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In its long-awaited decision in Schaad v. Alder,¹ the Supreme Court of Ohio (Court) upheld a temporary state law allowing cities to collect income tax from non-resident individuals working remotely during the COVID-19 pandemic.

Background

The Ohio General Assembly enacted House Bill 197 (HB 197) in response to the COVID-19 pandemic in March 2020. In addition to declaring a state of emergency, the legislation treated income earned by an employee required to work remotely due to the emergency as earned at the employee's principal place of work for the duration of the declared emergency (see Tax Alert 2020-0888). At the time, there was uncertainty as to whether the temporary legislation applied only to employer withholding obligations or if it also authorized a temporary imposition of tax by the principal workplace city on remote workers performing work outside that city's limits.

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). HB 110, however, did not expressly apply the refund provisions for employee personal income tax to 2020.

Many remote workers sought refunds for city taxes withheld by principal workplace cities for 2020, which were denied by lower Ohio courts (see e.g., Tax Alerts 2021-0912, 2021-2227). In June 2022, the state Supreme Court accepted the instant appeal on Cincinnati's imposition of income tax on a nonresident remote worker (see Tax Alert 2022-1044), culminating in this decision.

Court's holding

In a 5-2 ruling, the majority opinion rejected the taxpayer's primary argument that Section 29 of HB 197 violated the Due Process Clause of the US Constitution, finding the Federal constitutional provisions govern interstate taxation and not intrastate taxation. The majority also noted that the United States Supreme Court has never applied Federal constitutional limitations to purely intrastate taxation. The majority also concluded that Section 29 of HB 197 did not violate the Home Rule provision of the Ohio Constitution; while temporarily expanding the power of primary workplace cities to tax employees working remotely, the provision also limited the employees' cities of residence from taxing that same income.

The first of two dissenting opinions argued the Ohio Constitution denies cities taxing power over those who do not live or work inside the city limits and prohibits the General Assembly from compelling cities to impose such taxes. The second dissent noted that the United States Supreme Court has never ruled on whether Due Process protections apply when a city tax is extended beyond the city's boundaries. The second dissent expressed the view that Due Process protections apply to city taxes and that the taxpayer's rights may have been violated.

Implications

Given the federal constitutional arguments, the taxpayer could appeal the decision to the United States Supreme Court; whether such an appeal will be made is currently unknown. The Regional Income Tax Agency (RITA), which administers income taxes for over 400 Ohio jurisdictions, suspended decisions in applicable 2020 refund claims pending the outcome in Schaad. RITA announced via email the same day of the decision that it was analyzing the ruling and would provide further guidance on those refund claims in a future message.

Some Ohio cities have chosen to simply reject similar 2020 refund claims. Taxpayers will likely be unable to claim 2020 refunds on the same grounds, given that the Ohio Supreme Court has upheld the legislation's constitutionality.