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June 1, 2021

Ohio Supreme Court rules again that income from stock options earned in Cleveland during employee's residency are taxable even though employee moved to Florida

In Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No. 2021-Ohio-1734, the Ohio Supreme Court (Court) held once again that the City of Cleveland (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, relocated to and was a resident of Florida. The Court's holding deals with income from stock options exercised in 2016. In 2020, the Court issued an opinion on the same issue for the same taxpayer but for tax years 2014 and 2015. (See Tax Alert 2020-0352.)


In 2007, the taxpayer, Ms. Willacy, received stock options as compensation for services performed for her employer in Cleveland. Following her retirement from her employer in 2009, she moved to and became a resident of Florida. In 2016, while a Florida resident, she exercised some of these stock options, recognizing income. As required by Cleveland regulatory law, her former employer withheld and remitted municipal income tax to Cleveland on the gains from the exercise of these stock options.

The taxpayer sought a refund of the municipal income tax withheld and remitted to 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 stock options were exercised. The Court reasoned that the income-producing event need not coincide with the taxable event.

The same judge who dissented from the Court's 2020 opinion again dissented. The judge stated for a second time that he would have concluded that, because of the passage of years and the fact that the taxpayer resided in another state, that minimal connection to Ohio was lacking.


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 on a state's ability to impose its taxes 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 rules governing the taxation of trailing compensation can vary between the state and its localities. For instance, the Indiana Department of Revenue ruled in 2014 that state income tax and withholding, but not county income tax, applied to bonuses that were earned within the state but paid to employees who no longer reside in the state (Indiana Rev. Ruling 2014-02, Oct. 1, 2014). In New York, however, income tax withholding is not required by New York City but is required by Yonkers (NY Pub. NYS-50).

Employers should confirm the rules pertaining to trailing compensation in all state and local jurisdictions where employees have currently and historically provided services; however, this is particularly important now that more employers are allowing employees to work remotely outside of the state/locality of the business office.


Contact Information
For additional information concerning this Alert, please contact:
Workforce Tax Services - Employment Tax Advisory Services
   • Fred Branditz (
   • Kenneth Hausser (
   • Debera Salam (
   • Kristie Lowery (
Indirect Tax / State and Local Tax
   • Bill Nolan (
People Advisory Services
   • Jason French (