Supreme Court denies 2020 municipal income tax refunds

The Ohio Supreme Court on Feb. 14 issued a 5-2 decision in the Schaad v. Alder case, Slip Opinion No. 2024-Ohio-525.  Court News Ohio also provided a summary of the ruling here. Justice DeWine – joined by Justices Donnelly, Stewart, Brunner, and Deters – wrote the majority opinion. Chief Justice Kennedy and Justice Fischer wrote separate dissenting opinions.

Regrettably, Schaad’s attorneys only argued that the entire statute was unconstitutional, even the withholding provision itself, and never even raised the refund issue. Therefore, the majority opinion leads to an unfortunate result: because the temporary law was found to be constitutional, the decision ultimately denies taxpayers the ability to claim 2020 municipal income tax refunds.

OSCPA filed an amicus brief in the case on Aug. 10, 2022, not questioning the constitutionality of the temporary law, but supporting those individual taxpayers who were denied refunds by the cities and required to pay income tax to municipalities where they neither lived nor physically performed services.

In 2021, OSCPA did secure a law change (House Bill 110, 134th GA) ensuring qualified remote workers would be able to receive municipal tax refunds for Tax Year 2021. In H.B. 110, the legislature left it up to the Ohio Supreme Court to address refunds for 2020. Unfortunately, the Ohio Supreme Court did not clearly recognize the distinction between employers’ withholding and employees’ tax liability.

Justice DeWine’s majority opinion states the temporary tax law did not violate the Ohio Constitution’s Home Rule provision because it expanded the power of employers’ cities to tax employees working from home while also limiting the employees’ cities of residence from taxing their income. The majority opinion concluded that Ohio had a rational reason for enacting the temporary law, namely, to ensure municipal tax revenues remained stable “amidst the rapid switch to remote work that occurred during the pandemic.”

In her dissenting opinion on page 23, Chief Justice Kennedy cited OSCPA’s amicus brief and wrote “there is a difference between where an employer must withhold taxes from an employee and where an employee’s income is taxable.”

In the amicus brief, OSCPA argued that the cities are “effectively interpreting R.C. 718.011 and Section 29 as a taxing provision, or in the alternative, as a situs of where income was earned provision, but that is not what R.C. 718.011 or Section 29 says or means. R.C. 718.011 is not a taxing provision, nor does R.C. 718.011 situs where income is earned for purposes of imposing tax. It is a safe harbor to simplify employer withholding. It clearly states that the deemed location is “for purposes of division (B)(1)” – (where the 20-Day Withholding Exception is codified) and does not determine the ultimate taxability of the wages in the hands of the employee.”

Section 29 and R.C. 718.011 of House Bill 197 (133rd GA), a 2020 law change early in the pandemic, was intended to address the significant withholding challenges faced by employers of workers who suddenly were working remotely – often outside the city where the business itself was located.  However, many cities where the money was withheld refused to grant refunds to remote taxpayers.

The majority opinion (see page 19, footnote 1) did briefly acknowledge OSCPA’s argument asserting “that Section 29 ‘does not have anything to do with assessing a nonresident’s municipal-tax liability.’ This view…was not raised by any party at any stage in this case but instead was presented only in an amicus brief to this court. But of course, ‘[a]mici curiae (authors of the amicus brief) are not parties to an action and may not, therefore, interject issues and claims not raised by parties.’”