Ohio Supreme Court upholds law on employer-based municipal tax

The Ohio Supreme Court recently held that a temporary law in effect during the COVID-19 pandemic directing Ohio workers to pay municipal income tax based on their “principal place of work” rather than the municipality where they actually performed the work did not violate the Due Process Clause.¹ In affirming the Court of Appeals, the Ohio Supreme Court explained that the federal cases imposing a limitation on interstate taxation under the Due Process Clause have never been applied to matters of intrastate taxation. The court also held that the enactment of the legislation was a valid exercise of the legislature’s constitutional authority.

Background

In March 2020, the governor of Ohio declared a state of emergency due to the COVID-19 pandemic. The Ohio Department of Health responded by generally requiring people to stay at home. Ohio enacted uncodified legislation providing that during the emergency and for 30 days after the conclusion of the emergency, “any day on which an employee performs personal services at a location, including the employee’s home, to which the employee is required to report for employment duties because of the declaration shall be deemed to be a day performing personal services at the employee’s principal place of work.”²

The taxpayer lived in Blue Ash, a suburb of Cincinnati, and worked primarily from his employer’s office in Cincinnati before the pandemic. In response to the state’s directives, the taxpayer’s employer advised him to work from home beginning in March 2020. The taxpayer complied and only occasionally worked from the office. In June 2020, the taxpayer began working from home full time and did not work from Cincinnati again until December 2020. The taxpayer’s employer withheld municipal income tax for Cincinnati for the 2020 tax year. The taxpayer requested a refund of the tax to the extent such tax was associated with the time in which the taxpayer worked outside Cincinnati when the emergency order was in effect. Cincinnati’s finance director denied the taxpayer’s refund request.

Following the denial of the refund request, the taxpayer sued the finance director and argued that the temporary legislation violated the U.S. and Ohio Constitutions because it authorized a municipality to tax income that nonresidents earned outside the municipality. The taxpayer requested an injunction prohibiting enforcement of the temporary legislation and a refund of his withheld municipal income tax. After the trial court dismissed the lawsuit, the appellate court affirmed the dismissal. The appellate court rejected the taxpayer’s argument that the legislation unlawfully expanded Cincinnati’s powers of municipal taxation, and determined that a municipality may impose taxes for activities performed outside its borders when permitted by state law. Also, the court rejected the taxpayer’s argument that the Due Process Clause prohibits a municipality from taxing a nonresident for work performed outside the municipality. The court explained that the taxpayer relied on case law concerning interstate rather than intrastate taxation. Finally, the court decided that the legislation survived a rational basis review. The taxpayer appealed this decision to the Ohio Supreme Court. 

Municipalities tax work performed outside  

The Ohio Supreme Court affirmed the appellate court’s decision that Cincinnati could tax income on work performed in a different municipality. The court accepted the taxpayer’s appeal on the following propositions: (i) the legislation is incompatible with due process and the court’s prior decisions on the due process requirements for municipal taxation; (ii) the legislature cannot authorize municipalities to engage in extraterritorial taxation; and (iii) the legislature’s authority to pass emergency laws as allowed by the Ohio Constitution does not expand its substantive constitutional powers.

Prior to addressing the taxpayer’s three main arguments, the court explained that the legislature has authority under the Ohio Constitution to enact legislation that does not conflict with the U.S. or Ohio Constitutions. The state has delegated certain powers to municipalities through the Home Rule Amendment, but the Ohio Constitution retains the legislature’s authority to restrict municipal taxation. 

Due Process Clause not violated

The court rejected the taxpayer’s argument that the Due Process Clause prohibits one political subdivision in the state from taxing the citizens of another political subdivision for work that was not performed in the taxing subdivision. First, the court held that the legislation survived a rational basis review. Because the taxpayer did not allege a violation of a fundamental right, his challenge only could succeed by establishing that there was no “reasonably conceivable state of facts that could provide a rational basis” for enacting the legislation.³ The court determined that there was a rational basis for enacting the legislation because the state had a legitimate interest in ensuring that the municipal revenues remained stable during the rapid change to remote work that occurred during the pandemic.

In affirming the appellate court, the supreme court agreed that the legislation did not infringe upon due process limits on state sovereignty. The court acknowledged that the U.S. Supreme Court has long recognized that the Due Process Clause places limitations on the power of one state to tax a citizen of another state.⁴ As explained by the Ohio Supreme Court, the U.S. Supreme Court has never held that this due process limitation applies to taxation occurring within a single state. The U.S. Supreme Court has made clear that this due process protection does not apply to intrastate taxation.⁵ According to the Ohio court, “[t]here is a significant difference between our federal system of government, with its 50 sovereign states and a national government with limited powers, and our state system, which contains one sovereign with plenary authority and various political subdivisions of that sovereign.”

The court also concluded that the Ohio cases relied on by the taxpayer did not support his argument. The taxpayer based his contention on the Ohio Supreme Court’s relatively recent decisions in Hillenmeyer v. Cleveland Board of Review⁶ and Willacy v. Cleveland Board of Income Tax Review⁷ that involved municipal ordinances and out-of-state residents. However, these cases resolved questions of interstate rather than intrastate taxation and did not hold that purely intrastate taxation violated the Due Process Clause.

The taxpayer also cited earlier decisions in which the court referenced the federal due process test in upholding municipal taxes involving interstate taxation.⁸However, in determining that these cases did not support the taxpayer’s position, the court explained that none of the local taxes in these cases offended due process. Also, these cases were inherently different from the instant case because they concerned challenges to municipal taxes rather than state law. The instant case concerned the power of the state to allocate municipal taxes within its borders rather than the extent of the power delegated to a political subdivision. 

Legislature had authority to enact the contested legislation 

The court determined that nothing in the Ohio Constitution prohibited the legislature from enacting the challenged legislation. The taxpayer unsuccessfully argued that the Home Rule Amendment to the Ohio Constitution⁹ limited the legislature’s authority to implement the taxation scheme at issue. The court explained that municipalities have been delegated the power to tax, but the Ohio Constitution specifically empowers the legislature to limit this power.¹⁰ The Home Rule Amendment does not preclude the legislature from granting additional powers to municipalities beyond those delegated to them through this provision.¹¹ The court concluded that these principles make it clear that the contested legislation does not violate the Home Rule Amendment. The legislation empowers a municipality that is not the one where the employees perform their work to collect a tax from these employees. At the same time, the legislation prevents a municipality where the employees are actually working from collecting a tax from these employees. Because the legislature has the authority to grant a municipality additional authority, and because it has the power to limit a municipality’s authority to collect taxes, the court held that the legislation was completely consistent with the Ohio Constitution.

Ohio Constitution’s emergency laws provision does not expand legislature’s powers

The court agreed with the taxpayer’s argument that the legislature’s authority provided by the Ohio Constitution to pass emergency laws does not expand its substantive constitutional powers. However, the court’s agreement with the taxpayer on this issue did not change the result of the decision. As explained by the court, enactment of the legislation was within the legislature’s authority under the U.S. Constitution and did not violate the federal Due Process Clause. 

Dissenting opinions 

Two dissenting opinions were filed. In the first dissenting opinion, the justice would hold that the contested legislation does not fall within the authority provided to the legislature under the Home Rule Amendment. According to the dissent, the legislature required Cincinnati to collect taxes on income earned by certain nonresidents for work performed outside the city. The court’s prior decisions recognize that the Home Rule Amendment denies the legislature authority to dictate to municipalities what income tax to impose. The first dissenting opinion also questioned the majority’s determination that the Due Process Clause does not apply to intrastate taxation. The second dissenting opinion would have held that the federal due process decisions apply to municipal taxes and the tax, as applied to the taxpayer, was unconstitutional. 

Commentary

The Ohio Supreme Court’s decision concerning the constitutionality of temporary legislation enacted in response to the COVID-19 pandemic allows municipalities to tax income earned for work performed outside the municipality in 2020. Five of the justices determined that the Due Process Clause limitations do not apply to intrastate taxation, but two dissenting justices did not agree with this holding. As noted in the first dissenting opinion, the contested temporary legislation was amended in 2021 to clarify that on and after Jan. 1, 2021, the provision does not apply “for purposes of determining the location at which a nonresident employee’s work was completed, services were performed or rendered, or activities were conducted for the purpose of determining the employee’s municipal income tax liability.”¹² Although this decision applies to temporary legislation that no longer is in effect, it remains relevant in determining the applicability of due process protection to municipal taxation and the legislature’s power under the Home Rule Amendment to enact legislation concerning municipalities. As indicated in the dissenting opinions, there is some controversy concerning the majority’s opinion on both issues.

Given the non-uniform nature in which municipalities impose the local income tax, there are many situations where an Ohio resident lives in an area in the state that does not impose a municipal income tax, but works in a commercial center like Cincinnati, Cleveland, or Columbus that does impose the tax. Essentially, this decision results in the disappointing termination of refund claims made by these individual taxpayers, at least for the 2020 tax year. Left undecided by the court was whether a similarly situated employee of a Cincinnati business living outside Ohio (for example, in the nearby Kentucky suburbs) would likewise be denied relief. In addition, there may still be opportunities for refund claims covering the 2021 tax year and beyond for Ohio residents in certain situations.

Clearly, the legislation was designed to ensure that municipalities would not be financially devastated by the shift in working patterns from in-person to remote during and after the pandemic. It is a particularly frustrating result for taxpayer employees that for much of 2020 could not feasibly enter an in-person office in a city that imposed the municipal income tax, either because the city or the employer prevented employees from entering into the city or office, respectively. The decision implies that in future situations in which municipality revenue streams are imperiled due to an emergency (health, fiscal or otherwise), the state may be more likely to quickly adopt legislation that will be supported by the state courts. 

1 Schaad v. Alder, Ohio Supreme Court, Slip Opinion No. 2024-Ohio-525, Feb. 14, 2024. Five of the justices joined the majority opinion. Two justices filed separate dissenting opinions.
2 H.B. 197, Laws 2020, § 29.
3 Armour v. Indianapolis, 566 U.S. 673, 681 (2012), quoting Federal Communications Commission v. Beach Communications, Inc., 508 U.S. 307, 313 (1993).
4 The U.S. Supreme Court has held that the Due Process Clause requires a “‘minimal connection’ between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.” Trinova Corp. v. Michigan Department of Treasury, 498 U.S. 358, 373 (1991), quoting Mobil Oil Corp. v. Vermont Commissioner of Taxes, 445 U.S. 425, 436-437 (1980), quoting Moorman Manufacturing Co. v. Blair, 437 U.S. 267, 273 (1978).
5 See, e.g., Interstate Oil Pipe Line Co. v. Stone, 337 U.S. 662, 667-668, (1949); International Harvester Co. v. Evatt, 329 U.S. 416, 421 (1947.
6 41 N.E.3d 1164 (Ohio 2015).
7 151 N.E.3d 561 (Ohio 2020).
8 Thompson v. Cincinnati, 208 N.E.2d 747 (Ohio 1965); McConnell v. Columbus, 173 N.E.2d 760 (Ohio 1961); Angell v. Toledo, 91 N.E.2d 250 (Ohio 1950).
9 OHIO CONST. art. XVIII, § 3.
10 OHIO CONST. art. XVIII, §§ 6, 13.
11 Prudential Co-op. Realty Co. v. Youngstown, 160 N.E. 695 (1928).
12 H.B. 110, Laws 2021, § 610.115, amending H.B. 197, Laws 2020, § 29. The amendment also provides that these temporary provisions apply on and after March 9, 2020, but before Jan. 1, 2022.