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On September 26, 2022, the Cuyahoga County Court of Common Pleas ordered the City of Cleveland to refund 2020 income tax it collected from an individual who worked remotely in Pennsylvania during the COVID-19 pandemic.¹

The individual was a Pennsylvania resident working for a Cleveland-based company. Before the COVID-19 pandemic, the individual typically commuted to Cleveland for work, returning to her home in Pennsylvania on the weekends. Before 2020, she sought, and received, income tax refunds from Cleveland for the days she worked outside of Cleveland. In March 2020, Governor Mike DeWine declared a state of emergency, with the Director of Health issuing stay-at-home orders.

In response to these emergency measures, the General Assembly enacted House Bill 197 (HB 197) (see Tax Alert 2020-0888). Section 29 of HB 197 deemed employees to be performing personal services at their principal place of work, even though their employer required them to perform those services at another location, such as their home, because of the COVID-19 emergency. This provision was intended to mitigate the administrative burden on employers of withholding and remitting tax to each employee's municipality of residence and allowed the employer to withhold tax based on the employee's principal place of work. Section 29 did not expressly address whether employees' wages were subject to municipal income tax by their principal place of work or place of residence.

In 2021, the Ohio legislature enacted House Bill 110 (HB 110), which sunset the temporary withholding provisions after December 31, 2021, and allowed employees working remotely to claim refunds of tax paid to the principal-place-of-work municipalities, including tax that was withheld by their employers, for days that the employee worked elsewhere during 2021. (See Tax Alert 2021-1322.) The employee personal income tax refund provisions of HB 110, however, did not expressly apply to 2020.

The individual argued that Cleveland lacked jurisdiction to impose income tax on her earnings from remote work and that Section 29 of HB 197 was unconstitutional under both the Ohio and US Constitutions. The Cuyahoga County Court of Common Pleas did not hold that Section 29 of HB 197 was unconstitutional on its face, reasoning that it was not incompatible with the Ohio legislature's constitutional authority to address the COVID-19 pandemic and pass laws limiting the power of municipalities to impose income taxes. However, the court concluded that Section 29 could not, as a matter of due process, confer jurisdiction to levy a tax on income earned by a person who is not an Ohio resident and worked outside Ohio. The court observed that due process relies on a fiscal relationship with the individual enjoying services and protections provided by the taxing jurisdiction. An employee physically present in the taxing jurisdiction enjoys these protections, but the mere ability of a remote worker to communicate virtually with the home office does not.

The court distinguished the facts in this case from those currently before the Supreme Court of Ohio, in Schaad v. Adler, Appeal No. C-210349; 2022-Ohio-340. In that case, county courts of appeals determined that due process was satisfied because the individual in that case was a resident of Ohio (See Tax Alerts 2022-1044, 2021-2227). The court did not discuss the "convenience of the employer rule," which states such as New York, Pennsylvania, Connecticut, Delaware, and Nebraska have adopted to tax nonresidents who work for in-state employers but work outside of the state for their personal convenience, rather than the employer's business convenience.

Implications

It is unknown at this time whether Cleveland will appeal this decision. The decision lends support for a refund claim for individuals who do not reside in Ohio, worked remotely outside of Ohio and had Ohio city income taxes withheld for 2020. Individuals who reside in Ohio and seek refunds related to remote work performed in 2020 will likely have to await the result of the ongoing litigation in Schaad v. Adler. The statute of limitations is generally three years from the payment of the tax.

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ENDNOTE

¹ Dr. Manal Morsy v. Dumas, Case No. CV 21 946057 (Ohio Ct. Comm. Pleas Sept. 26, 2022).