We’ve long pointed out the compliance and complexity problems of states imposing income tax on workers who are in the state for only a few days. My colleagues Andrew Wilford and Andrew Moylan recently described states that are clarifying that COVID-related remote work in their jurisdiction will not be used as an opportunity to expand tax authority over individuals or business tax nexus. Most states have yet to issue guidance, and Congress is considering a default rule.
Ohio, with 848 local income tax jurisdictions, normally allows local income tax to be imposed on any person who works within a jurisdiction for at least 20 days per year. In March, the state passed a law deeming remote employees who are working remotely due to COVID-19 to be working in their principal place of business, notwithstanding wherever they actually work. While simpler, it does result in situations where workers are liable for paying local income tax in a city they may never step into.
An Ohio think tank, the Buckeye Institute, and three of its employees filed suit in state court on July 2 to challenge the constitutionality of what the state is doing. Buckeye is headquartered in Columbus and must therefore withhold Columbus’s 2.5 percent local income tax from all employees, no matter where those employees happen to be. The three employees point out that they have teleworked outside of Columbus since March 18, 2020, in compliance with state requirements that they stay at home, and have instead worked from their homes in other jurisdictions (with lower taxes). They are seeking a refund of their Columbus taxes paid since that time and a halt to collection of income taxes from nonresidents of cities who are not performing work within those cities.
The claim is a Due Process Clause claim: Columbus is trying to tax the income of people who are neither residents nor earning income within the city’s limits. The lawsuit argues that the state’s action “deeming” the plaintiffs to be within Columbus’s jurisdictions violates the Due Process Clause of the U.S. and Ohio constitutions.
Columbus City Attorney Zach Klein responded: “Cities across the state stand to lose a massive amount of tax revenue, and there are real-world consequences affecting how we perform essential functions for millions of Ohioans, including taking care of the sick, feeding hungry children, paving our roads and keeping our community safe.”
The case is Buckeye Institute v. Yost, No. 20-CV-004301 in the Franklin County (Ohio) Court of the Common Pleas.