In a complaint filed Monday, Mark Boles, Nicholas Oar and Kos Semonski say the city and its revenue collector, Gregory Daly, violated the state and U.S. constitutions by limiting nonresident refunds of the city's 1% earnings tax on salaries, wages and other compensation. The individuals argue the city was "brazenly and unlawfully" keeping their money.
The individuals state that starting in 2020, the city issued guidance and required additional documentation for refund requests that effectively limited tax refunds to nonresidents traveling for work and excluded individuals teleworking outside the city, including those teleworking due to the COVID-19 pandemic. The city subsequently denied the individuals' request for refund for that year, according to the individuals, even though some had received the refund in prior years.
Distinguishing between nonresidents working outside the city and those traveling outside the city for business purposes was an arbitrary distinction without rational basis, the individuals claim, and the city continues to violate their individual rights by denying refunds for tax already paid through withholdings by their employers.
Specifically, the complaint alleges that the city violated the individuals' substantive due process rights under the Fourteenth Amendment of the U.S. Constitution by abusing executive power and acting arbitrarily or, alternately, by acting with deliberate indifference toward their property rights.
The city also breached the individuals' Fourth Amendment right of protection against unreasonable search and seizure, the individuals argue, adding that it was unreasonable for the city to retain earnings tax for days they did not work in the city.
"Defendants' retention of earnings tax withholdings even after plaintiffs and others have filed a proper application for a refund is no different than police officers pocketing money from suspect during arrests," the individuals said.
Additionally, the individuals argue that the city's actions violated the Missouri Constitution's Hancock Amendment, which requires voters to approve any additional taxes from political subdivisions. The policy change is both an unapproved new tax and an expansion of the tax base, they claim, because work outside the city by nonresidents was previously untaxed and the tax base did not include days worked outside city bounds.
Boles, Oar and Semonski seek to represent a class of nonresidents of St. Louis whose employers withheld the tax and paid it from Jan. 1, 2020, onward and who have been denied similar refund requests. The individuals are seeking damages equal to the tax paid for days worked out of the city and attorneys fees, and are asking the court to preliminarily enjoin the city to reinstate the old requirements for seeking a refund.
The city's guidance has also raised concerns for state lawmakers, prompting legislation that would bar cities from imposing an earnings tax on workers who previously worked in the city but are currently telecommuting from outside the city.
An official from the St. Louis collector of revenue said in a committee hearing last week that the city is within its rights to tax teleworkers if their companies still operate within the city because those workers are still generating revenue for a company in the city.
Mark Milton, who represents the individuals, told Law360 on Tuesday that the intent of the earnings tax when it was enacted by St. Louis in the 1950s was to tax nonresidents for the work they do in the city, and that the city's policy change went beyond that goal.
"It's not what the voters intended and it's not what the state legislature intended when they authorized the city to enact an earnings tax," he said.
Milton noted that the burden of the tax has increasingly fallen on nonresidents as the city's resident population has declined over decades and that the change in the refund requirements exacerbated issues related to the pandemic, when many nonresidents worked from home due to the COVID-19 pandemic.
"Realistically, how many people could certify that they traveled for business in 2020? Probably not very many," he added.
Bevis Schock, another attorney representing the individuals, has challenged St. Louis taxes in the past. In an email to Law360, Schock said the current lawsuit has no relation to other cases.
The offices of the city and the revenue collector, Daly, did not immediately respond to requests for comment.
Boles, Oar and Semonski are represented by Mark Milton of the Milton Law Group and by Bevis Schock.
Counsel for the City of St. Louis and Daly was not immediately available.
The case is Mark Boles et al. v City of St. Louis et al., case number 4:21-cv-00378, in the U.S. District Court of the Eastern District of Missouri.
--Additional reporting by Daniel Tay. Editing by Vincent Sherry.
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