Court allows cities to temporarily collect income tax from stay-at-home workers during pandemic.

Court allows cities to temporarily collect income tax from stay-at-home workers during pandemic.

A state law that allowed cities to temporarily collect income tax from individuals working from home but who lived outside of city limits during the COVID-19 pandemic was constitutional, the Supreme Court of Ohio ruled today.

In a 5-2 decision, the Supreme Court found the state had a legitimate interest in ensuring that municipal revenues remained stable during the pandemic when employees were ordered to work from home. The decision rejected a man’s claim that allowing Cincinnati to tax his income while he worked at his Blue Ash home violated the U.S. Constitution.

Writing for the Court majority, Justice R. Patrick DeWine stated that the due process clause of the U.S. Constitution has been understood to limit the power of states and cities to tax out-of-state individuals. However, the Court concluded that the federal constitutional provision governs “interstate” taxation, not “intrastate” taxation, where one municipality collects income tax from a resident of another municipality. After all, majority explained, the federal government’s relationship with the 50 sovereign states is very different from the state government’s relationship with municipalities and the U.S. Constitution limits federal authority in ways that the Ohio Constitution does not limit state authority.

The state law also did not violate the Home Rule provision of the Ohio Constitution, which allows cities to enact their own tax laws, the opinion stated. Justice DeWine noted that lawmakers are empowered to grant additional taxing power to municipalities beyond what is authorized by the Home Rule clause. Additionally, the Home Rule clause allows state lawmakers to limit the taxation powers of a municipality.

Justice DeWine wrote that the temporary tax law did not violate the 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.

Justices Michael P. Donnelly, Melody Stewart, Jennifer Brunner, and Joseph T. Deters joined Justice DeWine’s opinion.

Chief Justice Sharon L. Kennedy dissented, rejecting the view that the tax law allowed Cincinnati to tax income that Josh Schaad of Blue Ash earned while working from home. She wrote that even if the tax law purported to require municipalities to impose an extraterritorial tax on nonresidents, the Home Rule amendment denies municipalities the power to tax those who do not live or work inside the city limits and prohibits the General Assembly from compelling municipalities to impose such taxes.

In a separate dissenting opinion, Justice Patrick F. Fischer noted that the U.S. Supreme Court has never ruled on a case regarding whether the federal constitution’s due process protections apply when a municipal tax is extended outside of the municipality’s boundaries. He noted that in prior cases, he has concluded that federal due process protections apply to those taxed by cities and that Schaad’s rights may have been violated.

Tax Law Altered During Pandemic
In March 2020, Ohio declared a state of emergency because of COVID-19. The Ohio Department of Health directed people to stay home during the pandemic and issued an order that allowed only those engaged in essential work to leave home.

Shortly after the health department’s order, the General Assembly enacted House Bill 197. Section 29 of that bill created a temporary law requiring that, during the period of the stay-at-home order and for 30 days after, each day an employee spent working from home or an offsite location “shall be deemed to be a day performing personal services at the employee’s principal place of work.”

Cincinnati used the provision to continue to collect income tax from those who were temporarily not working in the city. From June through December 2020, Schaad worked full-time from his Blue Ash home. During that time, Schaad’s employer continued to withhold municipal income tax from Schaad’s pay and submit it to the city of Cincinnati.

Schaad requested a refund of his city taxes for the days he worked outside Cincinnati while the emergency order was in effect. Karen Alder, Cincinnati’s finance director, denied the request. Schaad sued Alder, arguing that the temporary state law violated the U.S. and Ohio constitutions because it authorized a municipality to tax income earned by nonresidents outside the municipality.

The trial court dismissed his case, and he appealed to the First District Court of Appeals. The First District affirmed the dismissal, and Schaad appealed to the Supreme Court, which agreed to hear his case.

Supreme Court Examined Federal Constitutional Protections
The Court analyzed Schaad’s claims under the federal and state constitutions. Schaad argued that the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution prohibits one political subdivision of a state from taxing citizens of another political subdivision for work outside of the taxing political subdivision. Justice DeWine explained that for Schaad to prevail, he had to prove a set of facts showing that Ohio had no rational basis to enact the law.

The majority opinion concluded that Ohio had a rational reason for enacting the temporary law, namely, to ensure municipal tax revenues remained stable “admist the rapid switch to remote work that occurred during the pandemic.”

Schaad noted that prior Supreme Court of Ohio decisions found that municipal taxes imposed on those who did not live in the city violated the federal due process clause. But the opinion distinguished those decisions from Schaad’s case because they dealt with individuals who did not live in Ohio. The federal protections limit the authority of one state to tax citizens of another state, but they do not limit a state’s intrastate taxation authority,  the majority opinion stated. The opinion also observed that many of the cases Schaad cited involved taxes imposed by cities through municipal ordinances. By contrast, Schaad’s case deals with taxing powers granted to cities by state law.

Court Reviewed State Constitution Taxing Powers
Justice DeWine explained that the General Assembly may enact any law that does not conflict with the U.S. or Ohio constitutions. Municipalities are political subdivisions created by the state and may only exercise those powers expressly granted to them by the Ohio Constitution or the General Assembly.

In 1912, Ohio adopted Article XVIII, Section 3, the Home Rule amendment to the Ohio Constitution. The opinion explained that this amendment delegates certain powers to municipalities, including the power to enact local taxes. It allows the General Assembly to limit the power of local governments to levy taxes. However, the Court explained, the Home Rule clause does not prevent the General Assembly from granting additional powers to municipalities.

The opinion stated that the temporary law empowered a municipality to tax work performed outside of the municipality while at the same time preventing a municipality where an employee is actually working from taxing that employee.

“Both of these aspects of Section 29 are completely consistent with the Ohio Constitution,” the opinion  explained. “Because the General Assembly has the power to grant a municipality additional authority, and because it has the power to limit a municipality’s authority to collect taxes, Section 29 is within the General Assembly’s authority to enact.”

Law Violated Home Rule Provision, Dissent Stated
In her dissent, Chief Justice Kennedy noted that Section 29 provided only that an employee working from home would be deemed to be working at the employee’s “principal place of work,” not at the employer’s principal place of business. The assessment of a municipal income tax on nonresidents does not turn on where an employee’s principal place of work is located; instead it depends on where the employee’s income was actually earned, she explained.

The chief justice wrote that the Home Rule amendment limits the taxing powers of municipalities and does not allow a city to tax income earned or received by nonresidents outside the city's boundaries. She stated that under the majority’s interpretation of Section 29, the law required Cincinnati to collect taxes on income earned by nonresidents for work performed outside of the city limits. But although the Home Rule amendment allows the General Assembly to limit municipal taxing power, it cannot enact a law that would force Cincinnati to tax those working outside the city limits, she wrote.

Once people who had been commuting to Cincinnati to work began working from home outside the city limits, Cincinnati lost its authority to collect taxes from them, she wrote. She concluded that as interpreted by the majority, Section 29 was unconstitutional.

Chief Justice Kennedy also questioned the majority’s conclusion that the federal due process clause did not protect Schaad from extraterritorial taxation. She noted that the cases cited by the majority regarding intrastate taxes only involved “statewide” taxes applied by states against residents of other states. And in those cases, the U.S. Supreme Court case had no opportunity to decide whether the federal due process clause applies to extraterritorial municipal taxes, she wrote.

Separate Dissent Echoes Possible Federal Constitutional Protections
In his separate dissent, Justice Fischer explained that federal due process protection requires some definite link between a state and the person, property, or transaction a state seeks to tax. He echoed the chief justice’s dissent, pointing out that the U.S. Supreme Court has never addressed federal due process protections for municipal taxes. He concluded that the federal constitution protected Schaad from paying Cincinnati income tax when he worked in Blue Ash.

“When he worked in Blue Ash, Schaad plainly derived no benefit from Cincinnati. Put simply: no link, no minimum connection existed between Cincinnati and Schaad during the relevant time frame,” Justice Fischer wrote.

Justice Fischer stated he would remand the case to the trial court for further consideration.

2022-0316. Schaad v. Alder, Slip Opinion No. 2024-Ohio-525.

View oral argument video of this case.

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