for summary judgment, Morsy argued that Cleveland’s taxation violates the rule set out by the state supreme court that localities may not tax nonresidents unless it is the jurisdiction in which the income actually arises.
Morsy argued that even if “the Ohio General Assembly could authorize some departure from due process for Ohio residents (which it manifestly cannot), it would have no jurisdiction to tax Dr. Morsy, who is not an Ohio resident.”
Morsy contended that she pays municipal income tax twice on the same income under section 29’s scheme and that the tax improperly discriminates against interstate commerce, violating the commerce clause. She also argued that the provision violates the due process clause by allowing the extraterritorial taxation of nonresidents.
But Cleveland argued in its February 7 motion for summary judgment that Morsy’s challenge must be dismissed because she failed to exhaust her administrative remedies, saying it's undisputed that Morsy did not appeal Cleveland’s determination denying her refund request.
Cleveland contended that the General Assembly had the authority to enact section 29 and that the provision does not violate the dormant commerce clause because it does not unreasonably burden interstate commerce. It added that the General Assembly setting tax policy for individuals living and working in the state does not violate due process and that Morsy is clearly subject to Cleveland’s taxing jurisdiction, contending that Morsy worked in the city for portions of the tax year.
The city argued that none of the cases challenging section 29 have resulted in a court finding that it was unconstitutional, noting that The Buckeye Institute has sought the Ohio Supreme Court’s review of Kilgore.
The taxpayer in Schaad v. Alder (Appeal No. C-210349) is represented by attorneys with The Buckeye Institute. The taxpayer in Morsy v. Gentile (Case No. CV-21-946057) is also represented by the institute's attorneys.