The challenge by Manal Morsy, a resident of the Philadelphia suburb Blue Bell who works for a Cleveland company, is meritless because the law does not violate due process and Morsy falls under personal jurisdiction in Cleveland, the city told the Cuyahoga County Court of Common Pleas on Friday. The Ohio General Assembly is authorized to allocate municipal income tax between jurisdictions, the city said, asking the court to dismiss Morsy's challenge.
"The due process clause is not offended when the Ohio General Assembly legislates regarding someone who had been living in Ohio four, five days per week as well as working full time in Ohio until the pandemic began," the city said, adding that Morsy was "plainly subject to the authority of the Ohio General Assembly."
Morsy filed the suit against Cleveland after the city denied her tax refund request for days worked from home in 2020. According to her complaint, Morsy would typically fly into Cleveland on Sunday or Monday and fly back home to Blue Bell on Friday, but she has worked exclusively from home since March 2020 because of the pandemic.
Because 100% of her income is taxed in Pennsylvania, she said, Ohio's law results in her income being subject to double taxation. Morsy's claims echo those of several Ohio residents who have sued other Ohio cities. However, unlike those individuals, Morsy is an out-of-state resident.
The law's income-tax sourcing provision, created through the enactment of H.B. 197 last year, will be in effect until 30 days after Ohio lifts the state of emergency that was issued because of the pandemic. The Buckeye Institute, a free-market research group in Ohio, represents Morsy and other individuals who challenged the law.
According to the city, the due process clause does not limit Ohio's ability to determine tax policy regarding individuals living and working in Ohio for its municipalities. The state General Assembly is within its powers to enact statutes that authorize the extraterritorial application of local tax ordinances, the city said.
Additionally, the city asserted that Morsy is clearly subject to personal jurisdiction in Cleveland, saying that her presence in the city until March 2020 established minimum contacts with the city. The city also asserted that Morsy's employment activities being "directed into Cleveland" means that she had "purposefully availed herself of the privilege of working in Cleveland as to have established minimum contacts there."
Cleveland also noted that courts have signed off on other states' tax policies imposing income taxes on employees based on the location of the employer. The city cited a New York case in which that state's highest court upheld applying New York's state income tax to all wages earned by an individual who only worked in the state for part of the tax year.
Jay Carson, a senior litigator at the institute who represents Morsy, slammed the city's argument that it has personal jurisdiction over Morsy.
"If you look at what courts have done in terms of determining whether someone is a resident or whether a jurisdiction has 'in personam' jurisdiction over them, they look at 'do they actually live there,'" Carson told Law360.
The Buckeye Institute would have a strong case even if Morsy was not an out-of-state resident, but her status as a Pennsylvania resident further strengthens the case, Carson told Law360.
Notably, the Ohio Senate has passed a biennial budget bill that would, among other things, reverse the provisions of H.B. 197. Under the budget bill, the state would provide that H.B. 197's provisions were meant to offer withholding relief and were not to be used to determine an employee's location for municipal income tax liability. The bill would also end the withholding relief on Dec. 31, 2021. The legislature is currently discussing the budget bill to reconcile differences between the Senate's and the House of Representatives's versions.
The Buckeye Institute is supportive of the budget bill's proposed action on H.B. 197, Carson said. Should the Senate's proposal, which would apply to the entire period of the state of emergency, be enacted, Morsy as well as the Ohio residents challenging the law would likely get complete relief, Carson said.
In a separate case against Columbus involving institute employees in which a ruling on the city's motion to dismiss their complaint is pending, Columbus has argued that the law was enacted to simplify the income tax rules during the spread of COVID-19, the respiratory illness caused by the coronavirus. Additionally, Columbus said that courts have held that states have broad sovereignty to institute tax policy within their borders as they see fit.
Counsel for the city of Cleveland declined to comment.
Morsy is represented by Jay R. Carson and Robert Alt of the Buckeye Institute.
Cleveland is represented by Diane Menashe and Daniel Anderson of Ice Miller LLP.
The case is Dr. Manal Morsy v. Sharon Dumans et al., case number CV21-946057, in the Cuyahoga County Court of Common Pleas.
--Additional reporting by Abraham Gross and Paul Williams. Editing by Neil Cohen.
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