OSCPA asks for COVID-related muni tax withholding clarifications

OSCPA staff report 

The Ohio Society of CPAs has both the U.S. and Ohio Constitution on its side, as it continues to make the statement at the Statehouse that employees should not have to pay income tax to cities where they neither live, nor work.

This time the Society advanced that argument May 12 to the Senate Ways & Means Committee regarding Senate Bill 97, which seeks to modify municipal income tax employer withholding rules for COVID-19-related work-from-home employees. 

The legislature last year passed House Bill 197 to address a variety of urgent pandemic-related issues. It included Section 29, a temporary provision that allowed employers to continue withholding city income tax at their business locations for the many employees who were suddenly working from home. 

SB 97, like companion legislation in the House, would make several clarifications to Sec. 29. OSCPA Tax Policy Director Greg Saul, Esq., CAE, acknowledged the impact these proposals could have on cities and businesses. However, he told the Senate Ways & Means Committee that “employees should not be left with the financial burden of owing tax to a city for periods when they neither worked nor lived there." “The Constitution, in fact, prevents it,” Saul continued. “At the same time, the substitute version of S.B. 97 gives employers some certainty as they gear up for meeting their municipal withholding tax obligation in a post-pandemic world.”  

It was also noted that Ohio municipalities are receiving a collective $3 Billion through the American Recovery Plan Act to help with the COVID impact at the local level. In calendar year 2018, the latest data available from the Department of Taxation, municipal income tax collections statewide were estimated at $5.6 Billion. 

In his testimony, Saul focused on changes supported by OSCPA that are being proposed in the bill:  

Employer Withholding Tax: Sub. SB 97 retains the withholding protections of Section 29 through December 31, 2021, giving businesses time to set up new systems to track employees and comply with the municipal income tax withholding requirements post-pandemic through December 31, 2021.. 

Employee Wage Tax: The bill clarifies that Section 29’s purpose was to expand the protections of the 20-Day Occasional Entrant withholding rule for the benefit of employers and municipalities amid the pandemic, not to require non-resident employees to pay tax to municipalities where they did not work.  

Net Profits Tax: The bill provides explicitly that the payroll factor, one of the three factors used to calculate how much net profit is subject to each city’s tax, remains at the principal city of work. 

OSCPA also submitted a legal opinion written by Zaino Hall & Farrin for OSCPA that outlines why remote workers should continue to be eligible for refunds from municipalities where they neither work nor live. Read Saul’s testimony in its entirety, as well as the legal opinion.