By Demetrius Robinson & Melissa Yasinow
Thanks to a recent lawsuit, Ohioans who have worked from home during the COVID-19 pandemic can now request a refund on local income taxes from the Regional Income Tax Agency (RITA). The only hitch: they may never get it.
In March of last year, in response to the coronavirus pandemic, Ohio enacted House Bill 197, which was supposed to temporarily suspend the provision of ORC Section 718.011 exempting an employer from its withholding obligation to a municipality in which an employee performed services for fewer than 20 days in any year. This directly addressed the question of where local income tax was due when working from home. The suspension is effective for the period of emergency declared by Executive Order 2020-01D and for 30 days thereafter.
According to the commentary to HB 197 from the Ohio Legislative Service Commission, the legislation was designed to prevent an employer from potentially becoming subject to a municipality’s income tax withholding requirement as a result of a change in the employee’s workplace from that of the employer (the “principal place of work” under the statute) to the employee’s home as result of pandemic. However, when House Bill 197 was originally passed, it is highly unlikely that the legislature anticipated that the pandemic would continue for more than an entire year. Therefore, when does “temporarily” become permanent? What are the income tax responsibilities for a business when employees are working from home?
Under Ohio law, an employer is required to withhold and remit taxes for its employees at the employee’s “principal place of work.” Under the statute, the term “principal place of work” is defined as “the fixed location to which an employee is required to report for employment duties on a regular and ordinary basis.” In layman’s terms, that usually means the employer’s office or factory. Under House Bill 197, an employer is able to treat any day on which an employee performed personal services at a location, including the employee’s home, as a day performing personal services at the employee’s principal place of work (i.e. employer’s office, in most cases.) Therefore, if an employee works from home due to the coronavirus pandemic, and exceeds the 20-day threshold, an employer need not withhold the employee’s home city income tax but could continue to withhold the employee’s previous work city tax location.
A recent lawsuit, filed in Franklin County Court of Common Pleas, is asking the Court to declare House Bill 197 unconstitutional. In Buckeye Institute, Et al v. Megan Kilgore, Et al (Case No. 20CV-4301, filed August 2020), the Buckeye Institute sued the City of Columbus seeking an injunction against a continued requirement to withhold for a nonresident to the City of Columbus and a declaratory judgment that House Bill 197’s continued withholding requirements are unconstitutional. The Buckeye Institute alleges that the levy of income tax on nonresident-employees who are no longer working in the City is unconstitutional under the Ohio Constitution and does not comport with Ohio law. This lawsuit, if successful, will have significant impact on both employees and employers. If successful, an employer may have to start withholding for any jurisdiction in which its employees are now working “permanently,” including the employees’ homes. However, if unsuccessful, an employee may be required to continue paying additional tax for a location in which he/she is no longer working. For example, the city of Shaker Heights has a local income tax rate of 2.25% and only provides a credit of ½ of 1% for income tax paid in another jurisdiction. Therefore, if an employee’s previous “principal place of work” was Cleveland (with an income tax rate of 2.5%) an employer would withhold and remit 2.5% to the city of Cleveland and then the employee would also have to pay an additional 2% to the City of Shaker Heights even if he/she spent most of last year working from home, resulting in a total tax obligation of 4%.
The Two-Part Problem
Therefore, the issue is really a two-part problem: (1) whether or not an employer should continue to withhold to a “principal place of work” location that no longer comports with the reality of the situation, and (2) whether or not employees are even subject to income tax withholding as nonresidents in which they no longer have any physical presence. Under long-standing law, an employer is required to withhold and remit tax to any jurisdiction in which its employees are performing services for the employer with limited exception, including the 20-day rule and Small Employer Exception (See R.C. 718.01 et al). Therefore, an employer must withhold for its employees in jurisdictions in which such employees are working (i.e. Fixed Location or Work Site). However, the Ohio Supreme Court recently reconfirmed the long-standing principle that “local authorities may tax nonresidents only if theirs is the jurisdiction within which the income actually arises and whose authority over it operates in rem.” Hillenmeyer v. Cleveland Bd. Of Rev. (2015), 144 Ohio St.3d 165, citing Shafer v. Carter, 252 U.S. 37, 55, 40 S. Ct. 221 (1920). Thus, concluding that the taxation of a nonresident’s compensation must be directly linked to the location where the services were performed. Id.
Therefore, even if an employer has a continued withholding requirement under House Bill 197, is the employee still subject to tax in the jurisdiction in which their employer is withholding? Since the pandemic, most employers, at the recommendation of the CDC and various state health organizations, have encouraged their employees to work from home. These workers have now performed services for their employer from the comfort of their living rooms and kitchen tables. They may have created home offices, upgraded their internet service, and have now done so for almost an entire year. In fact, some employers have now indicated that they are going to adopt a permanent work-from-home policy. Therefore, it is unlikely that the transition to working from home is a temporary situation. It is hard to say that the local municipalities have continued jurisdiction over a nonresident-employee who no longer has any relationship with that municipality, does not avail themself of that jurisdiction’s services, and has taken action to disassociate themself from that jurisdiction.
RITA Allowing Remote Workers to Claim Refund of Withheld Local Taxes
While the City of Columbus is asserting its alleged right to continue to collect for these nonresident employees, other jurisdictions are already preparing for the potential that the Buckeye Institute’s challenge might be successful. The Regional Income Tax Agency (RITA), one of the largest collectors of local income tax, has updated its Form 10A to allow remote workers to claim a refund of the withheld 2020 local taxes. RITA will hold the requests in a suspended status until the lawsuit is concluded. If the courts hold that a refund is not allowed, then the requests will be denied. If the lawsuit is successful, then RITA is indicating that it will return the collected tax. However, it is important to note that the suit may take months, if not longer, to resolve.
What’s Next for House Bill 197?
While House Bill 197 currently remains the law of the land, it appears to be on shaky ground. It would seem that the Ohio Legislature should be capable of passing legislation that balances the administrative burden on employers in trying to comply with withholding requirements and the potential impact on the employer being subject to municipal net profits tax, while at the same time ensure that employees are not overtaxed.
If the pandemic has forced some of your employees remote, their income tax when working from home may also be causing you some headaches. For more information on how this suit could impact your business or tax liability, please contact Demetrius Robinson (firstname.lastname@example.org or 614.427.5749), Kevin O’Connor (email@example.com or 216.736.7213), Melissa Yasinow (firstname.lastname@example.org or 216.736.7205) or any of our Tax professionals.