April 2, 2021
Ohio Board of Tax Appeals holds municipality cannot impose income tax on portion of employee's work outside of municipality
In Aul Jones v. City of Massillon (Aul Jones),1 the Ohio Board of Tax Appeals (Ohio BTA) held that an employee cannot be subjected to a municipality's income tax on the portion of work the employee performed outside of the municipality.
The Ohio BTA's decision is instructive because it differentiates between an employer's municipal income tax withholding under Ohio Revised Code Chapter 718 2 and a municipality's ability to impose individual income tax. The ruling may also be instructive in applying recently enacted Section 29 of Ohio House Bill 197 (HB 197) (an uncodified section of Ohio law). This provision temporarily changed Ohio municipal income tax rules by stipulating that any day in which an employee performs personal services at a location, including the employee's home, is deemed to be a day performing personal services at the employee's principal place of work.3
Ohio BTA decision
The taxpayer (Aul Jones) was an employee of the United States Postal Service (USPS) and resided in Louisville, Ohio. Aul Jones reported to work each day at the USPS office in Massillon, Ohio, where she performed some duties and then drove a postal vehicle to deliver letters and packages to addresses outside of Massillon's incorporated boundaries (i.e., townships where no municipal income taxes are imposed). Due to federal exemption, the USPS was not obligated to withhold municipal income taxes from her wages. The parties stipulated that Aul Jones spent 40% of her time performing services at the USPS's Massillon office and 60% of her time working outside Massillon. Massillon assessed Aul Jones for underpaying municipal individual income taxes. Aul Jones appealed and the municipal board of appeals affirmed the assessment.
Massillon asserted that it was entitled to tax 100% of Aul Jones's wages because the Massillon USPS office was her "principal place of work" as defined in Ohio Rev. Code 718.011(A)(7).4 Aul Jones argued that Ohio Rev. Code 718.011 relates to employer withholding and that Massillon could only impose tax on income received by the nonresident for work performed in the municipality pursuant to Ohio Rev. Code 718.01(B)(2).5
The Ohio BTA said that Ohio Rev. Code 718.04(A)6 allows a municipality to impose both an income tax and a withholding tax. While related, the two taxes are distinct with each having its own set of requirements, the Ohio BTA said. Ohio Rev. Code 718.011 references municipal income tax withholding, but did not, in the Ohio BTA's opinion, define an employee's income tax liability. The Ohio BTA observed that Massillon's argument conflated the employer withholding rules with its authority to impose its municipal income tax on a nonresident individual. The BTA ordered that the assessment be canceled, finding that Ohio Rev. Code 718.04 only allowed Massillon to tax income earned for work done in the municipality.
The Ohio BTA's decision is not an outlier. The Ohio Supreme Court's decisions in the so-called "jock tax" cases7 strongly suggest that a nonresident cannot be subjected to municipal income tax when not physically working in the municipality. Accordingly, the Ohio BTA's decision, coupled with these prior decisions, create uncertainty around temporary state legislation HB 197, which was enacted in response to the COVID-19 emergency and is being interpreted to allow the imposition of municipal income tax on employees even if they are not physically working in the municipality.
HB 197 — purpose, judicial and legislative challenges
HB 197 was enacted in March 2020 in response to the COVID-19 emergency orders when many businesses required employees to work from their homes. Section 29 of HB 197,8 backed by the Ohio Chamber of Commerce, was intended9 to prevent the administrative burden of withholding and remitting tax to each employee's municipality of residence and, instead, allowed the employer to withhold based on the employee's principal place of work. Section 29 of HB 197 does not expressly address whether employees' wages are subject to municipal income tax by their principal place of work or place of residence. The reference in Section 29 of HB 197 to Ohio Rev. Code Chapter 718 may be read to effectively adopt a "convenience of the employer rule," similar to those used by several states, including New York, that imposes nonresident income tax without regard to physical presence in the state.
Based on the cases discussed above, Section 29 of HB 197 may be challenged because those cases indicate that municipalities may not impose tax when the employee is not physically working there. Section 29 of HB 197 is being further challenged by the Buckeye Institute, which filed a lawsuit asserting the US and Ohio Constitutions do not authorize the Ohio General Assembly to expand the taxing power of municipalities beyond established limits (Tax Alert 2020-2098). In addition, employees living in a municipality that imposed their municipal income taxes at a lower tax rate than the employees' principal place of work location are seeking refunds of the tax that their employers withheld and remitted to the municipality of the employees' principal place of work. Some cities, such as Cincinnati and Columbus, have indicated that any refunds requested will be denied. The Regional Income Tax Agency (RITA) has indicated they will receive employee refund claims for its member cities but will hold them in abeyance pending the outcome of the Buckeye Institute litigation.
In addition to the judicial challenges, the Ohio General Assembly is considering two bills — Senate Bill 97 and House Bill 157. These bills would repeal Section 29 of HB 197 and immediately end the temporary employer withholding relief. Repealing Section 29 of HB 197 would create a significant and immediate administrative burden10 for many employers because they would have to implement processes for tracking where employees are working and withholding and remitting Ohio municipal income taxes. Both of these bills have been referred to the respective chambers' Ways and Means Committees.
The Ohio BTA's decision in the Aul Jones case follows prior Ohio court decisions holding that a municipality cannot impose income tax on a nonresident individual who is not physically performing services in that municipality. The Aul Jones decision will likely be cited in challenges to how Section 29 of HB 197 is being applied to individual taxpayers seeking refunds of taxes from municipalities where they are not physically working. Businesses should monitor these judicial challenges as well as the progress of proposed legislation that, if enacted, would repeal Section 29 of HB 197. Businesses should consider working with their government relations teams so they have a voice regarding adequate lead times for adapting new withholding requirements (and possibly municipal net profits tax implications) that would result from a repeal of this provision.
1 Aul Jones, et. al. v. City of Massillon, Dec. and Order, Ohio BTA Case No. 2018—2137 (March 29, 2021).
2 Ohio Rev. Code Chapter 718 governs municipal income taxation.
3 HB 197, Sec. 29. ("Notwithstanding [Ohio Rev. Code 718.011], and for the purposes of [Ohio Rev. Code] Chapter 718 … during the period of the emergency declared by [Ohio Gov.] Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, any day on which an employee performs personal services at a location, including the employee's home, to which the employee is required to report for employment duties because of the declaration shall be deemed to be a day performing personal services at the employee's principal place of work.")
4 Ohio Rev. Code 718.011(A)(7) defines, in relevant part, "[p]rincipal place of work" as "the fixed location to which an employee is required to report for employment duties on a regular and ordinary basis."
5 Ohio Rev. Code 718.01(B)(2) defines "income" to include " … compensation … received by the nonresident for work done, services performed or rendered, or activities conducted in the municipal corporation … ."
6 Under Ohio Rev. Code 718.04(A), "a municipal corporation may levy a tax on income and a withholding tax if such taxes are levied in accordance with the provisions and limitations specified in this chapter."
7 Hillenmeyer v. Cleveland Board of Review, 144 Ohio St.3d 165 (2015) and Saturday v. Cleveland Board of Review, 142 Ohio St.3d 528 (2015) (both addressing the apportionment of municipal income taxes on professional football players playing in the city of Cleveland); see also, City of Springfield v. All American Food Specialists, Inc., 85 Ohio App.3d 464, 2nd Appel. Distr. Ohio Ct. of App. (Mar. 26, 1993).
8 See footnote 3 for the relevant text to HB 197, Sec. 29.
9 Section 29 of HB 197 also suggests, due to its reference to Ohio Rev. Code Chapter 718 generally, that an employer is not doing business in a municipality if the employer's only connection to the municipality is its employee temporarily working from home due to the COVID-19 emergency declaration, which would protect employers against the imposition of municipal net profits tax. Section 29 of HB 197 also benefitted cities that had large employer presences by maintaining their tax base pending a return to normal after the COVID-19 emergency ended.
10 Repeal of Section 29 of HB 197 would also create nexus issues for employers that have people working from home in municipalities where it had not been filing municipal net profits tax returns and would result in revenue losses for municipalities that relied on the municipal income taxes from nonresidents working at employer locations in those municipalities.