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On April 27, 2021, the Court of Common Pleas of Franklin County (court) found in The Buckeye Institute v. Kilgore¹ that Section 29 of 2020 Ohio House Bill 197 (Section 29 of HB 197) did not violate the Ohio and US Constitutions. Section 29 of HB 197 temporarily deems remote work performed by an employee working from home during the COVID-19 pandemic emergency to occur at the employee's principal place of work.

The Buckeye Institute, which brought the case, has appealed the decision to Ohio's 10th District Court of Appeals.² This decision comes amid other challenges to Section 29 of HB 197 and legislative efforts to modify its provisions.

Background of Section 29 of HB 197

Section 29 of HB 197 was enacted in March 2020 in response to Ohio Governor Mike DeWine's COVID-19 emergency order requiring many employees work from home. Section 29 of the uncodified law provided:

Notwithstanding section 718.011 of the [Ohio] Revised Code, and for the purposes of Chapter 718 of the [Ohio] Revised Code, during the period of the emergency declared by [Ohio] 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.

Section 29 of HB 197 was intended to alleviate the administrative burden on Ohio employers of withholding and remitting tax to the municipality where each employee resided and, instead, allow an employer to withhold taxes based on the employee's principal place of work. Section 29 of HB 197 did not expressly address which jurisdiction (place of residence vs. principal place of work) could tax a teleworking employee's wages, giving rise to several employee challenges, such as those made by The Buckeye Institute.

The Buckeye Institute challenge

On July 2, 2020, The Buckeye Institute, an independent research and educational institution, filed this lawsuit³ in the Court of Common Pleas of Franklin County seeking a declaratory judgment that (1) Section 29 of HB 197 violates the Fifth and Fourteenth Amendments to the US Constitution and (2) the Ohio Constitution does not authorize the Ohio General Assembly to expand the taxing power of the state's municipalities beyond established limits. The Buckeye Institute alleged that prohibiting the plaintiffs from working from their offices in Columbus and then deeming that they are working within Columbus for taxing purposes "offends the basic principles of equity, and the Due Process requirements of the US and Ohio constitutions."

In dismissing The Buckeye Institute's complaint, the court first noted the precedent for Section 29 of HB 197, citing existing law⁴ allowing an employer to withhold income tax for the employee's principal-place-of-work municipality for the first 20 days that the employee works in another municipality. The court also noted that enactments by the Ohio General Assembly enjoy a presumption of constitutionality.

The court then turned to The Buckeye Institute's substantive arguments, the first being that municipalities may tax only income earned by residents or income earned by nonresidents who work within their borders. In support of this argument, The Buckeye Institute cited Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623 and Willacy v. Cleveland Bd. of Income Tax Rev., 159 Ohio St.3d 383, 2020-Ohio-314. The court determined that reliance on these cases was misplaced as both involved interstate taxation. The court said that "[n]either Hillenmeyer nor Willacy address the Ohio General Assembly's longstanding power to tax Ohio residents wholly within Ohio's borders, or to set appropriate coordinating limitations between Ohio municipalities for an efficient, organized and coordinated intrastate taxing schema." The court also rejected the argument that Section 29 of HB 197 impermissibly expanded⁵ the Ohio General Assembly's municipal taxing powers. The court said that Section 29 of HB 197 "is an express limitation on municipal latitude in taxation, providing uniform rules regulating the circumstances in which municipalities can and cannot tax."

The court's decision focused on the withholding obligations in Section 29 of HB 197. The court did not address, however, a taxpayer's ability to receive a refund from the city where the primary workplace is located. Employees living in a municipality that imposes lower income taxes than the municipality in which they work could seek refunds of the tax that their employers withheld and remitted to their workplace municipality. Some cities, such as Cincinnati and Columbus, have indicated that any refund requests will be denied. The Regional Income Tax Agency (RITA) has indicated it will receive employee refund claims for its member cities but will hold them in abeyance pending the outcome of The Buckeye Institute litigation.

The court did not consider the recent decision by the Ohio Board of Tax Appeals (Ohio BTA) in Aul Jones v. City of Massillon, Ohio BTA No. 2018—2137 (March 29, 2021). In Aul Jones, the Ohio BTA held that a municipality could not tax an employee's income from work performed outside of the municipality (see Tax Alert 2021-0695). An open question raised by Aul Jones is whether the Ohio General Assembly could enact legislation that would effectively allow a municipality to tax an employee's income from worked performed outside the municipality, even though the municipality could not impose the tax itself. In The Buckeye Institute decision, the court noted that the Ohio General Assembly could only limit municipal taxing powers. If a municipality, as held in Aul Jones, lacks the power to tax income from work not performed within its borders, then is the Ohio General Assembly's implicit imposition of such a tax an impermissible expansion of municipal taxing authority?

Legislative activity

There has also been legislative activity around Section 29 of HB 197. Two bills, 2021 Ohio House Bill 157 (HB 157) and 2021 Ohio Senate Bill 97 (SB 97), introduced earlier this year, would simply repeal Section 29 of HB 197 and immediately end the temporary withholding relief for employers. Concerns have been raised about the significant and immediate administrative burden that would be imposed on Ohio employers if Section 29 of HB 197 were repealed.

A substitute version of HB 157 (Sub HB 157) is being drafted. An Ohio Legislative Services comparative analysis⁶ indicates that Sub HB 157 would not immediately repeal⁷ Section 29 of HB 197, but would sunset the law after December 31, 2021. Under this measure, Section 29 of HB 197 would be modified to do the following:

• Require the working arrangement to result from the COVID-19 pandemic rather than the Governor's emergency declaration
• Specify that Section 29 of HB 197 does not prohibit an employer from remitting withheld income tax to the municipality where the teleworking employee resides or to another location
• Specify that Section 29 of HB 197 does not prohibit an employer from assigning a different principal place of work to the employee, which may change the employer's withholding obligations
• Provide that Section 29 of HB 197 applies solely for determining an employer's withholding obligations and where an employer's net profits are sitused, and not for the purpose of determining the location where a nonresident employee's wages are subject to municipal income tax
• Prohibit a municipal corporation from assessing taxes, penalties or interest against an employer for the employer's failure to properly withhold tax from an employee's wages, as long as the employer properly withholds in accordance with Section 29 of HB 197 (this would apply to all municipal taxes withheld from March 9, 2020 through December 31, 2021)

This legislation is subject to change as negotiations continue in the Ohio General Assembly with the participation of affected parties.

Implications

With The Buckeye Institute appealing this decision, and with other lawsuits pending, it may be some time before the questions raised by Ohio's municipal-tax-situsing litigation are resolved. Currently, no cities appear to be granting refunds but some taxing authorities, such as RITA, have indicated that they will receive claims and hold them pending the resolution of the litigation. Employee refund claims typically require some employer substantiation so employers will need to consider how to respond to employees who request assistance in filing refund claims. Businesses should also continue monitoring legislative developments in this area. Unlike prior repeal proposals, it appears that the Ohio General Assembly is trying to give employers some lead time before possibly repealing Section 29 of HB 197.

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ENDNOTES

¹ The Buckeye Institute v. Kilgore, Franklin C.P. No. 20-CV-4301 (Apr. 27, 2021).

² The Buckeye Institute v. Kilgore, Franklin C.P. No. 20-CV-4301, Notice of Appeal (Apr. 28, 2021).

³ The Buckeye Institute has also filed at least two other complaints on behalf of Ohio city taxpayers in the Franklin (Columbus, Ohio) and Hamilton (Cincinnati, Ohio) county courts of common pleas. See Denison v. Kilgore and Schaad v. Alder.

⁴ Ohio Rev. Code 718.011.

⁵ Article XVIII, Section 13 of the Ohio Constitution permits the Ohio General Assembly to limit the power of municipalities to levy taxes and incur debts.

⁶ Ohio Leg. Service Comm., Substitute Bill Comparative Synopsis, Sub. H.B. 157, 134th General Assembly (undated).

⁷ 2021 Ohio House Bill 264 (HB 264) was also recently introduced. HB 264 would sunset Section 29 of HB 197 as of the later of 30 days after the rescission of the Governor's emergency declaration or December 31, 2022. It does not appear that this legislation would be able to garner enough votes for passage but may have served as an impetus for the modifications in Sub HB 157.