The Buckeye Institute told the Franklin County Court of Common Pleas in a brief filed Thursday that a temporary law deeming remote work performed during the pandemic to occur at an employee's principal place of business created an extraterritorial tax in violation of the U.S. Constitution. The institute, joined by three of its employees, urged the court to deny a motion from Megan Kilgore, the city of Columbus' auditor, to dismiss the case.
Kilgore argued on Aug. 25 that the due process clause didn't prohibit Ohio from crafting a law that regulated its intrastate tax policy. But the institute said that state and local laws, as well as precedent, have established restrictions on local income taxes. Municipalities may tax only income earned by residents who live there or income earned by nonresidents who work within their borders, the institute said, adding that those two facts don't apply to the present dispute.
"Neither circumstance is present here, where the city of Columbus, pursuant to the language of H.B. 197, claims the unprecedented and extraordinary power to tax the income of nonresidents for work performed outside of the city," the institute said.
H.B. 197, enacted in March, was a sweeping bill passed in response to the spread of the novel coronavirus, which causes the respiratory illness COVID-19. The law's municipal 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.
The institute, which is based in Columbus, and its employees challenged the law in June 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.
In response to Kilgore's arguments that the U.S. Supreme Court's 2018 Wayfair ruling counters the institute's claim that the due process clause bars taxing individuals who aren't physically present in a taxing jurisdiction, the institute said that case was inapplicable to the present dispute.
Wayfair abolished the physical presence standard for sales and use taxes but was mainly a commerce clause dispute rather than a due process challenge, the institute said, noting that Kilgore also conceded that point. Furthermore, the Ohio Supreme Court didn't cite Wayfair in February when it upheld Cleveland's tax on stock options that a former employee, Hazel Willacy, received while working there and cashed after retiring and moving to Florida, the institute said.
"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," the institute said. "Its silence on this issue is telling."
Kilgore argued that H.B. 197 simplified the administration of the local tax laws by maintaining the status quo for remote workers, who were accustomed to paying income taxes to the city that their employer was located in when traveling to the office before the pandemic. Observers have also noted that cities that rely on income taxes from commuters could experience budget difficulties if the local income tax sourcing was shifted to other towns.
The institute acknowledged that striking down the temporary tax sourcing provision would "result in difficulties" for state and local governments in Ohio. However, it argued that those concerns were not material to the facts of the case because "constitutional rights that are subject to government convenience are no rights at all."
Robert Alt, the institute's president and chief executive officer, told Law360 on Friday he hopes that the court will throw out the motion to dismiss and allow the case to proceed on the merits, saying a ruling on the current law would have broad implications across the state.
Denting the dismissal motion "would be a substantial step toward validating the rights of employees who are working from home and being unconstitutionally taxed," said Alt, who also represents the institute in the case.
Two identical bills seeking to repeal the local tax-sourcing provisions of H.B. 197 were introduced in the state Legislature in August: H.B. 754 and S.B. 352. Neither bill has yet to receive a committee hearing.
Counsel for Kilgore did not immediately respond to a request for comment Friday.
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.
--Editing by Neil Cohen.
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