Ohio dismisses municipal income tax challenge

An Ohio appeals court recently affirmed a lower court’s dismissal of a taxpayer challenge to a temporary law that allowed Ohio cities to impose municipal income tax on employees working in other municipalities during the COVID-19 pandemic.¹ In Buckeye Institute v. Kilgore, the Tenth District of the Ohio Court of Appeals determined that the temporary income tax sourcing rule did not violate federal or state due process limitations placed on a municipality’s jurisdiction to tax, and that the rule was not an overreach of state legislative authority to administer municipal income taxes.

Background

On March 27, 2020, Ohio enacted emergency legislation (H.B. 197) providing various tax relief measures in response to the COVID-19 pandemic.² This law included temporary provisions that sourced the compensation of teleworking employees to the employee’s principal place of work, even if the employee was working at a location outside of the principal location.³ This measure was implemented to ensure that municipalities would continue to maintain expected revenues and to counter the fiscal impact of remote work from a municipal income tax perspective. The temporary provisions were set to expire 30 days following the end of Gov. Mike DeWine’s state of emergency declaration, first enacted in March 2020.⁴

While the temporary municipal income tax withholding rules were expected to expire in conjunction with the lifting of the governor’s state of emergency in July 2021, budget legislation enacted in June 2021 extended the temporary withholding rules through Dec. 31, 2021.⁵ Importantly, the legislation provided withholding relief for the 2021 tax year by allowing employees working remotely to claim refunds of tax paid to localities for days that the employee worked elsewhere during the year.⁶ However, the employee municipal income tax refund provisions do not apply to the 2020 tax year.⁷

Shortly after H.B. 197 went into effect, employees of The Buckeye Institute (Institute), a Columbus-based free-market policy organization, sought refunds of municipal income tax that Columbus deemed sourced to the city while they worked remotely from locations outside the city. After the city’s auditor declined to respond to the refund requests, the Institute in July 2020 filed a lawsuit in Ohio trial court. The lawsuit sought a declaratory judgment that H.B. 197 violated the Due Process Clause of the U.S. Constitution and that the Ohio legislature exceeded its authority to expand the taxing power of the state’s municipalities under the Ohio Constitution.⁸ The Institute asserted that there was no proper connection between the city of Columbus and the income it sought to tax, due to the fact that such income was earned outside the city.

Lower court ruling

In granting the city’s motion to dismiss the case,⁹ the trial court first noted that the Ohio legislature historically has regulated municipal taxes as part of a “statewide coordinated framework,” citing a rule that allows employers to withhold municipal income tax at the employee’s principal place of work for the first 20 days that the employee works elsewhere.¹⁰ The court also discussed that Ohio legislative enactments are entitled to a presumption of constitutionality.

The trial court next considered the Institute’s argument that municipalities may tax only income earned by nonresidents who work within their borders. The court examined two cases cited by the Institute in support of its argument, Hillenmeyer v. Cleveland Board of Review¹¹ and Willacy v. Cleveland Board of Income Tax Review.¹² Both cases restricted Ohio cities’ ability to impose taxes on certain nonresidents. However, the Court found that neither case addressed the Ohio legislature’s longstanding power to tax Ohio residents wholly within state borders, since both cases involved the interstate taxation of nonresidents. Recognizing the inherent authority of the state legislature to regulate municipal taxation when necessary,¹³ the Court concluded that the legislature acted within its authority to enact H.B. 197. Rather than expanding municipal taxing authority, the Court reasoned, the law instead provided uniform rules for the municipal taxation of teleworking employees during the “exigent circumstance” of the pandemic. The Institute appealed the decision to the Ohio Court of Appeals.

Appeals Court decision

On appeal, the Court of Appeals considered whether the Ohio legislature had the authority to enact H.B. 197, and whether the trial court erred in rejecting the Institute’s arguments based on Ohio case law. First, the Court noted that the judicial review of legislative enactments does not include policy judgments and carry a presumption of constitutional validity unless they are “clearly incompatible” with constitutional provisions. Next, the Court agreed with the city that the state legislature acted within its powers to enact H.B. 197 under the Ohio Constitution. Citing to Ohio case law, the Court noted that the legislature has broad authority to limit or restrict taxation at the municipality level.¹⁴ The Court discussed the unique circumstances under which H.B. 197 was enacted in order to “temporarily structure municipal income tax” to mitigate the economic impact of the pandemic on Ohio municipalities. Emphasizing the Ohio legislature’s authority to legislate in response to state-wide emergencies,¹⁵ the Court concluded that the legislature was within its authority to enact H.B. 197.

Finally, the Court addressed the Institute’s due process argument that municipal taxation of a teleworking employee’s income should be based on the location where the services are performed. The Court determined that none of the cases cited by the Institute addressed the question of whether an emergency law violates due process clause limitations on tax. Further, the Court observed that the cases did not involve the issue of whether remote work of an employee could be reasonably associated with the activity of an employer to support imposition of a municipal tax, “particularly in the context of a public health crisis.” Unpersuaded by the Institute’s reliance on the Hillenmeyer and Willacy cases, the Court concluded that H.B. 197 did not violate the due process limitations on the city’s jurisdiction to tax. Accordingly, the Court affirmed the judgment of the trial court.

Commentary

The Buckeye Institute decision marks the first ruling by an Ohio appellate court to address the constitutionality of Ohio’s temporary municipal income tax souring law. Noting the broad authority of the Ohio legislature to regulate municipal tax policy, the Court highlighted the flexible standard established by federal and Ohio case law for analyzing due process violations in the context of local income taxes. Given that other Ohio cities face similar legal challenges from remote workers over the constitutionality of H.B. 197 that are also being appealed, it will be interesting to see whether Ohio’s other appellate courts will come to different conclusions.

In any event, the validity of H.B. 197 may soon be considered by the Ohio Supreme Court, given that the Institute filed an appeal with that court on January 14, 2022.¹⁶ In its brief, the Institute argued that the appeals court’s decision conflicts with Ohio Supreme Court case law on municipal income taxation and that the case presents questions “of public and great general interest,” given the wide impact of the case on Ohioans working remotely. Although Ohio’s 2021 budget bill partially reversed the temporary municipal income tax sourcing law by allowing remote workers to file refund claims for income tax withheld in 2021 by cities based on their primary work location, the question remains open as to whether refund claims may be obtained for the 2020 tax year. On appeal, the Ohio Supreme Court will be required to weigh the constitutional concerns raised by the taxation of teleworking employees lacking a connection to their principal work location with a potentially significant loss in tax revenue if Ohio cities are required to pay out refunds for the 2020 tax year.

1 Buckeye Institute et al. v. Kilgore et al., No. 21-AP-193, Ohio Court of Appeals, Tenth Appellate District, Nov. 30, 2021.
2 H.B. 197, Laws 2020.
3 H.B. 197, § 29.
4 Executive Order 2020-01D, signed Mar. 9, 2020.
5 H.B. 110, § 610.115, Laws 2021, amending H.B. 197, § 29. For further discussion, see GT SALT Alert: “Ohio enacts biennial budget bill with tax changes.”
6 H.B. 110, § 757.40.
7 H.B. 110, § 757.40(C).
8 The Buckeye Institute filed similar complaints alleging the same issues on behalf of affected employees in other Ohio trial courts. See, e.g., Denison v. Kilgore, No. 21-CV-00848, Franklin County Court of Common Pleas, filed Feb. 2021; Schaad v. Alder, No. A-2100517, Hamilton County Court of Common Pleas, filed Feb. 2021.
9 Buckeye Institute v. Kilgore, No. 20-CV-4301, Franklin County Court of Common Pleas, Apr. 27, 2021.
10 OHIO REV. CODE § 718.011.
11 37 N.E.3d 1248 (Ohio 2015). In Hillenmeyer, the Ohio Supreme Court ruled that Cleveland’s method for calculating income taxes on nonresident professional athletes was unconstitutional.
12 151 N.E.3d 561 (Ohio 2020). In Willacy, the Ohio Supreme Court found that Cleveland may impose tax on a retired city employee’s stock options when exercising them after moving to Florida. For further discussion of the Willacy case, see GT SALT Alert: “Ohio upholds municipal tax of stock options.”
13 Citing Cincinnati Imaging Venture v. City of Cincinnati, 686 N.E.2d 528 (Ohio Ct. App. 1996).
14 City of Athens v. McClain, 168 N.E.3d 411 (Ohio 2020) (citing OHIO CONST. art. XVIII, § 13). For further discussion of the Athens case, see GT SALT Alert: “Ohio considers city net profits tax regimes.”
15 OHIO. CONST. art. II, § 1d.
16 Buckeye Institute et al. v. Kilgore et al., No. 2022-0052, Ohio Supreme Court, appeal filed Jan. 14, 2022.

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