Ohio Policy Group Defends Position in Remote Worker Case

DR. MANAL MORSY,
Plaintiff,
v.
SHARON DUMAS,
Defendant.

IN THE COURT OF COMMON PLEAS
CUYAHOGA COUNTY, OHIO

JUDGE MICHAEL P. SHAUGHNESSY

PLAINTIFF'S BRIEF OPPOSING DEFENDANT'S MOTION TO DISMISS

Plaintiff Dr. Manal Morsy opposes Defendant Sharon Dumas, in her official capacity as Finance Director of the City of Cleveland (“the City's”) Motion to Dismiss. Under R.C. 2723.01, this court has original jurisdiction over constitutional challenges to illegal taxes and Dr. Morsy is not required to exhaust any administrative remedies. Indeed, because hers is a constitutional challenge to a statute, the City's Tax Review Board cannot provide the relief she requests and Dr. Morsy has no administrative remedies to exhaust.

More importantly, on the merits, for more than 70 years the Ohio Supreme Court consistently has held that the Fifth Amendment's Due Process Clause as applied to the states by the Fourteenth Amendment allows municipalities to tax two — and only two — types of income: (1) income earned by residents who live in the municipality, and (2) income earned by nonresidents for work done within the municipality. Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165 (2015), 2015-Ohio-1623, 41 N.E.3d 1164, 42, citing Shaffer v. Carter, 252 U.S. 37, 55, 40 S. Ct. 221, 64 L. Ed. 445 (1920); see also, Thompson v. City of Cincinnati, 2 Ohio St.2d 292, at syllabus, 208 N.E.2d 747 (1965) (“A municipal corporation may levy a tax on the wages resulting from work and labor performed within its boundaries by a nonresident of that municipal corporation.” (Angell v. City of Toledo, 153 Ohio St. 179, 91 N.E.2d 250, approved and followed.”)). This limitation flows from the Ohio Supreme Court's 1950 decision in Angell v. City of Toledo (1950), 153 Ohio St. 179, 91 N.E.2d 250, in which the Court first recognized a municipality's authority to tax non-residents only for work actually performed in the taxing jurisdiction, through Willacy v. Cleveland Bd. of Income Tax Rev., 159 Ohio St.3d 383, 2020-Ohio-314, 151 N.E.3d 561, decided just last year. Neither circumstance of residency in nor work performed in the taxing City is present here. Absent one of those circumstances, Sec. 29 of H.B. 197 and the City's taxation of Dr. Morsy pursuant to that statute violate Due Process.

Moreover, in this case, the City, through Sec. 29 of H.B. 197 improperly discriminates against interstate commerce in contravention of the U.S. Constitution's dormant Commerce Clause. Under Sec. 29's scheme, Dr. Morsy, as a Pennsylvania resident, pays municipal income tax twice on the same income where an Ohio resident would not. This violates the “bedrock principle” that “a State [nor by extension a municipality] may not tax value earned outside its borders.” Corrigan v. Testa, 149 Ohio St.3d 18, 19, 73 N.E.3d 381 (2016) (quoting Allied-Signal, Inc. v. Dir. Div. of Taxation, 504 U.S. 768, 777, 784, 112 S. Ct. 2251, 119 L.Ed. 2d 533 (1992)).

In its Motion, the City makes some extraordinary assertions regarding its authority to tax income earned outside of its borders. These propositions are as novel the coronavirus that H.B. 197 was written to address and the City cites no authority to support them. Nor does the City attempt to reconcile its expansive theory of jurisdiction to tax with the well-established body of State and federal law — such as Hillenmeyer, Corrigan, and Allied-Signal, supra — that contradicts them.

By creating a fiction deeming that work performed at home was actually performed at the employer's principal place of business, Section 29 plainly makes tax collection more convenient for employers, payroll companies, and municipal governments. Yet, as the U.S. Supreme Court has observed, “the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution.” Stern v. Marshall, 564 U.S. 462, 131 S. Ct. 2594, 2599, 180 L.Ed.2d 475 (2011).

Constitutional limits on government power apply even during — perhaps especially during — times of crisis. See Marysville Baptist Church, Inc. v. Beshear, 957 F.3d 610, 615 (6th Cir. 2020) (“While the law may take periodic naps during a pandemic, we will not let it sleep through one”) And in this case, the binding Ohio Supreme Court precedent beginning with Angell and continuing in an unbroken line for more than 70 years holds that the General Assembly's enactment of Section 29 of H.B. 197, however well-intentioned or salutary for the City's finances, violates the Due Process Clause.

I. FACTUAL BACKGROUND

In response to the COVID-19 pandemic, on March 22, the State Director of Health issued an Order that required, subject to certain exceptions, “all individuals currently living within the State of Ohio . . . to stay at home or at their place of residence” (“the Stay-at-Home Order”). The Stay-at-Home Order further required that “[a]ll businesses and operations in the State,” except “Essential Business and Operations” as defined in the Order, “cease all activity within the State . . .” (See Stay-Stay-at Home Order, ¶¶s 1-2).¹

On March 28, 2020, Governor DeWine signed into law H.B. 197, a measure designed to address various aspects of the health crisis and to cushion its economic impact. In that legislation, the General Assembly provided that for municipal income taxation purposes, employees working from home during the health emergency and for thirty days thereafter would be retroactively deemed to be working at their typical work location.²

Specifically, Section 29 of H.B. 197 provided that:

“[D]uring the period of the emergency declared by Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, any day on which an employee performs personal sendees at a location, including the employee's home, which the employee is required to report for employment duties because of the declaration shall he deemed to he a day performing personal sendees at the employee's principal place of work”

(H.B. 197 Sec. 29, as enrolled (emphasis added)).

Dr. Morsy is a resident of Blue Bell, Pennsylvania, a suburb of Philadelphia. She is employed in the bio-tech industry. Her employer's usual place of business is located within the City of Cleveland. Before the COVID-19 pandemic, Dr. Morsy commuted on a weekly basis from her home in Blue Bell to Cleveland. Dr. Morsy would typically fly into Cleveland on a Sunday evening or Monday morning and fly back to Blue Bell on Friday. Her employer withheld Cleveland municipal income tax from her pay, pursuant to R.C. 718.03. And each year, Dr. Morsy tracked her days worked inside and outside of Cleveland and applied for a tax refund pursuant to the City's codified ordinances and tax forms, which she always received. Complaint, ¶¶s 9-11.

Beginning in March of 2020, the State of Ohio and later her employer, required Dr. Morsy to stay out of her office in the City and instead to work from her home in Blue Bell, Pennsylvania. Complaint at ¶¶s 28-30. The State then in H.B. 197 “deemed” the work to have been performed in the City of Cleveland for tax purposes. Pursuant to Sec. 29 of H.B. 197, Dr. Morsy's employer has withheld Cleveland income tax on all of her income from March 13, 2020 through the present. Id. at ¶ 33. In addition, Dr. Morsy is required to pay income tax on 100% of her income in Blue Bell, Pennsylvania. Id. at ¶ 34.

On March 4, 2021, Dr. Morsy applied for a refund of tax withheld for days when she worked outside of the City during the 2020 tax year, specifically, March 13, 2020 through December 31, 2020. Complaint at ¶ 34. The City of Cleveland, through its Tax Department denied any refund to Dr. Morsy, citing H.B. 197. Id. at ¶ 35. Dr. Morsy is thus subject to double taxation on the same income. The Orwellian operation of these two State acts — the first requiring Dr. Morsy to not work in her Cleveland office, and the other deeming a fiction for the purpose of taxation that Dr. Morsy did in fact work in the City of Cleveland — while she was in Pennsylvania — offends basic principles of equity protected by U.S. Constitution's Due Process Clause and dormant Commerce Clause.

LAW AND ARGUMENT

A. Standard of Review

Statutes have a strong presumption of constitutionality and must appear beyond a reasonable doubt that the legislation and constitutional provisions are clearly incompatible. Libertarian Party of Ohio v. Husted, 10th Dist. No. 16AP-496, 2017-Ohio-7737, 97N.E.3d 1083, ¶ 31 (2016). Nevertheless, “where the incompatibility between a statute and a constitutional provision is clear, a court has a duty to declare the statute unconstitutional.” Id., citing Cincinnati City School Dist. Bd. Of Edn. v. Walter, 58 Ohio St.2d 368, 383, 390 N.E.2d 813 (1979). Here, there is no way to square Section 29 of H.B. 197 and the City's conduct under it with the Ohio Supreme Court's decision in Hillenmeyer v. Cleveland Bd. of Rev., which holds that “[l]ocal taxation of a nonresident's compensation for services must be based on the location of the taxpayer when the services were performed.” 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, 43 (2015). In reviewing a dismissal for failure to state a claim, a reviewing court must presume that all factual allegations of the complaint are true and make all reasonable inferences in favor of the non-moving party. E.g., Mitchell v. Lawson Milk Co. (1988), 40 Ohio St.3d 190. A complaint may not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts warranting recovery. O'Brien v. Univ. Community Tenants Union (VF15), 42 Ohio St.2d 242.

B. Dr. Morsy Is Not Required to Exhaust Administrative Remedies

1. R.C. 2723.01 Provides this Court with Original Jurisdiction to Enjoin and Order the Refund of an Illegal Tax and Does not Require a Plaintiff to Exhaust Administrative Remedies.

The City first argues that Dr. Moray's claim is procedurally barred because she failed to exhaust her administrative remedies. The City, however, overlooks the substantial body of law dating back nearly a century holding that R.C. 2723.01 provides the common pleas court with original jurisdiction over challenges to the legality of a tax and plaintiffs raising a constitutional challenge to a statute are not required to exhaust administrative remedies. See Fox v. Lakewood, 84 Ohio App.3d 202, 205, 616 N.E.2d 588, 590 (8th Dist. 1992) (holding that R.C. 2723.01 provides for original jurisdiction to challenge illegally levied income taxes); see Aspinwall v. Mentor Bd. of Tax Rev., 146 Ohio App.3d 466, 473, 766 N.E.2d 1034, 1039-40 (11th Dist. 2001) (“when seeking to enjoin an illegal collection of taxes, pursuant to R.C. 2723.01, a party does not have to exhaust all administrative remedies.”); St. Francis Community Urban Redevelopment Corp. v. Rhodes, 1st Dist. Hamilton No. C-960514, 1997 WL 71296, *2 (quoting Conn v. Jones, 115 Ohio St. 186, syllabus, 152 N.E. 897, 899, 4 Ohio Law Abs. 394 (1926)) (“Under [R.C. 2723.01], a property owner may apply for an injunction to restrain the levy or collection of a tax upon the ground that the property to be taxed is exempt, without proceeding under [R.C. 5715.27] et seq. These sections provide a concurrent and not an exclusive remedy.”).

Courts have recognized the ability to challenge a tax's constitutionality directly without intermediate administrative steps as far back as 1926, when the Ohio Supreme Court, interpreting the General Code's version of R.C. 2723.01, held that “[w]hen the question raised is as to the very power to lay the tax, and not as to the valuation of the property, nor as to the amount of the assessment, injunction will lie under section 12075 [R.C. 2723.01], That section gives a remedy against the levy of an unauthorized tax concurrent with the remedy contained in sections 5616, 5611-1, and 5611-2, General Code.” Conn, 115 Ohio St. at 196-97.

The City argues that the Eighth District Court's decision in BP Communications Alaska, Inc. v. Cent. Collection Agency, 136 Ohio App.3d 807, 737 N.E. 2d 1050 (2000), requires Dr. Morsy to exhaust her administrative remedies because she has “conceded” that the City of Cleveland has the power to impose an income tax. See Mot. to Dismiss at 5. But the City ignores the fundamental distinction on which BP Communications turned. In BP Communications, the court held that because BP challenged the constitutionality of City's actions, rather than the constitutionality of a statute, BP had to exhaust its administrative remedies:

BP requested a declaration on the constitutionality of CCA's collection of income tax from nonnexus affiliates, but that request did not specifically raise the constitutionality of a statute or ordinance; instead, it raised an issue as to the constitutionality of CCA's actions as applied to the ordinances.

Id.

The court took pains to distinguish cases like BP's, which dealt with “valuation, or amount of assessment” from those that challenged “the very power to lay the tax.” Id. at 815, quoting Conn, 115 Ohio St. at 195. The court further expressed its concern that if BP was not required to exhaust its administrative remedies relating to the calculation of its taxes, a reviewing court would be denied the benefit of the agency's “special expertise in tax matters” and “would permit an R.C. 2723.01 action for any claim that a tax was wrongly computed, as opposed to limiting it to those levied with no authority whatsoever.” Id. at 815.

Those factors are not present here, however, where Dr. Morsy plainly, specifically, and unambiguously seeks a declaration that Sec. 29 of H.B. 197 is unconstitutional under the Due Process Clause. While BP did not raise a constitutional challenge to a statute, the first count of Dr. Morsy's Complaint is captioned: COUNT ONE: ACTION FOR DECLARATORY JUDGMENT BASED ON UNCONSTITUTIONALITY OF H.B. 197. Complaint at 12 (emphasis in original). Further, Dr. Morsy requests relief in the form of “a declaration stating and an Order holding that Sec. 29 of H.B. 197 of the 133^rd Ohio General Assembly is unconstitutional and void.” Id. at 14. Of the complaint's fifty-seven paragraphs, more than twenty specifically mention the Constitution, Due Process, or the Commerce Clause. Complaint, passim. Properly construed, BP Communications supports Dr. Morsy's position that R.C. 2723.01 is the proper vehicle to challenge the constitutionality of a tax, without the need for administrative exhaustion.

Certainly, Dr. Morsy acknowledges the City's right to impose municipal income tax on work that she actually performed in Cleveland. But that acknowledgement is a far cry from conceding that a state statute authorizes the City to tax work performed in Pennsylvania. By way of analogy, one can agree that the Cleveland Police have the power to make arrests without conceding that they can do so anytime, anywhere, or without probable cause.

2. Appeal to the City's Board of Tax Review Would Be Futile Because the Board Lacks the Authority to Declare Sec. 29 Unconstitutional.

The City's argument that Dr. Morsy failed to exhaust her administrative remedies also ignores the equally substantial body of law holding that “parties need not pursue their administrative remedies if doing so would be futile or a vain act.” Driscoll v. Austintown Assoc., 42 Ohio St.2d 263, 275, 328 N.E.2d 395 (1975). A “vain act” occurs when an administrative body lacks the authority to grant the relief sought. State ex rel. Teamsters Local Union 436 v. Cuyahoga Cty. Bd. of Commrs., 132 Ohio St.3d 47, 2012-Ohio-1861, 969 N.E.2d 224, 24, citing Nemazee v. Mt. Sinai Med. Ctr., 56 Ohio St.3d 109, 115, 564 N.E.2d 477 (1990). Indeed, the BP Communications court, on which the City relies, held that it is “futile to force a party to exhaust an administrative appeal to an agency that can afford no meaningful relief.” BP Communications, 136 Ohio App.3d at 813 (internal citations omitted).

The City's Board of Tax Review is an administrative agency, and as such, “lacks jurisdiction to determine the constitutional validity of statutes.” State ex ret. Mallory v. Pub. Emp. Retirement Bd. (1998), 82 Ohio St.3d 235, 240, 694 N.E.2d 1356, 1361; see also State, ex rel. Columbus Southern Power Co., v. Sheward, 63 Ohio St.3d 78, 81, 585 N.E.2d 380, 382 (1992) (“It is settled that an administrative agency is without jurisdiction to determine the constitutional validity of a statute.”); see also, S.S. Kresge Co. v. Bowers (1960), 170 Ohio St. 405, 407, 11 O.O.2d 157, 166 N.E.2d 139 (“[T]he Board of tax Appeals, being an administrative agency and not a court, was without jurisdiction to consider and determine a question of constitutional validity. Hence, nothing could have been accomplished by raising the question there.”). Again, Dr. Morsy is seeking a declaration that Sec. 29 of H.B. 197 — an act of the state legislature — is unconstitutional. This is not a remedy that the City's Board of Tax Review can provide.

Further, even if the Board had the power to grant Dr. Morsy the relief she seeks, it lacks jurisdiction to hear her complaint. An administrative agency can exercise only the jurisdiction conferred on it by statute. M6 Motors, Inc. v. Nissan of N. Olmsted, LLC, 8th Dist. No. 100684, 2014-Ohio-2537, 14 N.E.3d 1054, 41; see also, State ex rel. Shaker Square Co. v. Guion (App.1957), 145 N.E.2d 476 (A municipal administrative agency . . . “that is created by a legislative body is limited to exercise only such authority granted to it by the legislative body.”)

The Board of Tax Review's authorizing ordinance, as well as R.C. 718.01 and 718.11, limits its jurisdiction to “appeals by taxpayers of assessments issued by the Tax Administrator regarding a municipal income tax obligation that is subject to appeal as provided in RC Chapter 718, this chapter or the rules and regulations.” Cleveland City Ordinance § 192.40(a) (emphasis added); see also, R.C. 718.11(C) (“Any person who has been issued an assessment may appeal the assessment to the board created pursuant to this section by filing a request with the board.”) (emphasis added).

An “assessment” does not encompass every adverse determination or act by the Tax Department. Rather it is a defined and limited term in the Revised Code:

“Assessment” means a written finding by the tax administrator that a person has underpaid municipal income tax, or owes penalty and interest, or any combination of tax, penalty, or interest, to the municipal corporation that commences the person's time limitation for making an appeal to the local board of tax review pursuant to section 718.11 of the Revised Code and has "ASSESSMENT" written in all capital letters at the top of such finding.

R. C. 718.01(PP)(1). Highlighting the term's limited meaning in the context of tax appeals, R.C. 718(PP)(2) adds that an “'Assessment' does not include an informal notice denying a request for refund issued under division (B)(3) of section 718.19 of the Revised Code, [or] a billing statement notifying a taxpayer of current or past-due balances owed to the municipal corporation, . . . .” R.C. 718.01(PP)(2).

Here, no assessment has been issued to Dr. Morsy. Indeed, because her employer has already withheld the disputed taxes and they have been transferred to the City, there is no reason why the City would issue an assessment. And without an assessment, the Board lacks jurisdiction to hear any “appeal” from this dispute. Simply put, Dr. Morsy has no administrative remedies to exhaust.

C. The Due Process Clause of the Fifth Amendment Prohibits Extraterritorial Municipal Taxation on Nonresidents of the Municipality.

On the merits, the statute at issue here purports to allow municipalities to tax nonresidents on income that they earned outside of the municipality — or in Dr. Morsy's case, outside of the State. The City has claimed that it is entitled to that revenue. Both the U.S. and Ohio Supreme Courts, however, have spoken authoritatively on this issue holding that “[b]eyond in personam taxing jurisdiction over residents, local authorities may tax nonresidents only if theirs is the jurisdiction 'within which the income actually arises and whose authority over it operates in rem.'" Hillenmeyer, 144 Ohio St. 3d at 175, citing Shafer v. Carter, 252 U.S. 37, 55, 40 S. Ct. 221, 64 L. Ed. 445 (1920). In other words, a municipal corporation can tax income in only two circumstances, when it exercises in personam over a taxpayer by virtue of the taxpayer's residence in the municipality, or when it exercises in rem jurisdiction over the income because it is earned for work performed within the municipality's borders. AZ at 175-76 (noting residential requirement for exercise of in personam taxing jurisdiction); see also Corrigan, 149 Ohio St.3d at ¶ 15 (“[g]ovemmental jurisdiction in matters of taxation * * * depends upon the power to enforce the mandate of the state by action taken within its borders. . . .”)

1. Due Process and Nonresident Taxation

The municipal power to tax income arises from the Home Rule Amendment to Ohio's Constitution, rather than from any statutory grant from the Ohio General Assembly. Gesler v. Worthington Income Tax Bd. of Appeals (2013), 138 Ohio St.3d 76, 2013-Ohio-4986, 3 N.E.3d 1177, ¶ 17. The Home Rule Amendment authorizes municipalities “to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws.” The clause “within their limits,” however, imposes a common-sense yet significant restraint on municipal power. It means that a city's home rule authority is necessarily coextensive with its geographic limits. See Prudential Co-op. Realty Co. v. City of Youngstown (1928), 118 Ohio St. 204, 207, 160 N.E. 695, 696, 6 Ohio Law Abs. 175 (“The direct authority given by that article [the Home Rule Provision] is expressly limited to the exercise of powers within the municipality.”)

The Ohio Supreme Court first recognized that the Home Rule Amendment authorized a municipality to tax nonresidents in Angell v. City of Toledo (1950), 153 Ohio St. 179, 183-84, 91 N.E.2d 250, 252-53. In so doing, the Angell court answered two questions. The first was whether a municipality had any authority whatsoever to tax the income of nonresidents. The court answered that question by holding that such authority exists pursuant to the Home Rule Amendment, but subject to limitations that the legislature may impose under Article XVIII, Section 13 or Article XII, Sec. 6 of the Ohio Constitution. Id. at 182-84.

The second question that the Angell court answered — the question on which this case turns — involves the due process limitations on taxing nonresidents' income arising from the U.S. Constitution's Fifth and Fourteenth Amendments. Id. at 185. There, the Angell court borrowed from the U.S. Supreme Court's decision in Stale of Wisconsin v. J.C. Penney Co. to adopt a “fiscal relation” test for municipal income tax, which requires that the taxes bear “some fiscal relation to the protections, opportunities, and benefits given by the state.” Angell, 153 Ohio St. at 185 (internal citations omitted). The Angell court's application of an analogous interstate test to municipal income taxation of nonresidents of the municipality established that the Due Process Clause protection long recognized by the Ohio Supreme Court in the interstate context applies with equal force to municipal income taxation of employees who reside outside of the municipality.

Later cases cemented Angell's dual principles that a city's power to tax arises from the Home Rule Amendment and that due process requires a fiscal relation between the tax and benefits provided by the city. In McConnell v. City of Columbus, 172 Ohio St. 95, 173 N.E.2d 760 (1961) the Court upheld the City's income tax on an employee of The Ohio State University, reasoning that although the employee worked for an arm of the State and on State-owned property, he still performed his work and thus earned his income within the City of Columbus. Id. at 100. Four years after McConnell, the Ohio Supreme Court once again affirmed that there are two instances in which a city may tax wages: “a municipality may tax the wages realized within that municipality by a nonresident (Angell, supra) and may tax the wages of a resident realized from a source outside the municipality.” Thompson, 2 Ohio St.2d at 298.

Ohio appellate courts have also consistently applied the fiscal relation test to prohibit cities from taxing nonresidents for work performed outside of city limits. See Vonkaenel v. City of New Philadelphia (2001), 5th Dist. Tuscarawas No. 2000AP-04-0041, 2001 WL 81700, *3 (“Any direct benefit that appellants [UPS drivers] receive from the City of New Philadelphia while they are working outside of New Philadelphia is limited. Moreover, the mere fact that the City of New Philadelphia provides services to appellants' employer, such as protection against fire and theft, is insufficient, to justify a tax upon appellants under the “fiscal relation” test for work performed by appellants outside of the City of New Philadelphia”); Czubaj v. Tallmadge (2003), 9th Dist. Summit No. 21389, 2003-Ohio-5466, ¶ 12 (severance pay not subject to municipal taxation because plaintiff's “forbearance of service cannot be deemed a service performed” within the municipality).

Thus, when Hillenmeyer v. Cleveland Rd. of Rev. arrived before the court in 2016, the principle that “[l]ocal taxation of a nonresident's compensation for services must be based on the location of the taxpayer when the services were performed” was already well-established in Ohio law. 144 Ohio St.3d 165 at ¶ 43. Last year, the Ohio Supreme Court re-affirmed the contours of municipal taxation in Willacy v. Cleveland Bd. of Income Tax Rev., 159 Ohio St.3d 383, 2020-Ohio-314, 151 N.E.3d 561. There, just as in Hillenmeyer and the cases that preceded it, the Court recognized that a municipality's power to tax income arose under the Home Rule Amendment and was “limited by the Due Process Clause, which requires a municipality to have jurisdiction before imposing a tax.” Id. Thus, based on the unbroken chain running from Angell through Hillenmeyer, because Dr. Morsy is not a resident of the City of Cleveland and the work in question was not performed in Cleveland (or even in Ohio), Due Process does not permit the City to tax Dr. Morsy's income.

2. Neither the City nor the State of Ohio has Jurisdiction to a Nonresident's Work Performed in Another State.

Under Angell, Hillenmeyer, el al., the constitutional analysis is binary. If the work was performed in the City, the City has jurisdiction to tax it. Otherwise, it does not. For constitutional purposes, it is immaterial whether the taxpayer performed the work in Shaker Heights, Lakewood, or San Diego. The only question is whether the work was performed in the City. See Hillenmeyer, 144 Ohio St. 3d at ¶ 43 (“[L]ocal taxation of a nonresident's compensation for services must be based on the location of the taxpayer when the services were performed.”); see also Willacy, 159 Ohio St. 3d at ¶ 26 (“[C]ompensation must be allocated the place where the employee performed the work.”).

But cities in parallel cases have made State residence an issue by arguing that the Hillenmeyer and Willacy decisions turned on the plaintiffs' status as a non-Ohio residents, rather than a nonresident of Cleveland. Trial courts in Franklin County and Hamilton County have relied on this erroneous reasoning to hold that Hillenmeyer and Willacy were inapplicable because they involved “the wholly separate question of interstate taxation.” (Buckeye Institute v. Kilgore, Case No. 20 CV-4301 (April 27, 2021,Franklin County), Op. at 7, (emphasis in original), see also Schadd v. Adler, Case No. A21 00517 (June 16, 2021, Hamilton County).

In this case, the City — represented by the same counsel as the cities in Kilgore and Adler — now argues that despite Dr. Morsy's status as non-Ohio resident, the City nevertheless has jurisdiction to tax Dr. Morsy because (1) the State has authorized such taxation, (2) physical presence is not required under the Due Process Clause, (3) the City actually has in personam jurisdiction, (4) other State's tax remote workers, and (5) other Ohio taxes allow the taxation of nonresidents. Mot. to Dismiss at 9-16. These arguments universally misconstrue the due process requirements inherent to impose a tax and conflate the “minimum contacts” principles used to determine long-arm jurisdiction over out-of-state defendants with the jurisdiction to tax discussed in Angell, Hillenmeyer and Shaffer.

This distinction between the jurisdiction to tax and the jurisdiction to hale a party into court is similarly well-established in federal law. For example, the U.S. Supreme Court held that “([i]n the context of state taxation, the Due Process Clause limits States to imposing only taxes that “bea[r] fiscal relation to protection, opportunities and benefits given by the state.” N. Carolina Dept, of Revenue v. The Kimberley Rice Kaestner 1992 Family Tr. 139 S.Ct. 2213, 2219-20, 204 L.Ed.2d 621 (2019), citing Wisconsin v. J. C. Penney Co., 311 U.S. at 444. More specifically, the federal test for due process in taxation, which Ohio courts have applied to municipal taxation, involves “a two-step analysis to decide if a state tax abides by the Due Process Clause. The Corrigan court explained that the first step follows the familiar “minimum contacts” analysis:

Inherent in the Supreme Court's pronouncement in Shaffer is the need for a link between the state and the person being taxed as well as between the state and the activity being taxed. The former is expressed in terms of the minimum-contacts test that is familiar in the context of determining the personal jurisdiction that may be exercised by a court sitting in one state and issuing process to a person in another state.

Corrigan, 149 Ohio St.3d at 32; see also N. Carolina Dept, of Revenue, 139 S.Ct. at 2219-20 (first requiring “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.'”).

Without question, Dr. Morsy has necessary but insufficient minimum contacts with the State of Ohio and the City of Cleveland. The City would end the analysis there and declare that it has jurisdiction to tax anyone with any minimum contacts with the City of Cleveland. But the Corrigan court did not end the analysis there:

In addition to the state's connection with the person to be taxed, “in the case of a tax on an activity, there must be a connection to the activity itself rather than a connection only to the actor the State seeks to tax.”

Corrigan, 149 Ohio St.3d at ¶ 33, citing Allied-Signal, 504 U.S. at 778, 112 S.Ct. 2251, 119 L.Ed.2d 533 (emphasis added). This distinction between the jurisdiction to tax and the minimum contacts needed for a Court to exercise jurisdiction over an out-of-state litigant makes sense when one considers that an out-of-state driver who causes an accident could reasonably anticipate being haled into the foreign state to answer for his tort. But it would be entirely unreasonable to expect that a foreign state could tax that driver's income simply because he crossed its borders.

This test is consistent with Shaffer's holding that the jurisdiction to tax depends upon “the government's power to enforce its mandate by action taken within its borders.” Corrigan, 149 Ohio St.3d at ¶ 15, quoting Shaffer, 252 U.S. at 49. Thus, for taxation purposes, a local government has in personam jurisdiction only over its residents. See Hillenmeyer, 144 Ohio St. 3d at 175-176 (“Beyond in personam taxing jurisdiction over residents, local authorities may tax nonresidents only if theirs is the jurisdiction within which the income actually arises and whose authority over it operates in rem.”); see also, Vonkaenel v. City of New Philadelphia, 2001 WL 81700, *3. Here, Dr. Morsy resides outside of the City's and the State's borders and the work for which she is being taxes was also performed outside of those borders. The City and the State thus lack the jurisdiction to tax her or her work. Id.

a. The State Cannot Authorize a Violation of the Due Process Clause

Taking the City's arguments to the contrary in order, the City first claims that it can collect an extraterritorial tax so long as a State statute authorizes it. The City's suggestion that a State can statutorily authorize what the Due Process Clause forbids is hard to take seriously. See Bd. of Ed. of City School Dist. of City of Cincinnati v. Walter, 58 Ohio St.2d 368, 383, 390 N.E.2d 813, 823 (1979), citing Marbury v. Madison, 5 U.S.(1 Cranch) 137, 2 L.Ed. 60 (1803) ((“where enactments violate the basic law, it was determined early in our judicial history that the courts have not only the power but the duty to declare such enactments invalid.”)

Ohio's highest Court has held — twice within the last five years — that a municipality lacks jurisdiction to tax a nonresident on work performed outside of its border. A tax imposed without jurisdiction, whether authorized by state statute or not, violates Due Process. See Corrigan, 149 Ohio St.3d at 19; see also Allied-Signal, 504 U.S. at 777 (“[A] State may not tax value earned outside its borders.”)

The only authority the City can muster for the extraordinary proposition that the State can authorize a City to tax nonresidents on income earned outside of the State is Time Warner Cable, Inc. v. City of Cincinnati, 1^st Dist. Hamilton No. C-19375, 2020-0hio-4207, 157 N.E.3d 941 (2020), which it claims holds that “it was permissible for the City's income tax ordinance to apply outside Cincinnati if authorized by state law.” Mot. to Dismiss at 10. But the Time Warner court said no such thing.

First, the Time Warner case did not deal with extraterritorial taxation. In fact, the Court made clear that “[c]ontrary to the City's contention [regarding extraterritorial taxation],” Time Warner was already subject to the City's income tax by virtue of its presence in the City. See Time Warner Cable, Inc. v. City of Cincinnati, 2020-0hio-4207 at ¶ 16. In other words, the threshold jurisdictional question had already been answered because Cincinnati had in personam jurisdiction over Time Warner because Time Warner was located in Cincinnati. Dr. Morsy, by comparison, does not live in the City of Cleveland.³  While before the pandemic she typically spent the work week in Cleveland, she was not living or working in Cleveland when she earned the income that the City is trying to tax. There is simply no authority to support the notion that a municipality has the power to continue to tax people simply because they used to live or work within its borders.

Second, the Time Warner case dealt with whether a state statute could require Cincinnati to accept a consolidated tax return from Time Warner that included related entities. This made municipal tax filing easier for groups of companies like Time Warner that filed consolidated federal income tax returns. The consolidated return allowed Time Warner to calculate its taxable income for Cincinnati purposes by (1) combining the income of all entities included in the return and (2) determining the portion of income subject to Cincinnati municipal income tax based on the combined activities of all entities included in the return. This was consistent with the city's tax code, which allowed a business situated in Cincinnati to calculate its net profits by based on the average of the percentage of the business' property within Cincinnati compared with its property outside of the City, the percentage of wages, salaries and other taxable income paid by the business within the City, and the ratio of gross receipts earned by the business within the City to those earned outside the City. See Cincinnati Municipal Code § 311-7. In other words, in Time Warner the statute concerning consolidated tax returns at issue and the relevant city's tax ordinance maintained the principle that tax liability must be determined based on the proportion of the business's activities occurring within the jurisdiction.

This is entirely consistent with Hillenmeyer, which noted that “[i]ncome derived from the conduct of a unitary trade or business [like that in Time Warner] may be apportioned by a general formula, while nonbusiness income [e.g., wages] must usually be more specifically allocated to that place where the particular increment of income is earned.” Hillenmeyer, 144 Ohio St.3d at 175, citing Peters & Miller, Apportionability in State Income Taxation: The Uniform Div. of Income for Tax Purposes Act & Allied-Signal, 60 Tax Law. 57, 71 (2006) (emphasis in original). Dr. Morsy is willing to pay municipal income tax for those days that she actually worked in the City — indeed she has already paid them. But that is not what H.B. 197 and the City demand.

Finally, to the extent that the Time Warner court addressed Cincinnati's concerns that accepting consolidated tax returns (subject to apportionment) constituted extraterritorial taxation — which the court described as a “dubious proposition” — it did so in dicta, merely noting that municipalities “may act extraterritorially where granted such authority by statute.” Importantly, the case on which the Warner court relied in making this statement, Prudential Co-op. Realty Co. v. City of Youngstown, did not involve taxation or the Due Process concerns that accompany it. 118 Ohio St. 204, 160 N.E. 695, 698-99, 6 Ohio Law Abs. 175 (1928). Instead, it involved the city's power to plat certain property outside of its limits that it was acquiring. In fact, the Prudential court drew a bright line between taxation and other extraterritorial actions that might be authorized by statute:

This ordinance must be treated as an inspection ordinance and is invalid if it operates as a revenue ordinance. It is not necessary that the statute should specifically give to the municipality power to charge and collect a fee to cover the cost of inspection and regulation. Where the authority is lodged in the municipality to inspect and regulate, the further authority to charge a reasonable fee to cover the cost of inspection and regulation will be implied. The fee charged must not, however, be grossly out of proportion to the cost of inspection and regulation; otherwise it will operate as an excise tax, which is clearly beyond the power of a municipality to impose.

Prudential Co-op. Realty, 118 Ohio St. at 214 (emphasis added). The question in Prudential was whether the fees charged were actually disguised taxes. Here, the municipal income tax is exactly what it purports to be: an extraterritorial tax imposed on a nonresident without in personam or in rem taxing jurisdiction.

In that same vein, the City euphemistically describes Sec. 29's extraterritorial taxation as “allocating] work across multiple jurisdictions.” Mot. to Dismiss at 7. Dr. Morsy does not dispute that the State enjoys broad authority to regulate intrastate taxation and to place limits on municipal taxation. But no matter how broadly that authority is construed, it can never exceed the boundaries established by the U.S. Constitution. See Madden v. Commonwealth of Kentucky 309 U.S. 83, 93, 60 S.Ct. 406, 410, 84 L.Ed. 590 (1940) (States have “the “sovereignty to manage their own affairs except only as the requirements of the Constitution otherwise provide.") (emphasis added). Thus, while the General Assembly has flexibility to fashion withholding rules like the 20-Day rule or to require certain procedures for accepting municipal tax returns as in Time Warner or requiring centralized administration of business net-profits taxes in Athens v. McClain, 163 Ohio St.3d 61, 2020-0hio-5146, 168 N.E.3d 411, these rules do not — and constitutionally could not — "reallocate" tax liability from one city to another beyond the permissible categories of resident in personam and non-resident in-rem local income taxation recognized in Angell, Thompson, and Hillenmeyer. Indeed, the Athens decision — on which the City relies, and which begins with the recognition that “[m]any Ohio municipalities impose a tax on income earned within their boundaries" — deals exclusively with the State's power to regulate the administration of municipal taxes and nowhere authorizes the State to bypass the Constitution's Due Process Requirements. See Athens, 163 Ohio St.3d at 64 (discussing State administration of validly enacted municipal taxes). And the State certainly cannot “allocate” municipal or State tax liability to a person living and working in another state for work performed in that other State — that is, outside the City and Ohio.

b. The City Misconstrues the Supreme Court's Wayfair Decision.

The City next argues that because the U.S. Supreme Court held in South Dakota v. Wayfair, Inc. that a State could regulate a company business within its borders even if the business did not have a physical presence in the State, it can therefore tax a Pennsylvania resident on work performed in Pennsylvania. 585 U.S. ___, 2093, 138 S. Ct. 2080 (2018). In so doing, the City again looks only to the first prong of the Shaffer analysis and conflates the power to regulate corporate activity with the jurisdiction to tax an individual.

The Wayfair case arose out of the State of South Dakota's efforts to collect sales taxes on online sales. South Dakota enacted a statute requiring out-of-state merchants making online sales into South Dakota to collect and remit sales tax on those sales. Wayfair, an internet furniture seller, challenged the statute as an unconstitutional burden on interstate commerce under the dormant Commerce Clause.

The statute at issue in Wayfair did not impose a tax on the selling corporation. Instead, it required Wayfair to collect and remit sales taxes from South Dakota customers, who were ultimately responsible for the payment of the sales tax. Wayfair, 138 S. Ct. at 2084. Sales tax is paid by the purchaser based on the State's in personam jurisdiction over him as a resident, but ordinarily is collected by the seller at the point of sale and then remitted to the State. This is entirely consistent the Angell, et al. and does not even hint at the judicial expansion of in rem jurisdiction over nonresident taxpayers. As noted above, the power to tax imposes different due process requirements than the power to regulate or hale a defendant into court.

Moreover, the City argues against a strawman when it refers to “[t]he Plaintiff's premise that physical presence is required under the Due Process Clause.” Dr. Morsy has made no such claim. Rather, she argues consistent with Corrigan, Hillenmeyer, Willacy, Shaffer, Allied-Signal, et al. that Due Process requires a municipal income tax to be based on either in personam jurisdiction — which Ohio reviewing courts have universally construed to mean residence within the taxing district — or in rem jurisdiction — which Ohio reviewing courts have construed to mean work performed or property owned within the taxing district.

More importantly, in Willacy, the Ohio Supreme Court — just last year and with the benefit of the Wayfair decision — reaffirmed Hillenmeyer. The Court held that because “what Willacy received was deferred compensation for her Cleveland-based work,” she owed municipal income tax on the stock sale proceeds. See Willacy v. Cleveland Bd. of Income Tax Rev., 2020-Ohio-314 at ¶ 29. In reaching its decision, the Ohio Supreme Court again emphasized that Due Process required that “compensation must be allocated to the place where the employee performed the work” and explained that the extraterritorial ordinance it had struck down in Hillenmeyer violated Due Process because it imposed income tax on “compensation earned while [the taxpayer] was working outside Cleveland.” Id., at ¶ 26 (internal citations omitted).

The Ohio Supreme Court had the benefit of the Wayfair decision when it decided Willacy. If the court had believed that Wayfair had somehow loosened the Due Process requirements relating to municipal income taxation and the taxpayer's physical presence, it could have said so. Its silence on this issue is telling. Even more telling, perhaps, is that the sole dissenter in Willacy actually cited Wayfair, but nevertheless would have held that there was an insufficient nexus for the City of Cleveland to tax Willacy's stock proceeds. See id., at ¶¶s 45-47, (Fischer, J., dissenting).

c. Dr. Morsy is Not Subject to the City's In Personam Taxing Jurisdiction.

The City seeks to avoid the jurisdictional problem by simply asserting that it does, in fact, have in personam jurisdiction over Dr. Morsy because she worked in the City for part of the year. This is an extraordinary claim, and the City provides no authority to support it. Essentially, the City argues that because Dr. Morsy directed her efforts towards the City, it can tax the work she performed in Pennsylvania. But no court has ever held that an employee can be subject to the income tax of a foreign city or State simply because her employer is located there. On the contrary, Angell, Corrigan, Hillenmeyer, and Willacy all premise municipal taxation on the worker's location when the work was performed. See also See Vonkaenel v. City of New Philadelphia (2001), 5th Dist. Tuscarawas No. 2000AP-04-0041, 2001 WL 81700, *3 (“Any direct benefit that appellants [UPS drivers] receive from the City of New Philadelphia while they are working outside of New Philadelphia is limited. Moreover, the mere fact that the City of New Philadelphia provides services to appellants' employer, such as protection against fire and theft, is insufficient, to justify a tax upon appellants under the “fiscal relation” test for work performed by appellants outside of the City of New Philadelphia.”). The City's failure to address the dissonance between these cases and its proposition that a city has in personam jurisdiction over anyone who has 'minimum contacts' speaks volumes. If the Corrigan, Hillenmeyer, and Willacy courts (as well as the federal courts they drew from) had understood in personam jurisdiction to apply to anyone with minimum contacts to the taxing jurisdiction, there would have been no reason for them to have drawn the in personam-in rem distinctions that they did. See, e.g., Hillenmeyer, 144 Ohio St. 3d at 175, citing Shafer, 225 U.S. at 55 (“[b]eyond in personam taxing jurisdiction over residents, local authorities may tax nonresidents only if theirs is the jurisdiction 'within which the income actually arises and whose authority over it operates in rem.'”).

The City also makes the broad yet unsupported claim that it can tax all of Dr. Morsy's income for the year because the municipal income tax is a “period” tax and not “transactional.” Mot. to Dismiss at 14. The City's failure to point to any authority to support this extraordinary argument is telling. No Ohio court has ever construed an “annual” tax to allow the taxing authority jurisdiction over all the taxpayer's annual income, regardless of where the work was actually performed. In fact, R.C. 718.01 and 718.02 contradict the City's position — as they must. For example, R.C. 718.02 explains that income from employment is taxed as the “average ratio of . . . (2) Wages, salaries, and other compensation paid during the taxable period to individuals employed in the business or profession for services performed in the municipal corporation to wages, salaries, and other compensation paid during the same period to individuals employed in the business or profession, wherever the individual's services are performed.” R.C. 718(A)(2). In other words, by State law, municipal income tax is calculated based on the ratio of work that the nonresident taxpayer performs in a given year the municipality versus work performed other places in that same year. There is no way to read that provision consistent with the City's claim that if a nonresident taxpayer performs any work in the municipality she is essentially “in for a penny, in for a pound.” This reading contradicts the City's own tax forms, which recognize a taxpayer's ability to seek a refund based on “[d]ays worked outside of the municipality for which the employer withheld tax. . . . .” See City of Cleveland, Department of Taxation, CCA, 2020 Application for Refund Worksheet, http://ccatax.ci.cleveland.oh.us/taxforms/Y2021/refundapp.pdf (accessed July 8, 2021).

While Due Process permits such an annualized determination to regulate a residential income tax, non-residents may only be taxed where there is a sufficient fiscal relation — that is, based upon “the location of the taxpayer when the services were performed.” Hillenmeyer, 144 Ohio St.3d 165, 2015-Ohio-1623, ¶ 43. Hillenmeyer, Willacy, and Corrigan have already held — quite specifically — that the City's attempted extraterritorial overreach is not the law.

Again, in making this argument, the City conflates the “minimum contacts” principles used to determine long-arm jurisdiction over out-of-state defendants with the jurisdiction to tax discussed in Angell, Hillenmeyer and Shaffer. Those cases explained that the jurisdiction to tax depended upon the government's power to enforce its mandate by action taken within its borders. Corrigan v. Testa (2016), 149 Ohio St.3d at 21 (internal citations omitted). Thus, for taxation purposes, a local government has in personam jurisdiction only over its residents, and “may tax nonresidents only if theirs is the jurisdiction within which the income actually arises and whose authority over it operates in rem.” Hillenmeyer, 144 Ohio St. 3d at 175-176; see also, Vonkaenel v. City of New Philadelphia, 2001 WL 81700, *3.

d. New York Law is Inapplicable Where There Is Recent Ohio Supreme Court Precedent Directly On Point

Rather than address the three recent Ohio Supreme Court cases directly on point, the City asks the Court to look outside of Ohio for authority permitting extraterritorial taxation. Specifically, the City points to Huckaby v. New York State Div. of Tax Appeals, 4 N.Y. 3d 427, 829, N.E. 2d 276 (2005). That case involved New York's “convenience of the employer” rule, which taxed New Yorkers on work performed out of state when such work was performed for the convenience of the employer rather than by necessity. Here, Dr. Morsy was forced to work remotely by a State mandate. Indeed, through the balance of 2020, Stay at Home Advisories issued by the City, as well as Cuyahoga County, remained in effect. Even so, this case is at best offered as persuasive authority. It is worth noting that it has not been deemed to be persuasive outside of New York, and it has only been cited by New York courts only three times in the last fifteen years. More fundamentally, however, Ohio courts are “bound by and must follow decisions of the Ohio Supreme Court.” Cleveland v. Maistros, 145 Ohio App.3d 346, 350, 762 N.E.2d 1065, 1068 (8th Dist.2001). This Court is thus bound to follow the law as set forth by the Ohio Supreme Court in Angell, Corrigan, Hillenmeyer, and Willacy.

e. Ohio's Commercial Activity Tax Is Inapposite

The City's final argument on the jurisdictional point seems to be that because Ohio's Commercial Activity Tax is sourced to the location where the benefit is received, and the CAT does not violate the Due Process Clause, then extraterritorial income tax created by Sec. 29 is permissible. Mot. to Dismiss at 17. The case that the City cites, however, turns on the “physical presence” strawman discussed above. Further, the Ohio Supreme Court that affirmed the CAT in November of 2016 in Crutchfield Corp. v. Testa, 151 Ohio St. 3d. 278, 88 N.E. 3d 900 (2016) is the same one that decided Corrigan and Hillenmeyer within the same year. If, in affirming the CAT, the Justices had intended to overrule Corrigan and Hillenmeyer before the ink on those decisions was dry, they certainly would have said so explicitly.

D. Sec. 29 of H.B. 197, as Applied to Dr. Morsy, Violates the Dormant Commerce Clause.

Finally, in addition to the Due Process Clause, the Supreme Court of the United States has read the Commerce Clause as “containing] a further, negative command, known as the dormant Commerce Clause, prohibiting certain state taxation even when Congress has failed to legislate on the subject.” Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 179 (1995). “By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce.” Corrigan, 149 Ohio St.3d at ¶ 16, citing Maryland Comptroller of Treasury v. Wynne, ___ U.S. ___, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015). A State or local tax survives a Dormant Commerce Clause challenge only “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). Although dormant Commerce Clause cases typically focus on direct State burdens on commerce, the dormant Commerce Clause likewise prohibits municipalities from burdening interstate commerce under color of State law. Regardless, H.B. 197 fails all four elements of the Complete Auto test.

First, the City has no substantial nexus to work performed entirely out-of-state by a nonresident. As the Supreme Court clarified in Allied-Signal, “[substantial nexus” requires that “there must be a connection to the activity itself, rather than a connection only to the actor the State seeks to tax.” Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777-78 (1992). In this case, the City doesn't even claim a connection to the actor it seeks to tax. It claims a connection to the actor's employer. The City stakes its claim to jurisdiction on Dr. Morsy's employer's location, rather than any connection to the work she performs. Far from cabining the authority to a substantial nexus, this novel argument admits to no limiting principle. If an employer's presence in a State is sufficient to confer taxing power upon any of its employees (and presumably any vendor or independent contractor) regardless of where the work is performed, the substantial nexus test would be toothless. The Constitution does not permit a State to just pretend that the work to be taxed was performed in within its borders.

Next, H.B. 197 fails Complete Auto second prong because the tax is not “fairly apportioned.” In fact, the tax is not apportioned at all. Dr. Morsy has been forced to pay Cleveland municipal income tax on all her earnings in 2020. The fair apportionment requirement “ensure[s] that each State taxes only its fair share of an interstate transaction ” Goldberg v. Sweet, 488 U.S. 252, 260-61 (1989), abrogated on other grounds by Wynne, 135 S. Ct. at 27 1798. Here, H.B. 197 absurdly deems that 100% of Dr. Morsy's work — which she actually performed in Pennsylvania — was, for taxation purposes, performed in Cleveland.

While this 100% apportionment would seem to require no further analysis, the test promulgated by this Court in Oklahoma Tax Comm'n is instructive. There, the Court held that a State exceeds its fair share of the value taxed when there is possibility of double taxation. Oklahoma Tax Comm'n, 514 U.S. at 184. In this case, double taxation is not merely a risk, it is a reality. Dr. Morsy is paying municipal tax on 100% of her salary to both Blue Bell, Pennsylvania and Cleveland Ohio.

For similar reasons, H.B. 197 fails Complete Auto's third prong, which prohibits discrimination against interstate commerce. This Court has invalidated similar tax schemes because they “had the potential to result in discriminatory double taxation of income earned out of state and created a powerful incentive to engage in intrastate rather than interstate economic activity.” Comp, of Treasury of Maryland v. Wynne, 575 U.S. 542, 135 S. Ct. 1787, 1801-02 (2015). In Wynne, the Supreme Court of the United States applied the Commerce Clause's “internal consistency” test to strike down Maryland's taxation of certain individuals and S corporations that earned pass-through income in other States and paid tax on that income in those States.

The internal consistency test “'looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.'” Id. at 1802. Plainly, if every State allowed municipalities to tax out-of-state work, a taxpayer who worked in her State of residence would pay municipal income tax once, while her neighbor who worked remotely for a company across the State's border would — like Dr. Morsy — be subject to double taxation on her income performed in the same location, resulting in interstate commerce being “taxed at a higher rate than intrastate commerce.” Id. at 1791. And if every State passed legislation like H.B. 197, the free movement of workers, goods, and services across state borders would suffer, as individuals would be less inclined to work across State lines. The Commerce Clause prevents precisely this type of “economic Balkanization.” Id. at 1794.

Finally, the Tax Rule fails Complete Auto's fourth prong, which requires the state tax to be “fairly related to the services provided by the State.” Complete Auto, 430 U.S. at 279. This prong mandates that “the measure of the tax be reasonably related to the extent of the contact, since it is the activities or presence of the taxpayer in the State that may properly be made to bear a just share of state tax burden.” Commonwealth Edison Co. v. Montana, 453 U.S. 609, 626 (1981). This echoes the Due Process test recognized in Angell. While working exclusively in Pennsylvania, Dr. Morsy has not used the roads, utilities, or safety services provided by the City or the State of Ohio. The City of Cleveland has provided no services to Dr. Morsy since early March of 2020. There is nothing the City or State has given for which it might ask for taxes in exchange. Accordingly, H.B. 197 violates the dormant Commerce Clause.

CONCLUSION

It is an over-worn cliché to call the events of the last year “unprecedented.” It is nevertheless true. In ordinary times, Section 29's problems would likely have come to light through the legislative process and the General Assembly might have found a solution that did not violate the Due Process Clause. Yet, while sympathy for the General Assembly's position may be appropriate, it cannot justify constitutional overreach. See Mominee v. Scherbarth (1986), 28 Ohio St.3d 270, 277, 503 N.E.2d 717, 723 (“While the General Assembly is empowered to respond to circumstances or perceived crises that demand legislative initiative, legislation must comport with the rights and guarantees established in the Ohio Constitution.”).

The Ohio Supreme Court has held time and again that municipal corporations can tax only two types of income: (1) income earned by residents who live in the municipality (under its in jurisdiction over those residents), and (2) income earned by non-residents for work done within the municipality (under its in rem jurisdiction over the work). Here, the City has taxed the income of a nonresidents for work performed outside of its borders — indeed outside the State's borders. Due Process and the dormant Commerce Clause do not permit it. Enforcing Due Process rights will often result in difficulties for municipalities and the State government. But constitutional rights that are subject to government convenience are no rights at all. As the Ohio Supreme Court explained over 150 years ago, “inconveniences may arise from this determination, but evils of much graver importance will be avoided.” State ex rel. Evans v. Dudley, 1 Ohio St. 437, 444 (1853). The graver evil here would be to establish the principle that the General Assembly may expand municipal taxing authority beyond the limits of the Due Process Clause, simply because it is convenient to do so. Once the power to transgress Due Process limits is established, it may prove difficult to constrain that power to the current crisis. The Plaintiff's complaint adequately states a cause of action, and for the all the foregoing reasons, the City's Motion to Dismiss should be denied.

Respectfully submitted,

Jay R. Carson (0068526)
Robert Alt (0091753)
The Buckeye Institute
88 East Broad Street, Suite 1300
Cincinnati, Ohio 43215
(614) 224-4422
Email: j.carson@buckeyeinstite.org
robert@buckeyeinstitute.org

Attorneys for Dr. Manal Morsy