February 12, 2020 Ohio Supreme Court rules stock options earned in Cleveland during employee's residency are taxable even though the employee moved to Florida In Willacy v. Cleveland Bd. of Income Tax Rev.,1 the Ohio Supreme Court (Court) held that the City of Cleveland can tax a former resident individual's income from stock options that were earned when the individual lived and worked in Cleveland but were exercised after the individual retired and relocated to Florida. Background In 2007, the taxpayer, Ms. Willacy, was issued stock options as compensation for employment services within Cleveland. Following her 2009 retirement, the taxpayer moved to Florida, and in 2014–2015 she exercised some of these options. As required by Cleveland regulatory law, the former employer withheld and remitted municipal income tax to the city. The taxpayer sought refunds from Cleveland. The refund claims were denied by the local review board and the Ohio Board of Tax Appeals. On appeal to the Ohio Supreme Court, the taxpayer argued that Cleveland's tax laws violate her due process rights, among other arguments. The Court disagreed, holding there was sufficient connection between the taxpayer and Cleveland as the tax was imposed on income arising from work performed in the city. Further, because all income was compensation for her work, it was fairly attributable to her activity in Cleveland. In addition, the Court rejected the taxpayer's argument that there is a due process issue because of the time gap between when the income-producing work was performed and when the options were exercised. The Court reasoned that the income-producing event need not coincide with the taxable event. A dissenting opinion would have concluded that, because of the passage of years, that minimal connection was lacking. Ernst & Young LLP insights Compensation that accrues for longer than a payroll period before payment is referred to as "trailing compensation." Trailing compensation includes bonuses, commissions, pay in lieu of time off, severance pay, equity compensation (i.e., stock plans) and nonqualified deferred compensation (unless excluded from state or local income tax as specified retirement income under the limitations imposed by federal law (P.L. 104-95 (codified at 4 U.S.C. Section 114))). Numerous state and local taxing authorities require income tax and withholding on the portion of trailing compensation that was earned within the jurisdiction regardless of where the employee lives or works when it is paid. Apportionment rules can vary by jurisdiction and type of wage payment. The taxation of trailing compensation rules also can vary between the state and its localities. For instance, in 2014, the Indiana Department of Revenue ruled that state income tax and withholding, but not county income tax, applies to bonuses that are earned within the state but paid to employees who no longer reside in the state. (Indiana Rev. Ruling 2014-02, Oct. 1, 2014.) Compare Indiana's county tax rules for trailing compensation paid to nonresidents to New York's local tax requirements. Income tax withholding isn't required by New York City but is required by Yonkers. (NY Pub. NYS-50.) As part of an overall taxability and multistate payroll tax compliance review, employers should confirm the rules pertaining to training compensation in all state and local jurisdictions where employees have currently and historically provided services. For more information on these and other state and local income tax withholding matters, see our special report, Crossing US borders. ———————————————
——————————————— 1 Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No. 2020-Ohio-314 (Ohio S.Ct. Feb. 4, 2020). ——————————————— EY Payroll News Flash
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