The Tax Angles of Ohio’s COVID-19 Response

The onset of COVID-19 largely halted activity in Ohio courts and the Board of Tax Appeals, with an important exception addressed here. However, despite the lack of new case law, there have been legislative developments comprising a portion of the state’s COVID-19 response. This article summarizes some recent key developments, including pending legislation.

Municipal Income Tax Employee Withholding

Revised Code Chapter 718 authorizes municipalities to impose a local income tax on businesses and individuals.¹ Ohio municipalities rely on income taxes to fund a substantial portion of their operations. However, new work-from-home arrangements prompted by COVID-19 threatened to substantially alter the ordinary flow of tax dollars. Ohio responded with H.B. 197 to help mitigate the impact on municipalities, as well as ease administrative burdens on employers already facing challenging circumstances.

Ohio employers generally must withhold and remit municipal income taxes on behalf of their employees in the city where their employees’ services are rendered.² Ohio’s occasional entrant rule (that is, the 20-day rule), however, provides an exception. Under the 20-day rule, employers generally do not have to withhold municipal income taxes for a jurisdiction where an individual performs services 20 days or less during a calendar year.³ In other words, an employee could temporarily perform services up to 20 days per year in a municipality before triggering municipal income tax withholding rules. To take advantage of this occasional entrant rule, employers must continue withholding municipal income taxes for the city where the employee’s “principal place of work” is located, even though the employee is temporarily providing services in another municipality (or outside one altogether).⁴

As a result of COVID-19, Gov. Mike DeWine (R) issued an executive order declaring a state of emergency,⁵ which was followed by a series of directives requiring nonessential workers to begin telecommuting en masse.⁶ Under Ohio law, this would have triggered an obligation for employers to begin withholding based on their employees’ work from home locations after crossing the 20-day threshold. Not only would this have been an administrative nightmare for employers, but it would have caused a substantial revenue drop for large cities and pushed revenue out to the suburbs where many employees reside.

As a result of both employers and cities clamoring for legislative relief, Ohio acted swiftly by passing H.B. 197 on March 27. In its simplest terms, section 29 of the act temporarily modifies existing municipal income tax withholding laws to require employers to continue withholding municipal income tax based on an employee’s principal place of work while an employee is working remotely during the pandemic. Principal place of work is defined as “the fixed location where an employee is required to report for employment on a regular and ordinary basis.”⁷

The specific language of section 29 is important, however, providing that:

The statutory text ties section 29 to an employee being “required” to work from home by the governor’s declaration of emergency; it does not appear to apply in instances in which employers voluntarily choose to keep their employees working from home during the pandemic. In light of Ohio’s gradual return-to-work policy, combined with possible imposition of new work restrictions as COVID-19 cases increase during summer months, employers should carefully review how section 29 applies to their workforce. Ultimately, section 29 will not apply to every employer and industry in the same way. Further, in practice, many employers are keeping employees remote after the time when they would be legally permitted to return to an office environment. Thus, after the 30-day grace period expires, these employers can no longer rely on section 29 to avoid changing their municipal income tax withholding practices.

Finally, adding one additional wrinkle in the short term, an employer and several employees have filed suit in Franklin County asserting section 29’s temporary municipal income tax withholding rule is unconstitutional. There have been no substantive rulings issued to date.

Over the long term, regardless of how section 29 is applied, COVID-19 is still likely to have a significant impact on municipal withholding and budgets. This immediate crisis forced the hand of many employers to establish work-from-home policies, and if successful, some work-from-home arrangements may become permanent. These employees will permanently pay taxes in the jurisdiction where they live, rather than their typical office location. With remote workplaces potentially becoming the new normal, many municipalities could face decreased tax revenue, while others will see an increase. This is a major concern for municipalities that have expressed concern that this may have a “crippling effect on the municipal budget.”⁸

Return Filing and Payment Deadlines

Section 28 of H.B. 197 includes another aspect of the state’s COVID tax response, authorizing the tax commissioner to — during the period of the emergency — extend return filing and payment deadlines. The tax commissioner exercised this authority regarding most Ohio taxes, including individual income and passthrough entity tax returns.⁹ Notably, the commissioner has not extended filing and payment deadlines for Ohio’s primary business tax, the commercial activity tax, which is filed and paid by most taxpayers on a quarterly basis.

Proposed Legislation

S.B. 307, which is pending before the General Assembly, proposes a temporary sales and use tax exemption for protective equipment — defined as “items for human wear and designed as protection against injury or disease or as protection against damage or injury of other persons or property but not suitable for general use.” This targeted sales and use tax exemption would apply to sales made after enactment and before January 1, 2021.

Another pending bill (S.B. 310) would bring Ohio’s treatment of Paycheck Protection Program loans in line with federal income tax law. The legislation would exclude forgiveness of Paycheck Protection Program loans from the definition of a gross receipt, thus excluding that forgiveness from the commercial activity tax.

Karvo Paving Co. v. Testa

As noted, there is one important Ohio case law development of the last few months. The Department of Taxation recently dismissed its appeal to the Ohio Supreme Court in Karvo Paving Co. v. Testa.¹⁰ As a result of this dismissal, the Ohio Court of Appeals’ decision in Karvo Paving remains good law.¹¹ Karvo Paving provides an important gloss on three separate Ohio sales and use tax exemptions. Since we addressed the Karvo Paving case previously in Tax Notes State,¹² we will forgo a complete rehash of the case. Ohio taxpayers, however, should consult this case for its interpretation of the resale, affiliated entity, and casual sale exemptions.