On February 14, the Ohio Supreme Court delivered a Valentine’s Day message that will be unwelcome to many Ohioans. In Schaad v. Alder, 2024-Ohio-525, the high Court rejected a due process challenge to what the Court characterized as the temporary taxation of Ohio wage earners by the municipality in which their “principal place of work” was located—as opposed to the municipality in which the wage earner actually performed the work. Underlying the Court’s decision is the COVID-19 pandemic emergency, which gave rise to the legislation the Court considered as well as the factual circumstances addressed by the Court’s decision. We have previously discussed the earlier stages of cases that presented the issue the high Court addressed in Schaad in this buzz and this buzz.
ZHF Observation: We urge taxpayers not to be unduly discouraged by the Supreme Court’s ruling, which is more limited than it may at first appear. First, the law considered by the Supreme Court expired by its terms 30 days after the governor rescinded his emergency order on June 18, 2021—and when the General Assembly later extended the measure to the end of 2021, it clarified that the measure applied only to withholding, and did not bar a taxpayer who seeks a refund of withheld amounts for days worked outside the taxing municipality. Second, the Ohio Supreme Court’s decision did nothing more than affirm the dismissal of Mr. Schaad’s civil lawsuit, which contested Cincinnati’s denial of his refund claim for tax year 2020—tax year 2021 was not at issue in Schaad’s case. For 2021, a refund claim would be controlled by the amended version of the law, and that amendment was not considered by the Supreme Court in Schaad. Third, other cases are pending that will present different facts and legal arguments, and the Supreme Court’s decision may not be conclusive in those situations. Therefore, the door is open for COVID 19 city tax refund opportunities. Please read on!
Uncodified Section 29 of Am.Sub. H.B. No. 197 (2020)
Because of pandemic emergency restrictions, many wage earners worked “remotely” instead of at their usual workplace. When working at home instead of the office, such workers might be performing their jobs outside the city to which they ordinarily owed municipal income tax. Shortly after Governor DeWine declared a COVID-19 emergency by executive order in March 2020, the General Assembly enacted Am. Sub. H.B. No. 197, which contained a number of provisions that attempted to accommodate Ohio law to the difficult circumstances resulting from the pandemic. In that legislation, uncodified Section 29 provided that, during the emergency declared by the governor’s emergency order, and for thirty 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 [emergency] declaration shall be deemed to be a day performing personal services at the employee’s principal place of work.”
To those familiar with Chapter 718 of the Revised Code, the language of uncodified Section 29—and especially its reference to R.C. 718.011—meant that Section 29, for purposes of the withholding safe harbor set forth in R.C. 718.011, created an expanded safe harbor: it allowed employers to be permitted to continue withholding municipal income tax at the employee’s principal place of business, as opposed to diverting the withholding to the actual “remote” location of the employee’s work. As the Board of Tax Appeals has stated, municipalities may “levy an income tax and a withholding tax, and while the two are related, they are distinct, and each has its own set of requirements.” Jones v. Massillon, BTA No. 2018-2137, 2021 Ohio Tax LEXIS 716, *5. See our discussion of the BTA’s Jones decision here. See also Chief Justice Kennedy’s dissenting opinion in Schaad at ¶ 65 (“there is a difference between where an employer must withhold taxes from an employee and where an employee’s income is taxable”).
Schaad filed a civil action seeking a refund of withholding his employer paid to Cincinnati
The litigants in Schaad (and several companion cases) understood Section 29 differently: they interpreted Section 29 as though it was a taxing provision, rather than a withholding provision that created a “safe harbor” for employers. Mr. Schaad worked in Cincinnati but resided in Blue Ash. When Cincinnati denied Mr. Schaad’s claim for refund of amounts withheld during 2020 for his work at home in Blue Ash, Mr. Schaad brought a declaratory judgment action against Cincinnati. In that case, both the city and Mr. Schaad assumed that Section 29 by its terms imposed Cincinnati’s income tax on Mr. Schaad for the remote work. Mr. Schaad sought a refund on the basis that, by imposing tax on his remote work, Section 29 is unconstitutional.
In the second sentence of the majority opinion, the Ohio Supreme Court adopted that same interpretation for the purpose of deciding the appeal. According to the Court majority, Section 29 “provided that for a limited time, Ohio workers would be taxed by the municipality that was their principal place of work rather than by the municipality where they actually performed the work.” (emphasis added). On the basis of that interpretation, the Court considered and rejected the taxpayer’s due process arguments.
ZHF Observation: In 2021, the General Assembly enacted uncodified section 610.115 as part of Am. Sub. H.B. No. 110: that provision amended Section 29 to clarify that, for tax year 2021, as related to employee wages, Section 29 applies only for purposes of withholding and “not for purpose of determining the location” of the employee’s work “for the purpose of determining the employee’s municipal income tax liability.” In other words: if during 2021 Mr. Schaad’s employer relied on Section 29 to pay withholding to Cincinnati during 2021, we read the law as requiring Cincinnati to refund Mr. Schaad for days on which he worked in his home in Blue Ash. Guidance issued by municipal tax authorities confirms that understanding of H.B 110. Moreover, in our view the Supreme Court’s affirmance of the dismissal of Mr. Schaad’s 2020 tax year case and its ruling do not affect refund claims submitted for tax year 2021.
The Supreme Court’s legal rulings
Of overriding importance to the Supreme Court’s constitutional ruling was the purely intrastate nature of the tax at issue. The city that claimed a right to retain the withheld amounts, Cincinnati, was an Ohio city; the place where Mr. Schaad performed remote work was Blue Ash, also an Ohio city; and Mr. Schaad was an Ohio resident. The Court distinguished several due process cases because they involved imposition of tax on a person not resident in Ohio (as opposed to not resident in the taxing municipality in Ohio). As the Court summarized the point in a heading, “Section 29 does not infringe upon federalism-based due process limits on state sovereignty.” The Court also identified a rational basis for Cincinnati retaining the withheld tax amounts: “Ohio had a legitimate interest in ensuring that municipal revenues remained stable amidst the rapid switch to remote work that occurred during the pandemic.”
Additionally, the Court distinguished some Ohio case law because those cases addressed the scope of the city’s taxing authority under its own charter and ordinances, not the authority of the state legislature to empower a city to impose a tax.
Finally, the Court majority rejected the contention that Section 29 could not impose Cincinnati’s tax on Mr. Schaad. Although the Court did not identify anything in the municipal ordinance that imposed the tax, the Court understood that Section 29 itself “empower[s] a municipality that is not the one where the employee performs his work to collect a tax from the employee,” while also “prevent[ing] the municipality where the employee is actually working from collecting a tax from that employee.”
ZHF Observation: In the above quote, the Court focuses on the General Assembly’s ability to impose or remove a “collection” responsibility regardless of where an employee works. However, the Court seems to have sidestepped the point that “collection” is different from actual imposition of the tax. If the Court meant to say that Ohio can also impose a municipal income tax (not just collection), then this decision may be in tension with other case law that has made such a distinction.
Justice DeWine authored the majority opinion, and Justices Donnelly, Stewart, Brunner, and Deters concurred in it.
The dissenting opinions
Two justices dissented, and each wrote a separate opinion.
In her dissenting opinion, Chief Justice Kennedy first stated her view that Section 29 concerned the employer’s withholding obligation, and in no way modified the city to which Mr. Schaad owed the tax. Next, the Chief Justice expressed her view that, even if the majority’s interpretation of Section 29 were correct, the imposition of tax by Cincinnati would be unconstitutional in that the Ohio Constitution does not grant the General Assembly authority to “commandeer” a municipality’s power of taxation. Finally, although the Chief Justice thought it unnecessary to reach the due process issue, she questioned the majority’s view that federal due process did not impose any relevant restrictions merely because of the intrastate nature of the tax.
In his dissenting opinion, Justice Fischer agreed with the majority that Section 29 imposed a tax, but he opined that by doing so Section 29 violated federal due process principles that had been articulated in other Ohio cases.
Ramifications of Schaad v. Alder
The Supreme Court’s ruling will reinforce some lower court decisions that rejected claims and arguments identical to Schaad’s facts. However, many factual situations and legal arguments remain unaddressed by the Schaad decision. For instance, the case leaves the door open on the following situations, some of which are pending in the tax appeal system:
When the Taxpayer is not a resident of Ohio. The Schaad majority’s federalism view of federal due process may open the door to a contrary result in a case in which the taxpayer is not an Ohio resident. See Morsy v. Gentile, 8th Dist. Cuyahoga No. CA-22-112061, stayed pending Supreme Court decision in Schaad. Unlike Schaad, Morsy involves a Pennsylvania resident who, because of the pandemic, worked remotely from home, and who sought a refund of money withheld by her employer to Cleveland. See our earlier buzz on the Morsy case here. The common pleas Court ruled in Morsy’s favor based on her not being an Ohio resident, and that outcome may be held to be consistent with the Supreme Court’s decision in Schaad.
When the Employee worked at home, but was not “required” to work from home. In the second count of his declaratory judgment complaint, the taxpayer in Schaad argued that his remote work did not relate entirely to the COVID-19 emergency, but the Supreme Court did not address that point. Nevertheless, the particular facts of remote work may be important to deciding whether Section 29 applies.
- Consider an employee of an essential business who worked remotely. Employees of banks, insurance companies, law firms, accounting firms, and other essential businesses were exempt from the Stay at Home Order issued by the State Health Department and were not “required” to work from home. Because Section 29 applied only if the employee was “required” to work away from the usual workplace “because of” the COVID-19 emergency, a taxpayer may be able to obtain a refund of taxes withheld to the “principal place of work” in this context.
- Consider an employee sent home for a few weeks by her employer, but then allowed the option to return to the office for work and yet chose to continue working at home. Again: Section 29 should not be applied if the employee chooses to work from home, rather than being required to do so.
- Consider whether a taxpayer’s principal place of work, which is defined in R.C. 718, may have changed by operation of law after spending more than half the year working from a location. Does Schaad address this situation?
Tax year 2021: A New Version of Section 29: In our observations above, we pointed out that in 2021 Am.Sub. H.B. No. 110 amended Section 29 to make explicit that, for tax year 2021, Chief Justice Kennedy’s dissenting view in Schaad is correct: the measure applies to withholding and does not address which city may impose the tax. Additionally, H.B. 110 extends the operation of Section 29’s safe harbor to the end of 2021.
Will the Taxpayer Appeal to the U.S. Supreme Court? It is possible that the taxpayer in Schaad will seek an appeal with the United States Supreme Court to address the federal due process issue. Such an appeal may make sense in light of U.S. Supreme Court precedent but persuading the nation’s highest Court to take an appeal is an uphill battle. The U.S. Supreme Court may view the limited nature of the issue—a tax treatment limited to a single year during the COVID-19 emergency—as a reason not to hear the case.
Time for filing 2020 refunds is running out. The Regional Income Tax Agency has stated that the last day to file a refund for municipal taxes withheld for tax year 2020 is May 17, 2024. Our professionals are happy to discuss how the Schaad decision may impact your facts and circumstances, and whether Schaad is dispositive to your situation.