Photo by Chris Montgomery on Unsplash
Ben Martin, Associate Member, University of Cincinnati Law Review
I. Introduction
At the onset of the COVID-19 pandemic, countless working Americans left their downtown offices and began working from home. As workers traded long commutes for Zoom calls in pajamas, roads and cities became less and less crowded, and city revenue sources were threatened.[1] Ohio cities, concerned about the income tax that had previously been derived from commuters traveling from suburbs to work in urban areas, pushed for a quick change. In response, Governor Mike DeWine and the General Assembly passed H.B. 197.[2] Included was Section 29 which, for tax purposes, determined that those working remotely from home would be deemed be working at their principal place of work.[3] Though cities supported this measure, not all workers did—some chose to challenge Section 29 in court. These challenges, however, have been largely unsuccessful in Ohio’s courts of appeals. In the most recent case, Schaad v. Adler, the First District Court of Appeals similarly rejected these challenges.
II. Background
A. State and Municipal Taxation
Generally, the Due Process Clause requires that a state only tax an individual if the state has jurisdiction over that person.[4] Absent jurisdiction, a tax simply becomes a confiscation of property.[5] Two types of jurisdictions will support a tax, in personam or in rem. [6] A tax based on in personam jurisdiction relies on a resident’s personal presence within the state.[7] In rem jurisdiction permits taxation of nonresidents who earn income “from their property or business within the State, or their occupations carried on” in the state.[8]
Municipalities, similar to states, possess the power to tax. Specifically, in Ohio, the home-rule authority established by Article XVIII, Section 3 of the Ohio Constitution allows Ohio municipalities to tax individuals.[9] This power, however, is subject to preemption by the Ohio General Assembly.[10] The General Assembly has frequently used its power of preemption to restrict municipalities from instating certain taxes or to establish greater uniformity across the state.[11] This power of preemption can extend to the point where the General Assembly can fully preempt a municipality from collecting an income tax unless the municipality does so according to a state statute.[12]
B. Section 29: The Work-From-Home Tax
In March 2020, in response to the COVID-19 pandemic, Ohio’s Governor Mike DeWine declared a state of emergency by executive order.[13] Shortly after this declaration, Ohio’s Director of Health ordered “all individuals living within the State of Ohio to stay at home or at their place of reside[nce],” with exceptions for “essential business and operations” (“Stay-at-Home Order”).[14] The General Assembly subsequently enacted 2020 H.B. 197, containing Section 29, which provided that
“Notwithstanding [R.C. 718.011], and for the purposes of Chapter 718 of the Revised Code, during the period of the emergency declared by Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, 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.”[15]
C. Schaad v. Adler
Following the passage of Section 29, Josh Schaad (“Schaad”), a resident of Blue Ash, Ohio, who worked in Cincinnati, brought an action challenging Section 29.[16] The City of Cincinnati refused to grant him a refund for the days he worked at home.[17] Schaad challenged Section 29 arguing that, by allowing a municipality to tax nonresidents for work done outside of the city, Section 29 violated the Due Process Clause.[18] In addition, Schaad argued that Section 29 did not apply to him, as he was already working partly outside of the city prior to the emergency declaration.[19]
The trial court granted the City’s motion to dismiss, finding that Section 29 did not violate Schaad’s due process rights.[20] Schaad appealed arguing that 1) the court applied the wrong due process analysis; 2) the court incorrectly determined that the City had in personam jurisdiction to tax a nonresident; and 3) the court incorrectly determined that the General Assembly could authorize extraterritorial taxation.[21]
Addressing Schaad’s assignments of error, the First District Court of Appeals noted initially that the City was required by state law to tax Schaad based on his place of business.[22] In 2020, the Ohio Supreme Court had determined that the General Assembly could create a uniform state-wide taxation scheme.[23] The City’s act of taxing Schaad was, then, simply the City complying with state law.[24] The court then pointed to the long-recognized power of a municipality to act (in this case, to tax) beyond the boundaries of the municipality when that action is authorized by state statute.[25] Therefore, the City’s power to tax Schaad under the Ohio Constitution, pursuant to Section 29, was well settled.
Moving to his due process arguments, Schaad argued that the City lacked in personam jurisdiction over him and therefore could not tax him. The court rejected Schaad’s argument in a single sentence: “Because Section 29 was a dictate of the Ohio General Assembly, and Schaad is a citizen of Ohio, Schaad has received all the process that he was due under the law.”[26] Simply put, Section 29 was a law passed by the State of Ohio dictating the way that municipalities were required to tax. In other words, because Schaad was a resident of Ohio he was subject to taxation by Ohio and that should be the end of the argument.
Arguing against this outcome, Schaad used three Ohio Supreme Court cases to support his argument that a municipality cannot tax a nonresident working outside of the municipality. Angell v. Toledo held that a tax on nonresidents who worked within the municipality would violate due process unless the tax bore “some fiscal relation to the protections, opportunities, and benefits given by the state, or, in other words, whether the state has given anything for which it can ask in return.”[27] In Hillenmeyer v. Cleveland Board of Review, the Ohio Supreme Court held that a tax scheme violated due process where it reached income generated outside of the municipality.[28] Due process, the Ohio Supreme Court said, “requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city.”[29] Finally, Schaad cited Willacy v. Cleveland Board of Income Tax Review, decided in 2020.[30] Willacy established a two part test to determine whether a tax violated due process: 1) there is a “definite link or minimum connection” between the taxing authority and the person sought to be taxed, and 2) the tax has a “rational relationship between the income taxed by the jurisdiction and the income-producing activity or property within that jurisdiction.”[31]
Schaad put these three cases forward as supporting the “proposition that a municipal corporation is prohibited by the Due Process Clause from taxing a nonresident’s income” where the income was generated outside of the municipality.[32] The problem with Schaad’s argument, the First District explained, was that all of these cases dealt with interstate taxation—taxation of a nonresident who performed work outside of the state which was doing the taxing.[33] Section 29 involved purely intrastate taxation, and therefore the court believed that Angell, Hillenmeyer, and Willacy were inapplicable to the issue in the case and ultimately upheld the trial courts dismissal of Schaad’s complaint.[34]
III. Discussion
Section 29 represented the General Assembly’s choice to alleviate the burden placed on Ohio cities following the Stay-at-Home Order.[35] Given the pending economic difficulties that the Stay-at-Home-Order would pose to cities, the decision to freeze workers’ principal place of work made sense even if not all Ohioans supported the decision. The challenges brought against Section 29 were brought by Ohioans who found themselves working from home in a municipality with a lower tax rate than the place which they normally had worked.
The due process challenges these workers brought, however, seemed to falter due to a lack of law on point. The cases brought by Schaad were off point enough that the First District did not even apply the due process standards offered by those cases.[36] The Kilgore plaintiffs did not fare any better when the Tenth District Court of Appeals actually applied those same standards.[37] The lack of favorable precedent and a strong presumption of constitutionality afforded to legislative enactments ensured that challenges to Section 29 faced an uphill battle.[38] As the Schaad court noted, any resident of Ohio is subject to taxation by Ohio; and the General Assembly can determine the manner that those taxes are levied.[39]
Though municipalities may levy taxes, state regulation of those taxes is nothing new.[40] Preemption of municipal tax schemes by the General Assembly is effectively the norm.[41] The Schaad court saw the City as simply following the directives of the General Assembly and not in any meaningful way, taxing extraterritorially on its own initiative.[42] Because the due process arguments against Section 29 failed, the remaining state law permitting a city to tax outside of its borders pursuant to a statute—like Section 29—gave Section 29 firm footing.[43] The decisions in both Schaad and Kilgore have put to bed, at least for now, due process arguments to telework taxation schemes.
IV. Conclusion
In the end, Section 29 represented a policy decision of the General Assembly to protect the revenue of municipalities that saw the work force that had previously sustained them locked at home, working remotely. Once Governor DeWine’s Stay-at-Home Order terminated, the General Assembly passed H.B. 110 which permitted an employer to assign a worker to a different principal place of work.[44] These rules continued until the end of 2021, at which point Ohio’s prior rule as set out in R.C. 718.001(A)(7) resumed.[45]
Ultimately, the added freedom of choice instituted in H.B. 110 has likely alleviated some of the frustrations faced by the plaintiffs in the cases challenging Section 29. While the specific facts presented in Schaad may have become dated in the fast-paced COVID landscape, the underlying principle that the General Assembly has the power to make the types of determinations at issue in Schaad remains unaltered. In a world of COVID variants arising two years into a pandemic few thought could last past July 2020, Section 29, or a policy like it could very well return. Following the ruling in Schaad and Kilgore, Ohioans can approach the future of COVID telework tax law with slightly more confidence knowing that things are at least a bit more settled in this area of the law than before.
[1] Anna Staver, House passes bill to let work from home employees seek refunds for 2021 commuter taxes, Columbus Dispatch, May 26, 2021, https://www.dispatch.com/story/news/2021/05/26/ohio-house-vote-whether-commuters-working-home-should-get-tax-refunds/7446077002/.
[2] Schaad v. Alder, 1st Dist. Hamilton No. C-210349, 2022-Ohio-340, ¶ 2.
[3] Id.
[4] Corrigan v. Testa, 149 Ohio St.3d 18, 2016-Ohio-2805, 73 N.E.3d 381, ¶ 15.
[5] Id.
[6] Id.
[7] Id. at ¶ 31.
[8] Id.
[9] Athens v. McClain, 163 Ohio St.3d 61, 2020-Ohio-5146, 168 N.E.3d 411, ¶ 4.
[10] Id.
[11] Id.
[12] Id. at 6.
[13] Schaad, 2022-Ohio-340, ¶ 2.
[14] Id.
[15] Id.
[16] Id. at ¶ 3.
[17] Id. at ¶ 3-4.
[18] Id. at ¶ 4.
[19] Id.
[20] Id. at ¶ 6.
[21] Id.
[22] Id. at 10.
[23] Id. See McClain, 163 Ohio St.3d 61, 2020-Ohio-5146, 168 N.E.3d 411, ¶ 51.
[24] Schaad at ¶ 10.
[25] Id. at 11 (citing Time Warner Cable, Inc., v. City of Cincinnati, 2020-Ohio-4207, 157 N.E.3d 941 (1st Dist.). See Prudential Co-op. Realty Co. v. City of Youngstown, 118 Ohio St. 204, 211-212, 160 N.E. 695 (1928).
[26] Schaad at 12.
[27] Angell v. City of Toledo, 153 Ohio St. 179, 185, 91 N.E.2d 250 (1950).
[28] Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1632, 41 N.E.3d 1164 ¶ 46.
[29] Id.
[30] Willacy v. Cleveland Bd. of Income Tax Rev., 159 Ohio St.3d 383, 2020-Ohio-314, 151 N.E.3d 561.
[31] Id. at ¶ 22
[32] Schaad, at ¶ 17.
[33] Id.
[34] Id. at 17-20. The First District further noted that the Tenth District Court of Appeals had decided the same way in Buckeye Institute v. Kilgore, 10th Dist. Franklin No. 21AP-193, 2021-Ohio-4196, ¶ 33. Id. at ¶ 17-18.
[35] Staver, supra note 1.
[36] Schaad, at ¶ 17-19.
[37] Kilgore, at ¶ 37-44.
[38] Concurring in judgment in Kilgore, Judge Nelson vaguely alluded to arguments against Section 29 that could have been brought. Kilgore, 2021-Ohio-4196, ¶ 51 (Nelson, J., concurring). If anything, Judge Nelson may have been hinting at a lack of imagination on behalf of the plaintiffs in these cases.
[39] Schaad, at ¶ 12.
[40] Ohio Rev. Code Ann. § 718.011. R.C. 718.011, the twenty-day rule was relied upon by the trial court in Kilgore to defeat the plaintiff’s claims in that case. Kilgore, 2021-Ohio-4196, ¶ 8.
[41] See discussion, supra Section II.a.
[42] Schaad, at ¶ 10.
[43] See Time Warner Cable, Inc. v. City of Cincinnati, 1st Dist. No. C-190375, 2020-Ohio-4207, 157 N.E.3d 941
[44] Edward I. Rivin, Ohio Tax Talk: Adjusting To The Latest Telework Tax Rules, https://frostbrowntodd.com/ohio-tax-talk-adjusting-to-the-latest-telework-tax-rules/.
[45] Id.
