H.B. 754, introduced Monday, would eliminate a temporary law that deems remote work performed during the pandemic to occur at an employee's principal place of work for municipal income tax purposes. The legislation, filed by Rep. Kris Jordan, R-Ostrander, was offered amid a legal battle over the temporary income tax withholding law. The Buckeye Institute, a free-market research group, asked a state court in July to declare the statute unconstitutional.
The law at issue was included in H.B. 197, a sweeping bill enacted in March in response to the spread of the novel coronavirus, which causes the respiratory illness COVID-19. The law's income tax sourcing provisions will be in effect until 30 days after Ohio lifts its state of emergency that was issued due to the pandemic.
The institute and three of its employees argued to the Franklin County Court of Common Pleas in July that allowing cities to tax income earned outside their borders is unconstitutional because "there is neither nexus nor fiscal relation between the city and the income being taxed." They lodged the complaint against Megan Kilgore, the city of Columbus' auditor, after she didn't respond to refund requests for withholding amounts deemed to be sourced there during the pandemic.
Kilgore asked the court on Aug. 25 to dismiss the complaint, arguing that the due process clause doesn't curtail a state's ability to enact an intrastate tax policy that only affects its residents and corporations.
Jordan's bill is identical to a Senate bill, S.B. 352, which was introduced Aug. 11 by Sen. Kristina Roegner, R-Hudson. Roegner's bill was referred to the Senate Local Government, Public Safety and Veterans Affairs Committee on Tuesday.
Robert Alt, the institute's president and chief executive, told Law360 on Tuesday that he sees the bills as a "positive step" that indicates the state Legislature is weighing whether to repeal the challenged law.
"We would support any policy change that would eliminate the unconstitutional, extraterritorial tax that was applied in H.B. 197," said Alt, who also represents the institute in the case. "Our primary concern is making sure this unconstitutional tax is eliminated."
Alt added that he thinks "it's reasonable to infer" that the bills were offered because some legislators believe they may need to undo the temporary income tax sourcing changes in light of the lawsuit's claims.
Edward Bernert, a partner with BakerHostetler, told Law360 on Tuesday that while he's unsure if lawmakers will support a repeal of the local tax withholding changes, he's hopeful the legislation will act as a springboard for the Legislature to address certain questions employers have with the temporary law.
For example, Bernert said H.B. 197's temporary withholding changes are ambiguous as to whether employees who work remotely in municipalities without an income tax can seek refunds of tax withheld for work deemed to have been performed in a city with a local tax.
"There are a lot of questions, and I think the biggest thing is that the employer really is caught in the middle of this," he said.
Additionally, Bernert said that whether or not lawmakers repeal the temporary withholding provisions, they will likely need to consider how a shift to a more permanent telework environment would affect cash flow to localities after the pandemic ends.
Without the provisions of H.B. 197, big cities which currently rely on income tax revenue from commuters could experience significant drops in their revenue streams if employees regularly begin working from home in a town without an income tax, Bernert said.
"I think any addressing of the problem here has to think about what it's going to do to revenues for municipalities in the state of Ohio," he said.
Representatives for Jordan, Roegner and Columbus Mayor Andrew Ginther did not immediately respond to requests for comment Tuesday.
Ohio is not alone in experiencing controversy over its method of taxing remote workers during the pandemic. New Hampshire officials and employers asked Massachusetts in August to withdraw a proposed regulation that would allow the state to continue to tax the wages of remote workers, citing potential constitutional issues with the proposed rule.
--Additional reporting by Abraham Gross and Jaqueline McCool. Editing by Joyce Laskowski.
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