The due process clauses of the U.S. and Ohio constitutions don't curtail the state's ability to make tax policy decisions that affect only its residents and corporations, city Auditor Megan Kilgore argued in a Tuesday motion. She asked the Franklin County Court of Common Pleas to dismiss a lawsuit from the Columbus-based Buckeye Institute, a free-market research group, and three of its employees against a law deeming remote work performed during the pandemic to occur at an employee's principal place of work.
Kilgore argued that courts have held that states have broad sovereignty to institute tax policy within their borders as they see fit, and that the temporary income sourcing law only affects only Ohio workers and businesses.
"Simply put, the due process clause does not limit the ability of the state of Ohio to determine intrastate tax policy in taxing an Ohio corporation and Ohio residents," the motion said.
The institute and its employees alleged in a July complaint that a law enacted in March 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."
The complaint was lodged after Kilgore didn't respond to letters from the employees seeking refunds of any withholding amounts that Columbus deemed to have been sourced to the city while they worked remotely during the pandemic, according to court documents.
The provision at issue was included in H.B. 197, a sweeping bill passed in response to the spread of the novel coronavirus, which causes the respiratory illness COVID-19. The law's income tax sourcing provision will be in effect until 30 days after Ohio lifts its state of emergency that was issued due to the pandemic.
Kilgore argued that the law was put in place to clarify how cities' income tax rules would be enforced amid the pandemic "to preserve the status quo and avoid undue compliance burdens and confusion."
The institute's claim that the due process clause bars imposing tax on an individual who is not physically present in the taxing jurisdiction when working has been rebuffed by the U.S. Supreme Court several times, including in its 2018 Wayfair opinion and 1992 Quill ruling, Kilgore argued.
She acknowledged that Wayfair, which abolished the physical presence standard for sales and use taxes, was more a commerce clause case rather than a due process dispute. But Kilgore said the due process arguments that failed in Wayfair and Quill were stronger than the institute's claims because the sales tax at issue in those cases created compliance obstacles, whereas H.B. 197 simplified the tax rules for Ohio localities.
Additionally, Kilgore said H.B. 197 was consistent with the bevy of tax rules that states have put in place during the pandemic "to maintain the status quo" of remote workers. Those rules include some jurisdictions not considering remote workers to create nexus for an employer and a proposed regulation in Massachusetts that would still consider certain remote workers to be working inside the state, she said.
"For those fortunate enough to earn income, this tax policy decision simply left them in the same municipal income tax position as if the pandemic had never occurred," Kilgore said of Ohio's law, adding that the institute's remedy for its claims lies with the Legislature instead of the courts.
Robert Alt, the institute's president and chief executive, rebuked Kilgore's arguments in an email to Law360 on Wednesday, saying the case centers on what is permitted under the U.S. Constitution rather than a dispute over the state's policy choices.
"The city of Columbus makes the outrageous claim that constitutional protections do not apply with the same force during times of emergency. The Supreme Court disagrees," said Alt, who also represents the institute in the case. "It has found that even terrorists are entitled to due process protections during wartime. So why is it that the city of Columbus would deprive hardworking Ohioans of the same constitutional protections we afford terrorists?"
The Ohio Supreme Court "has long found that due process protections apply to intrastate tax disputes," Alt added.
A bill, S.B. 352, that would repeal the income tax withholding elements at issue in H.B. 197 was introduced Aug. 11. The Senate has yet to meet since the bill was filed, but is scheduled to convene again next week.
The taxation for remote workers during the pandemic has emerged as a hot-button issue in recent months. New Hampshire's governor and state attorney general have asked Massachusetts to withdraw its regulation allowing the state to continue to tax the wages of remote workers, citing potential constitutional issues with the proposed rule.
Income tax nexus and withholding questions have also caught the attention of the Multistate Tax Commission, as Richard Cram, the director of the MTC's national nexus program, said in July that state developments are worth monitoring and that concerns over the varying rules may linger after the pandemic ends.
Counsel for Kilgore did not immediately respond to a request for comment Wednesday.
The Buckeye Institute and its employees are represented by Jay Carson of Wegman Hessler and its own Robert Alt.
Columbus Auditor Megan Kilgore is represented by Diane Menashe, Daniel Anderson and Mark J. Richards of Ice Miller LLP.
The case is The Buckeye Institute et al. v. Megan Kilgore, Columbus City Auditor et al., case number 20CV-4301, in the Franklin County Court of Common Pleas.
--Additional reporting by James Nani and Jaqueline McCool. Editing by Neil Cohen.
Correction: A previous version of this story misstated the name of a firm. The error has been corrected.
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