An Ohio think tank has asked the state supreme court to review another appellate court ruling on the constitutionality of taxing the income of a nonresident working remotely during the COVID-19 pandemic.
The Buckeye Institute filed a memorandum in support of jurisdiction on behalf of its client, asking the Ohio Supreme Court to review the decision of the Ohio Court of Appeals, First Appellate District, in Schaad v. Alder. In the decision, the appellate court found that a trial court had properly dismissed a challenge to an emergency state statute requiring that work performed at home during the pandemic be treated as if it had been performed at the employee's workplace for municipal income tax purposes.
The institute has filed multiple lawsuits on this issue on behalf of itself and other plaintiffs, all challenging section 29 of H.B. 197, legislation enacted in 2020 that says that an employee’s work “shall be deemed” to be performed “at the employee’s principal place of work” during the state’s COVID-19 emergency declaration. The Schaad case is the second appeal the institute has sent to the Ohio Supreme Court. In January the institute appealed a similar state appellate court decision in The Buckeye Institute v. Kilgore; the supreme court has yet to decide whether it will hear that case.
In a March 25 release, Jay R. Carson of Wegman Hessler, senior litigator for the institute, said that “Ohio’s emergency-based local income tax system — where the state forced people to work from home during the pandemic, but deemed their work to have been performed in higher-taxed office locations — violates the due process requirements of the United States and Ohio constitutions.”
“Mr. Schaad is asking for nothing more than for the Ohio Supreme Court to apply its prior decisions and reaffirm the commonsense and constitutionally recognized limitations on local governments’ power to tax nonresidents,” Carson added.
The taxpayer in the case, Josh Schaad, normally worked in Cincinnati but also spent some days traveling or working from his home in Blue Ash, Ohio. During the COVID-19 emergency, he worked solely from home, but his employer continued to withhold Cincinnati municipal income tax in accordance with H.B. 197. Schaad requested a refund of the withheld amount but was granted only a partial refund that was based on the time he typically worked outside the city.
He filed a lawsuit in the Hamilton Court of Common Pleas, but the court held that the provision was constitutional and granted Cincinnati’s motion to dismiss. The appellate court agreed, explaining that a municipality can tax beyond its borders if it is permitted to do so by state statute. The appellate court rejected Schaad’s due process argument, writing that “because Section 29 was a dictate of the Ohio General Assembly, and Schaad is a citizen of Ohio, Schaad has received all the process that he was due under the law.”
The Institute’s Memorandum
In its memorandum, The Buckeye Institute argues that the state supreme court should take up this case because it “presents issues concerning fundamental issues of Due Process that will affect taxpayers and local governments across the State for years to come,” even after the pandemic.
“The Court should take this case to address the substantial constitutional question of whether . . . local taxation of nonresidents is limited to the work the nonresidents perform within the city, or whether,” as the Schaad appellate court held, “the General Assembly can simply deem” that nonresidents’ work was performed there, the brief says.
The institute argues that the appellate court’s decision in Schaad conflicts with the state supreme court’s “long-standing Due Process analysis for municipal taxation that focused on where the taxpayer performed the work.”
The brief alleges that the Schaad appellate court decision — as well as the decision in Kilgore — “presents a substantial departure from established jurisprudence and goes so far as to indicate that the mere presence of an employer within a city’s limits may be enough of a fiscal connection for that city to tax its employees, regardless of where they work.”
“No Ohio appellate court, aside from the Tenth District in Kilgore, has ever adopted this rule,” according to the brief. The brief adds that the implications of such a rule “in a world where remote work is likely to become more common raise[s] significant constitutional as well as public policy questions.”
The brief also urges the court to take up the issue to address the “substantial constitutional import” of whether the General Assembly may expand a city’s “Home Rule authority in order to circumvent this Court’s clearly established Due Process restriction on municipalities taxing nonresidents who neither work nor live within the taxing municipality’s borders.” The brief acknowledges that the state constitution “undoubtedly” allows the General Assembly to “limit and regulate municipal taxation,” but it argues that “no Court has ever recognized a legislative power to expand municipal taxation or enlarge upon a city’s Home Rule authority.”
The brief suggests that the appellate court’s decision in Schaad could lead to a far-fetched but still real possibility that the General Assembly could authorize Cincinnati to tax the income of all employees of any company headquartered in the city, “regardless of whether [these employees] ever visited the ‘home office.’” The brief expresses concern that this “would represent a sea change in municipal tax law and would raise serious questions regarding due process and political accountability.”
The brief also urges the court to hear the appeal because “tax treatment of remote work will remain an issue when the pandemic ends.” Noting that “it seems unlikely that all of the downtown workers will return to their offices,” the brief points out that cities will still need revenue after the pandemic ends and may “look at any available avenue to find it,” including perhaps seeking ways to tax remote, nonresident workers once again.
Amicus Memorandum
The National Taxpayers Union Foundation also urged the state supreme court to take up the case, saying in a March 24 memorandum in support of jurisdiction that taxpayers “who live and work in different jurisdictions with different tax policies” and who began telecommuting during the pandemic “deserve answers” on the “complex and confusing tax nexus rules.” The foundation also wrote that the nexus rules are “in dire need of modernization.”
The foundation argued that H.B. 197 is “a sharp change from the Due Process standard that this court and courts around the country have repeatedly upheld: you don’t owe tax to a jurisdiction where you have no connection.” The legislation was “a dramatic change in how we think about individual taxation,” the foundation added. “Such a dramatic policy change . . . is a matter of grave public concern and worthy of consideration by the state’s highest court.”
Joseph Bishop-Henchman of the National Taxpayers Union Foundation told Tax Notes in a March 28 email that the issue in Schaad “is about whether you can face income tax liability when you don't even meet due process minimum contacts.”
“As more people telecommute from different jurisdictions, we're going to need better rules on this than ‘every state gets to tax all of it,’” Bishop-Henchman added.
The taxpayer in Schaad v. Alder (Case No. 2022-0316) is represented by attorneys with The Buckeye Institute.