CINCINNATI — When the spread of COVID-19 forced Ohioans to work from home, state legislators created a new way for cities to collect income taxes as workers temporarily made their homes their offices. The Ohio Supreme Court affirmed Wednesday that the temporary law was constitutional.
A Hamilton County man pushed back against House Bill 197, a comprehensive COVID relief bill passed by the General Assembly in 2020, part of which said despite the fact that workers were working from home, for tax purposes, they could be taxed based on the location of the employer, not their home.
Josh Schaad, whose financial services offices are in downtown Cincinnati, worked in his home of Blue Ash once the pandemic set in. He said he returned to the office “several days a week” in November 2020, and in January 2021, he applied for a municipal income tax refund for the days he worked outside of city limits for the previous tax year.
The City of Cincinnati said he was ineligible because of the state law that had been enacted.
Schaad sued the city of Cincinnati’s finance director and Ohio Attorney General, saying the law “fundamentally altered what had been the law for 70 years and required workers to pay income taxes to cities in which they neither lived nor worked, and in many cases, had not set foot in for months,” according to court documents.
“As the work in question was performed outside the geographical limits of Cincinnati, the city lacked taxing jurisdiction,” attorneys for Schaad wrote in their appeal to the state’s highest court.
When the trial court dismissed his case, Schaad appealed to the First District Court of Appeals, who upheld the dismissal, leading Schaad to appeal to the Ohio Supreme Court. In upholding the dismissal, Schaad said the appeals court departed from established legal precedent and “goes so far as to indicate that the mere presence of an employer within a city’s limits may be enough of a fiscal connection for that city to tax its employees, regardless of where they work.”
Schaad also called into question the authority the General Assembly has over municipal taxation, given Ohio’s status as a Home Rule state, wherein cities and counties have certain powers to govern themselves, such as sanitation services, regulation of police and local taxation.
A bipartisan Ohio Supreme Court majority sided with the state in a Wednesday decision, ruling that the temporary state law “was a valid exercise of the General Assembly’s constitutional authority.”
Justice Patrick DeWine wrote for the majority in the 5-2 decision, and while he and the rest of the majority justices agreed that “emergency legislation” like the COVID-19 relief bill did not expand “substantive constitutional powers” of the General Assembly, “that principle does not change the outcome of this case.”
In terms of the claims that the pandemic law violated Home Rule, DeWine wrote that Home Rule “does not preclude the General Assembly from granting additional powers to municipalities beyond those delegated to them through the Home Rule Amendment.”
“Essentially, what Section 29 (of the COVID relief bill) does is empower a municipality that is not the one where the employee performs his work to collect a tax from that employee,” the majority opinion stated. “At the same time, it prevents the municipality where the employee is actually working from collecting a tax from that employee.”
The majority court found that the section of the COVID relief bill at question in the lawsuit was “completely consistent with the Ohio Constitution.”
“Because the General Assembly has the power to grant a municipality additional authority, and because it has the power to limit a municipality’s authority to collect taxes, Section 29 is within the General Assembly’s authority to enact,” DeWine wrote on behalf of the majority.
Justices Michael Donnelly, Melody Stewart, Jennifer Brunner and Joseph Deters all signed on to the majority opinion, while Chief Justice Sharon Kennedy and Justice Patrick Fischer, filed dissents in the ruling.
In Kennedy’s disagreement with the majority, she said “under no fair reading of the Ohio Constitution can Section 29 be understood to be a limit or restriction on Cincinnati’s taxing authority.”
“The General Assembly cannot commandeer a municipalities home-rule taxing authority and replace it with a statutory scheme that requires extraterritorial taxation,” Kennedy wrote in her dissent. “The Home Rule Amendment denies the General Assembly that power.”
The Buckeye Institute, which said it represents parties in several municipal income tax cases, including the Schaad case, expressed disappointment in the decision.
“Local taxing authorities should be able to tax only within their own jurisdictions – where people live and actually perform the work,” Robert Alt, the institute’s president and CEO who argued the case before the Ohio Supreme Court, said in a statement.
The Ohio Municipal League released a statement praising the majority ruling, as Ohio’s cities and villages “rely on certainty and stability when it comes to their revenue streams,” the OML’s executive director, Kent Scarrett, said in the statement.
“While we consider this a victory for municipalities that affirms what they were directed to do by the state during the pandemic, we remain cautiously optimistic about all the implications of the ruling and will delve deeper into it over the coming weeks and months to gain a fuller understanding of its impacts,” Scarrett went on to state.
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