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Ohio Telework Tax Sourcing Law Hit With More Challenges

By Paul Williams · 2021-02-09 18:43:15 -0500

Two Ohio residents lodged additional constitutional challenges Tuesday against a state law allowing municipalities to tax employees working remotely elsewhere during the novel coronavirus pandemic, seeking to compel Cincinnati and Columbus to issue them refunds of withheld taxes.

The residents separately asked the Franklin County Court of Common Pleas and the Hamilton County Court of Common Pleas to declare unconstitutional a law that temporarily deems remote work performed during the pandemic to occur at an employee's principal place of business. They also asked the courts to order the cities to issue refunds for any taxes withheld while the employees were working in other municipalities.

Both complaints argue that "allowing a municipality to tax employees without some fiscal relation between the municipality and the work performed violates the due process rights of those employees under the Fifth and Fourteenth Amendments to the U.S. Constitution." They also allege that local income tax sourcing shift is impermissible under the Ohio Constitution.

The residents are represented by the Buckeye Institute, a free-market research group that filed a similar challenge last year on behalf of three of its employees against Columbus. The parties are awaiting a ruling from a judge in the Franklin County Court of Common Pleas on the city's motion to dismiss that lawsuit.

Columbus has argued in that case that the law was enacted to simplify the income tax rules during the spread of COVID-19, the respiratory illness caused by the novel coronavirus, and that courts have held that states have broad sovereignty to institute tax policy within their borders as they see fit. The law's income tax sourcing provision will be in effect until 30 days after Ohio lifts its state of emergency that was issued amid the pandemic.

The new complaints argue that with local income tax sourced to Columbus and Cincinnati, where the employers are located, the cities where the employees are working remotely, Groveport and Blue Ash, are deprived of income tax revenue under the temporary law.

Cincinnati cited the temporary law in denying Josh Schaad, a worker in the financial services industry, an income tax refund for days that he worked from home in Blue Ash in 2020, despite previously granting a similar refund in years past, according to his complaint.

The other resident, Eric Denison, who works for the Ohio Department of Health, was ordered to work remotely in Groveport starting last March 17. But the city of Columbus "has made clear" that it won't refund any income taxes withheld while he worked in Groveport, even though it routinely issued refunds to him in the past for days that he worked elsewhere, according to his complaint.

"Not only has Ohio absurdly deemed work that was actually performed at home or elsewhere to have been performed in higher-taxed office locations, but many folks are now being forced to pay more in municipal income taxes for 2020 than they did in 2019, even though they spent less time working in Columbus and Cincinnati respectively," Robert Alt, the institute's president and chief executive officer said in a statement.

According to the complaints, Blue Ash's income tax rate is lower than both the 2.1% rate that Cincinnati imposed through September 2020 and the 1.8% rate applied after that, and Groveport's income tax rate of 2% is lower than Columbus' tax rate of 2.5%.

Alt, who is also representing the residents, told Law360 that the Denison case may be consolidated with the other case that's currently pending against Columbus, but that the challenge against Cincinnati may stand on its own because it's filed in a different county.

The new cases raise an additional question of whether the new tax sourcing system applies to residents who were working remotely "based on prior work arrangements and not — as the emergency rule purports to regulate — because of the governor's emergency declaration," Alt said.

Robin Davis, a representative of Columbus Mayor Andrew Ginther, declined to comment.

A representative of Cincinnati Mayor John Cranley could not immediately be reached for comment.

Denison and Schaad are represented by Jay R. Carson and Robert Alt of the Buckeye Institute.

Counsel information for the cities was not immediately available.

The cases are J. Eric Denison v. Megan Kilgore in her official capacity as Columbus City Auditor, in the Franklin County Court of Common Pleas, and Josh Schaad v. Karen Alder, in her official capacity as Finance Director of the City of Cincinnati, in the Hamilton County Court of Common Pleas. The case numbers were not immediately available.

--Additional reporting by Daniel Tay. Editing by Robert Rudinger.

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