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Ohio Localities Assail Bill To Undo Local Tax Sourcing Shift

By Paul Williams · April 20, 2021, 8:16 PM EDT

Ohio local government representatives pushed back Tuesday against a bill that would undo a law that permits cities to temporarily impose income tax on remote workers, saying the legislation would lead to budget crunches by allowing retroactive refund claims.

Representatives of several municipalities told the state House Ways and Means Committee that H.B. 157 could have severe fiscal consequences for cities if lawmakers revoke a 2020 law that temporarily deems remote work performed during the coronavirus pandemic to occur at an employee's principal place of work. The bill would specify that the income tax change was meant to provide withholding tax flexibility for businesses but not alter the determination of an employee's municipal income tax liability, and sunset the withholding relief on Jan. 1, 2022.

Ashley Ringle, the director of communications for the Ohio Municipal League, told the panel that the bill is an "attempt to rewrite the original intent of the temporary language."

"Issuing refunds for a closed tax year could be devastating to municipalities, who were protected by the language in [the current law] and could have long-lasting negative consequences to the financial solvency of municipalities," she said.

The temporary change to the income tax rule was enacted through H.B. 197 last year and will be in effect until 30 days after Ohio lifts the state of emergency that was issued because of the pandemic. The law has been at the center of a series of legal challenges from teleworkers who claim cities have been using the statute to unconstitutionally tax them while they have worked remotely and haven't traveled to their employer's office during the pandemic.

If the bill is enacted, it could lead individuals to file tens of thousands of refund claims that cities didn't account for in 2020 budgets that have already been adopted, Keary McCarthy, executive director of the Ohio Mayors Alliance, told the committee.

But the committee's chairman, Rep. Derek Merrin, R-Monclova Township, noted that the bill doesn't require refunds to be issued but rather lets individuals decide whether to seek refund claims. McCarthy responded that while the refunds wouldn't be mandatory, he believes municipalities could be caught flat-footed if a deluge of retroactive refund requests were submitted.

"What we're fearful of is the unknown," he said.

Most members of the Republican-controlled panel appeared unmoved by the arguments from municipal representatives. The committee did not take action on the bill but seemed to favor it as a way to correct a policy of allowing cities to tax income earned from remote workers outside their borders.

"What we keep on hearing is there's a negative impact to the cities," Rep. Mark Fraizer, R-Newark, said. "But there's a negative impact to the taxpayer, who either has to pay double taxation or taxation to somewhere where taxes aren't owed."

Testifying in support of the bill on behalf of the Ohio Society of CPAs, Tom Zaino told the panel that he believed the fiscal impact of the potential refunds could be overstated. He said that many taxpayers may not go through the trouble of filing refund claims from the cities because they could have to pay a portion or all the refunded taxes to their towns of residence instead.

Zaino said the society supports a provision in the bill that would specify that a business' payroll factor for apportionment of a city's net profit tax would remain at the principal place of work. He also said that the Jan. 1, 2022, sunset date for withholding relief for businesses would allow them time to set up systems that could keep track of where their employees may work remotely in the future to comply with more municipal income tax withholding requirements.

The bill would also bar employers from being assessed penalties or interest from March 9, 2020, to Dec. 31, 2021, for failing to withhold the proper amount of local income taxes if the taxes were withheld based on the location of an employee's principal place of work.

But Ringle, from the municipal league, said that businesses could find it administratively onerous to certify individual employees' requests for a refund based on days that they worked remotely for tax years 2020 and 2021. She said that while the league supports the bill's sunset date, the courts should decide whether refunds are allowed for those years under the income tax changes in H.B. 197.

The committee voted 10-6 along party lines to table amendments from the panel's ranking member, Rep. Lisa Sobecki, D-Toledo, to push the sunset date to Jan. 1, 2023, and remove the clarification that the temporary withholding rule wasn't meant to change the sourcing of a nonresident's local income taxes. Toledo is one of the cities being sued for not issuing refunds to nonresidents based on the local income tax provision in H.B. 197.

Sobecki told Law360 that she would rather see lawmakers wait until the pandemic subsides before addressing the local tax issue and that the judiciary should weigh in on whether the tax sourcing shift is constitutional. She added that she believes the bill's fiscal impact on cities "would be devastating."

"The tax year is already closed and many cities have closed the books, so to speak. They've already paid employee salaries, paid for fire and police protection," Sobecki said. "Reversing the temporary emergency provision created to maintain the status quo is not sound policy."

The bill's primary sponsor, Rep. Kris Jordan, R-Ostrander, did not immediately respond to a request for comment.

--Editing by Neil Cohen.

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