OSCPA supports clarifications to COVID-related municipal tax withholding rules

Written on Mar 18, 2021

OSCPA staff report

Employees should not have to pay income tax to cities where they neither live, nor work, The Ohio Society of CPAs told legislators this week.

Such a statement would seem obvious in pre-pandemic times, but it is shaping up to be a hot issue this year at the Ohio Statehouse. The legislature last year passed House Bill 197 to address a variety of pandemic-related issues. It included Section 29, a temporary provision that allowed employers to continue withholding city income tax for the many employees who were suddenly working from home instead of at business locations.

House Bill 157 would repeal Sec. 29; such a move does not achieve the original bill’s goal of protecting Ohioans, OSCPA Tax Policy Director Greg Saul, Esq., CAE, told the House Ways & Means Committee March 16.

Saul said Section 29 includes significant benefits for employers, too.

“The best way to address the concern of all Ohioans would be to clarify that the original intent of Sec. 29 was that refunds will be issued by the principal place of work city if the services are or were being performed elsewhere,” Saul said. “In addition, the legislature could retain the withholding protections through the end of the year, giving businesses time to set up new systems to track employees and comply with the municipal income tax.”

Saul acknowledged legislators are facing a mess, with massive ramifications for city coffers and payroll employees. But Sec. 29 of HB 197 is about employees just as much as employers and municipalities.

“We have heard from several cities that want the temporary withholding provision to continue for years to keep that revenue stream flowing,” Saul said, “and from businesses with legitimate concerns about needing adequate time to update processes to track withholding for an expected increase in the number of post pandemic remote workers. But what we’re focusing on today are the unfair tax challenges impacting employees addressed in the legislation now before you.”

In terms of HB 157 itself, Saul said the law is clear: courts have consistently found that municipalities cannot tax a nonresident’s income if it is not earned there.

Read Saul’s testimony in its entirety, as well as a legal memo on the issue from Zaino Hall & Farrin, LLC.

House Ways & Means hearings on the bill are continuing, with changes and a possible vote likely in the coming weeks.