August 18, 2020
Ohio COVID-19 local nonresident income tax legislation faces challenges
Earlier this year, legislation was enacted under Section 29 of HB 197 that, effective March 9, 2020, and for 30 days following the conclusion of the state's emergency declaration, temporarily changes the Ohio municipal income tax rules by stipulating that any day in which an employee performs personal services at a telework location, including the employee's home, is deemed to be a day performing personal services at the employee's principal place of work.
HB 197 was backed by the Ohio Chamber of Commerce so that businesses would not be burdened with the task of changing Ohio local income tax withholding settings during the COVID-19 emergency.
The provision has the same result as the so called "convenience of the employer rule" adopted by several states, such as New York, that impose nonresident income tax without regard to physical presence in the state.
Now, the law faces a legal challenge and a bill has been introduced to the Ohio legislature to repeal it.
Ohio legal challenge
On July 2, 2020, the Buckeye Institute, an independent research and educational institution whose mission is to the advance free-market state public policy, filed a lawsuit challenging HB 197 on the basis that it violates the Fifth and Fourteenth Amendments to the US Constitution and that the Ohio Constitution does not authorize the Ohio General Assembly to expand the taxing power of the state's municipalities beyond established limits.
Within the court filing, the Buckeye Institute stated that by first prohibiting the plaintiffs from working from their City of Columbus office, and then deeming that they are working within the City of Columbus for taxing purposes, "offends the basic principles of equity, and the Due Process requirements of the US and Ohio constitutions."
Ohio bill to repeal HB 197
In August 2020, Ohio Senator Kristina Roegner (R) introduced SB 352 to the Ohio General Assembly that would repeal Section 29 of HB 197. The bill has no cosponsors. If enacted, the Ohio local income tax rules would return to the prior requirement that nonresidents pay the tax only in localities where they perform services.
Ernst & Young LLP insights
The temporary imposition of nonresident income tax on teleworkers without physical presence during the COVID-19 emergency is facing heightened scrutiny, increasing the likelihood of federal legislation.
U.S. House of Representatives Chris Pappas (D-NH) and Jim Himes (D-CT) introduced legislation under H.R. 7968 that would prevent states like Massachusetts from imposing state personal income tax on employees who are teleworking outside the state. Specifically, the bill would clarify that workers are required to pay income tax only in the state where they are physically present when the income is earned. The proposal came within days of New Hampshire Governor Chris Sununu announcing that he had directed the New Hampshire Department of Justice to investigate whether the COVID- 19 emergency regulations concerning income tax on teleworkers published by the Massachusetts Department of Revenue result in the improper collection of personal income tax from affected New Hampshire residents. New Hampshire does not currently impose a personal income tax on wages.
Earlier this year, Senator John Thune (R-SD) and Senator Sherrod Brown (D-OH) introduced legislation (S. 3995) to limit the circumstances where teleworkers and short-term business travelers can be subject to nonresident income tax. The provisions of S.3995 were included in the Senate Republican's Health, Economic Assistance, Liability Protection and Schools (HEALS) Act proposal for the next COVID-19 relief bill.
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