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Ohio Institute Says Local Remote Tax Provision Is Unconstitutional

Posted on July 12, 2021

An Ohio-based think tank is arguing that a statute allowing localities to collect income taxes on nonresidents working from home during the COVID-19 pandemic violates the U.S. and Ohio constitutions.

The Buckeye Institute has filed several lawsuits on behalf of itself and other plaintiffs challenging the constitutionality of the 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. One of those lawsuits is Morsy v. Dumas.

In a July 8 brief opposing a motion to dismiss the case, the institute argued that Manal Morsy, a Pennsylvania resident whose employer’s usual place of business is in Cleveland, is not required to exhaust administrative remedies before bringing the constitutional challenge alleging that Cleveland’s imposition of the municipal income tax under section 29 of H.B. 197 violates the federal and state due process requirements. The brief was filed in the Cuyahoga County Court of Common Pleas.

H.B. 197, enacted in March 2020, provides 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.


In an April 8 complaint, Morsy argued that allowing Cleveland to tax employees with no fiscal relation between the municipality and the work performed violates due process requirements of the Fifth and 14th amendments to the U.S. Constitution. She also argued that the Ohio Constitution does not allow the General Assembly to expand the taxing powers of municipalities and that therefore it exceeded its constitutional authority when enacting section 29.

Morsy continued that the due process clause allows municipalities to tax only two types of income: earnings of residents living in the municipality and income earned by nonresidents for work done in the municipality.

She also contended that the city is in violation of the federal dormant commerce clause to the extent it seeks to tax an out-of-state resident, saying that the tax on work performed entirely in Pennsylvania fails all four prongs of the test set out in Complete Auto Transit Inc. v. Brady.

Motion to Dismiss

Cleveland countered in a June 11 memorandum in support of a motion to dismiss that section 29 extends an existing concept known as the 20-day rule. Under R.C. 718.011, the municipal income tax is withheld for the employee's principal place of work for the first 20 days an employee works in another Ohio municipality.

The city continued that section 29 was written to provide “clarity as to how the municipal taxation rules would apply during the pandemic in order to preserve the status quo and avoid undue compliance burdens and confusion.”

Adding that the section allocates work across multiple Ohio jurisdictions, Cleveland argued that the General Assembly did not exceed its authority in enacting the provision and that the city’s taxation did not violate the dormant commerce clause. 

Cleveland claimed that its taxation of Morsy did not violate her due process rights, noting that the taxpayer disclosed in her complaint that she worked and resided in Cleveland four or five days a week before the pandemic. It also argued that physical presence is not required under the due process clause, citing the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc.

According to the city's memorandum, Morsy said she filed a tax refund request for 2020, but it was “denied on an unspecified date.” She did not allege that she took any steps to appeal the determination, according to Cleveland, which argued that by “filing suit without waiting for the city to act on her refund request and to allow any appeals to conclude,” the taxpayer failed to exhaust administrative remedies. 

“Plaintiff is effectively seeking an end run around the refund and appeal process established by the Revised Code. Her claim must therefore be dismissed for failure to exhaust administrative remedies,” the city argued.

Though Morsy acknowledged in her brief in opposition to dismiss that section 29 makes tax collection more convenient for employers and municipalities, she continued that the statutory provision exceeds constitutional limits. 

Adding that appealing the refund denial to the city’s board of tax review would be futile because it does not have the authority to declare the statutory provision unconstitutional, Morsy argued that there is a substantial body of law providing that plaintiffs challenging the constitutionality of a statute are not required to exhaust administrative remedies.

Morsy also claimed that the city misconstrued Wayfair, saying that the statute at issue in that case did not impose tax on the out-of-state retailer but rather required the retailer to collect and remit taxes from in-state customers, and that the Court’s decision “does not even hint at the judicial expansion of in rem jurisdiction over nonresident taxpayers.”

Other Challenges

The Buckeye Institute has filed four similar lawsuits against Ohio cities challenging section 29 of H.B. 197.

In Denison v. Kilgore, the city of Columbus agreed to refund the municipal income taxes withheld by that plaintiff’s employer. But trial courts have ruled against the plaintiffs in The Buckeye Institute v. Kilgore and Schaad v. Alder, both of which the institute has appealed.

Judge Carl A. Aveni of the Franklin County Court of Common Pleas also granted the Columbus auditor’s motion to dismiss The Buckeye Institute v. Kilgore on April 27, concluding that the state enjoys broad powers of intrastate taxation, and the Ohio General Assembly acted within its authority when enacting section 29.

Aveni said that section 29 is not unprecedented and that “Ohio law has long recognized that an employee may temporarily work outside of the employee's principal place of work during the tax year and yet be subject to an annual tax by the municipality where the employee’s principal place of work is located,” noting the 20-day rule.

Aveni held that the statute did not violate the plaintiffs’ due process rights, noting that the plaintiffs had primarily built their due process challenge on two Ohio Supreme Court decisions concerning interstate taxation, Willacy v. Cleveland Board of Income Tax Review and Hillenmeyer v. Cleveland Board of Review.

In 2015 the state supreme court held in Hillenmeyer that Cleveland's nonresident tax on an NFL player who was not actually present in the city violated the local tax ordinance and regulation and that the city’s method for calculating income taxes on nonresident professional athletes was unconstitutional.

In its 2020 decision in Willacy, the court ruled that Cleveland properly taxed a nonresident’s income derived from stock options that were exercised in 2014 and 2015 after she retired and moved out of state. The court upheld the city’s taxation of the nonresident’s income from stock options exercised in 2016 in a May 25 decision.

Aveni concluded that the cases do not “address the Ohio General Assembly’s longstanding power to tax Ohio residents wholly within Ohio’s borders, or to set appropriate coordinating limitations between Ohio municipalities for an efficient, organized and coordinated intrastate taxing schema.” 

Jay Carson of The Buckeye Institute told Tax Notes July 9 that they believe Hillenmeyer clearly applies to Ohio residents who don’t work or live in the municipality as well as out-of-state residents. Carson continued that in order to tax under the due process clause, the employee must live in the municipality or the work must be performed in the municipality.

Adding that the rule is where the work is performed, Carson said it doesn’t matter if the employee lives outside the state or within the state but in another municipality.

Carson also noted that the budget bill approved on June 30 by Gov. Mike DeWine (R) amends section 29 so that, effective January 1, 2021 it applies only to municipal income tax withholding and does not apply for the purpose of determining the employee’s tax liability, allowing affected employees to receive the money back when filing their tax returns going forward.

The taxpayer in Morsy v. Dumas (Case No. CV-21-946057) is represented by attorneys with The Buckeye Institute.

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