DR. MANAL MORSY,
Plaintiff,
v.
SHARON DUMAS,
in her official capacity as Finance Director of the City of Cleveland, et al.,
Defendants.
IN THE COURT OF COMMON PLEAS
CUYAHOGA COUNTY, OHIO
REPLY BRIEF
July 31, 2021 11:01
By: DANIEL M. ANDERSON 0067041
Confirmation Nbr. 2315106
JUDGE: Michael P. Shaughnessy
REPLY MEMORANDUM OF DEFENDANT SHARON DUMAS, IN HER OFFICIAL CAPACITY AS FINANCE DIRECTOR OF THE CITY OF CLEVELAND, IN SUPPORT OF HER MOTION TO DISMISS THE COMPLAINT
A. The Complaint Must Be Dismissed for Failure to Exhaust Administrative Remedies
Plaintiff alleges that she filed a tax refund request for 2020 on March 4, 2021 and that it was denied on an unspecified date. Complaint ¶ 11, 35, 36. She does not allege that she pursued any of the steps to appeal from that determination. Accordingly, she has failed to exhaust her administrative remedies by filing suit without waiting for the City to act on her refund request and to allow any appeals to conclude. Plaintiff is effectively circumventing the refund and appeal process established by the Revised Code. Her claim must therefore be dismissed for failure to exhaust administrative remedies. See BP Comms. Alaska, Inc. v. Cent. Collection Agency, 136 Ohio App.3d 807, 814-5 (8th Dist. 2000).
In BP Comms., the 8th District held that the power to enjoin a tax is limited to cases which contest “the very power to lay the tax.” The plaintiff in that case sought to enjoin the collection of tax from certain of its corporate affiliates which, it argued, had no tax nexus with Cleveland. It argued that application of Cleveland’s tax ordinance to them would be unconstitutional. During the pendency of appeal proceedings from the tax assessment, the plaintiff brought the action for injunctive and declaratory relief. The court noted that there was no contention that Cleveland lacked the power to impose the tax — the only question was whether or not the affiliates in question were properly subjected to it. Because that issue was one that required factual development, the court held that exhaustion of administrative remedies was required.
Plaintiff contests Cleveland’s power to levy the tax yet concedes that she is subject to the tax for the time periods when she was working within the City. In BP Comms., the court found that there was no question about the power to levy the tax — only whether the subsidiaries in question were properly subjected to it:
the distinction here is that the city has the legal authority to collect taxes from affiliates who choose to file a consolidated return. BP agrees that the city has authority to collect tax from affiliates with a nexus to the city, so its power to levy a tax in the first instance is not in question. That being the case, the requirement to exhaust administrative remedies would apply since the question becomes the amount of tax that could be collected.
136 Ohio App.3d at 815.1 Were this not the case, the court noted, it would permit an action under Section 2723.01 anytime a tax was wrongfully computed.
Further, while the administrative process cannot reach the question of the Constitutionality of Section 29, it can further develop the facts to shed light on the proper application of Section 29. As the 8th District noted in BP Comms., “These facts would likely receive a hearing in the administrative process and create a fuller record upon which a court could base a decision. This is the benefit of forcing a party to exhaust administrative remedies.” Id. at 816. See also Garrett v. Columbus Civ. Serv. Comm., 10th Dist. Franklin No. 11AP-1113, 2012-Ohio-3271, ¶ 28 (when a party challenges the constitutionality of a statute as applied to a specific set of facts, exhaustion of remedies requires that the factual record be developed before the administrative agency).
Furthermore, with respect to Plaintiffs 2021 taxes, recent actions by the Governor and General Assembly have made significant changes with regard to the application of Section 29. First, on June 18, 2021, Governor DeWine withdrew the Emergency Declaration. Under Section 29 as originally passed, this meant that its provisions would have expired on July 18, 2021. Two weeks later, however in HB 110, the biennial budget bill, the General Assembly further refined the application of Section 29. See HB 110, Section 610.115. That section left Section 29 largely unchanged as to 2020 taxes, but with respect to 2021 taxes, changed Section 29 so that it only determines withholding by the employer but no longer determines the employee’s ultimate tax liability. See Section 610.115(D). In essence, this means that the statutory directive to cities to use the pre-pandemic principal place of work to determine the location where remote work was performed no longer exists. Given that R.C. 718.01(B)(2) limits taxable income for nonresidents to “work done, services performed or rendered, or activities conducted in the municipal corporation” there is no longer any statutory directive to tax work performed in 2021 if the employee is physically located outside the city. Accordingly, assuming that Plaintiff files a tax return showing that she had taxes withheld in 2021 for days where she was not in Cleveland, she will be entitled to a refund for those days.
Accordingly, there is nothing left to enjoin with regard to 2021 and Plaintiff’s refund requests for 2020, a completed tax year, are subject to the administrative process as set forth above.
B. The Plaintiff’s Due Process Clause Claims Are Without Merit
Although Plaintiff asserts that she is a Pennsylvania resident, the Complaint discloses that, prior to the pandemic, she had both worked and resided in Cleveland 4-5 days per week and would travel to Pennsylvania for the weekends. Complaint, ¶ 10. In other words, prior to the pandemic, she had been living and working more in Cleveland than she had been in Pennsylvania. She also alleges that as a result of the pandemic, she began working at home in March 2020,, Complaint, ¶ 11, and further that she has not been in Ohio since March 2020. Id., 29-30.2
Contrary to Plaintiff's claims, the Due Process Clause3 4is not offended when the Ohio General Assembly legislates regarding someone who had been living in Ohio 4-5 days per week as well as working full time in Ohio until the pandemic began, she was plainly subject to the authority of the Ohio General Assembly. Plaintiff would have the Court ignore her long history of both living and working in Cleveland and decide this case as though she had always worked remotely from Pennsylvania. But her Complaint makes clear that is not the case. The Due Process Clause is not offended when the Ohio General Assembly adopts municipal tax policy for those who are living and working in Ohio, regardless of whether those taxes are imposed at the state or the municipal level.
This case is thus a far cry from Hillenmeyer, where the taxpayer in question had no connection to Cleveland other than that he had come to Cleveland to play in three football games for the Chicago Bears, and where there was no state statute directing how the City should enforce its tax ordinance. Plaintiff's substantial connections to Cleveland and Ohio, both in 2020 and in the preceding years, are more than adequate to satisfy the Due Process Clause.
Plaintiff seems to suggest that the fact that she not only worked but stayed in Cleveland during the week should be disregarded because she asserts that she is a “resident” of Blue Bell, Pennsylvania. Plaintiffs Brief, p. 18. The Complaint does not provide sufficient information to determine the question of her place of residence one way or another, pleading only the legal conclusion that Plaintiff is a resident of Blue Bell, Pennsylviana. R.C. 718.012 lays out many factors used to determine an individual’s residence and domicile. The point is simply that Plaintiff, by her own allegations, spent 4-5 days a week not only working but living in Cleveland, including more than two months in 2020. Regardless of where she may ultimately be deemed to be a resident, she is clearly subject to the jurisdiction of Ohio and Cleveland for income tax purposes.
Further, R.C. 718.02(A)(2) determines how to compute the net profits tax. Contrary to Plaintiff’s allegations, it has nothing to do with determining where work for wages or salary is deemed to have been performed. The definition of “income” is found in R.C. 718.01(B) (and, of course, as modified by Section 29 for tax year 2020 The issue here is not whether Cleveland’s tax complies with state law. Section 29 makes clear that it does. Rather, the question is whether Section 29, as applied to the Plaintiff, violates the Due Process Clause. It does not.
C. Plaintiff’s Commerce Clause Arguments Miss the Mark
Plaintiff suggests that the City “doesn’t even claim a connection to the actor it seeks to tax.” Plaintiff’s Brief, p. 27. As set forth in the Motion to Dismiss and above, that is not correct. Plaintiff’s own Complaint reveals her connections to Cleveland. Cleveland is not attempting to tax every employee who works for Plaintiff’s Cleveland-based employer but rather only those who either are working in Cleveland currently or those who were working in Cleveland prior to COVID-19 and who pivoted to remote work as a result of the pandemic. That is the limiting principle established by Section 29 that Plaintiff complains is missing.
On the second and third prongs of the Complete Auto test (Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)), while Plaintiff complains the tax is not fairly apportioned, and that she is subject to double taxation, she does not respond at all to Defendant’s point that tax credits are available to avoid double taxation. And while Plaintiff complains of economic Balkanization, it must be remembered that Cleveland is not attempting to impose its tax indefinitely upon every remote worker providing services to a Cleveland-based employer as Plaintiff seems to suggest. Rather, for tax year 2020, as directed by the General Assembly, it has taxed income earned by those whose principal place of work was in Cleveland prior to the pandemic. Now that the Governor has withdrawn the Emergency Declaration and the General Assembly has amended Section 29, taxation going forward will be based upon the physical location of the employee. Furthermore, if every State adopted Cleveland’s tax system, they would all allow credits to their residents for taxes paid to another municipality — and Plaintiff’s claim of “economic Balkanization” would not come to be.
Finally, while Plaintiff asserts that she was not in the City of Cleveland during 2020, that does not mean that Cleveland has provided her no benefits. Her employer’s offices — where the fruits of her labors are received — are still in Cleveland. For remote workers, it is those facilities that house the computer and email servers and other infrastructure that make remote work possible. And that infrastructure gets police protection from the Cleveland Division of Police, fire protection from the Cleveland Division of Fire, right-of-way management provided by the Cleveland Division of Engineering and Construction, and many other services that help to ensure that remote work remains possible.
D. Conclusion
For the foregoing reasons, and those stated in the Motion to Dismiss, the Complaint should be dismissed.
Respectfully submitted,
ICE MILLER LLP
Diane Menashe (0070305)
Daniel Anderson (0067041)
Diane.Menashe@icemiller.com
Daniel.Anderson@icemiller.com
(614) 462-2700
(614) 462-5135 (facsimile)
250 West Street, Suite 700
Columbus, Ohio 43215
Counsel for Defendant Sharon Dumas, in her Official Capacity as Finance Director of the City of Cleveland
FOOTNOTES
1It is worth noting that Hillenmeyer, cited extensively in the Complaint and in Plaintiff’s brief, involved constitutional claims and came before the Supreme Court as part of an appeal process that went from the City’s denial of his initial refund requests, through the Cleveland Board of Review, and the Board of Tax Appeals. 144 Ohio St.3d 165, ¶ 3.
2Plaintiff asserts that “while working from home, Dr. Morsy has performed all of her duties from Blue Bell, Ohio.” Complaint, ¶ 30. Defendant assumes that this is a typographical error.
3Although Plaintiff asserts claims under both the state and federal Constitutions, the Supreme Court of Ohio has equated the Ohio Due Course of Law Clause, Article 1, Section 16, with the Due Process Clause of the Fourteenth Amendment to the United States Constitution. Willacy v. Cleveland Bd. Of Income Tax Review, 159 Ohio St.3d 383, 2020-Ohio-314, ¶ 19.
END FOOTNOTES