Remote Workers Still Facing Local Tax Issues

Working from home was initially intended to be a temporary solution to the problems created by the pandemic. Almost five years after the identification of coronavirus disease 2019 (COVID-19), many remote workers are still maintaining their distance from the office and creating state and local tax issues for themselves and their employers. According to Forbes Advisor, 12.7% of full-time employees worked from home in 2023, while 28.2% worked a hybrid model.

Ohio

Ohio continues to lead the pack with challenges arising from local taxes assessed on workers no longer working in the office of their employers. Cities are reluctant to lose the revenue generated from workers currently performing their duties in locations far removed from their employers.

In 2022, Schaad v. Adler¹ was one of the five cases filed in the Ohio Supreme Court by the Buckeye Institute challenging the constitutionality of Ohio’s emergency-based local income tax system that was expanded by the state’s House Bill 197 extending municipal taxing authority. The question in these cases was: is it constitutional for the work of employees, who were forced to work from home by state orders, to be deemed to be working and taxed in a city other than where the work is performed?

The Buckeye Institute filed a lawsuit on behalf of Mr. Schaad requesting a refund of 2020 taxes and challenging House Bill 197, Ohio’s emergency-based income tax system that deemed work he performed at his home to have been performed in the higher-taxed office location of Cincinnati for the purposes of taxation. 

After being rejected by the trial court and appellate court, Schaad’s appeal challenging the constitutionality of the emergency law was accepted by the Ohio Supreme Court. In a split decision,² the majority opinion rejected the taxpayer’s primary argument that Section 29 of HB 197 violated the Due Process Clause of the U.S. Constitution, finding that the federal constitutional provisions govern interstate taxation and not intrastate taxation. It was also noted that the United States Supreme Court has never applied federal constitutional limitations to purely intrastate taxation. The majority also concluded that Section 29 of HB 197 did not violate the Home Rule provision of the Ohio Constitution. This provision limited the employees’ cities of residence from taxing the same income taxed by the primary workplace cities for employees working remotely.

Ohio, Part II

After the Schaad decision settled the matter of constitutionality of HB 197, the city of Cleveland decided to dismiss an appeal of a lower court’s order³ determining that the city had no jurisdiction to impose a municipal income tax on a Pennsylvania resident working remotely.

In this case, Dr. Manal Morsy lived in Blue Bell, Pennsylvania and was employed by Athersys, a biotech company located in Cleveland, Ohio. Prior to the pandemic, Dr. Morsy usually commuted to Cleveland and would stay Monday through Friday, returning home for the weekends. Prior to 2020, Dr. Morsy requested and received income tax refunds from the City of Cleveland for days she worked outside of Cleveland. In response to the pandemic, when the Governor of Ohio declared a state of emergency, Dr. Morsy’s work did not require her physical presence in Cleveland, so from March 12, 2020, she began working from home. She did not physically return to Cleveland for the remainder of 2020, but her employer, meanwhile, continued to withhold municipal income tax from her wages. The City of Cleveland had refused her request for a refund for the period from March 13 through December 31, 2020, when she worked exclusively from Pennsylvania.

The Schaad decision gave the municipalities the authority to tax employees working remotely within the state but did not allow an overreach to out-of-state residents like Dr. Morsy working completely in Pennsylvania during Ohio’s “Stay at Home” emergency law. The city subsequently dropped its appeal of the Morsy decision, where the judge ruled that “the Ohio General Assembly cannot authorize cities to engage in extraterritorial taxation.”

Ohio, Part III

Also, based on the Schaad decision, the City of Cincinnati was successful⁴ in asserting that work performed outside of the city during the pandemic was deemed to be performed at the principal place of business in Cincinnati. Following a similar fact pattern to Schaad, John Price worked remotely for a Cincinnati employer outside the city during the pandemic. He was refused a refund of taxes withheld by his employer and filed an appeal with the Ohio Board of Tax Appeals. Price argued that the emergency law of HB 197 did not apply to him as he was not forced to work from home, and that the law only applied to the employer’s responsibility to withhold taxes, not to the taxability of the remote worker. In following the Schaad decision, the court determined that the “principal place of work” language referred not only to the employer’s withholding responsibility but also to the taxability of the employee’s wages. The city correctly considered wages earned for personal services for his employer were considered income for purposes of his municipal income tax liability to the city.

Utah

In a recent decision,⁵ the Utah State Tax Commission disregarded the physical location from which an information technology specialist performed his duties, while focusing on the employee’s continued connection to a Utah employer. The taxpayer, who worked remotely, moved from Utah to another state in 2019 but continued to work for the Utah division of a global company. A Utah part-year resident personal income tax return was filed for 2019, including only income through the date of the move out of state. The employer continued to withhold Utah income tax for the remainder of 2019, as the employee inadvertently did not change his place of residence with the employer for purposes of state income tax withholding. Because the taxpayer’s Form W-2 sourced the entire year’s wages to Utah, the Division of Taxation requested either a corrected Form W-2 or a letter of explanation from the employer to provide proof that not all wages should be sourced to Utah. The employer declined to provide either justification.

Taxpayer maintained that he worked remotely for a global company assigned to its Utah division for the entire year. He provided services to one client who maintained offices in every state and several countries. Taxpayer asserted that the withholding of Utah income tax was merely an oversight on the employer’s part. The Division stated that the issue was not whether taxpayer was a Utah resident for the entire year, but rather that the wages for the year should be sourced to Utah. The Form W-2 provided proof to the Division that all wages were Utah-sourced income, regardless of the place of residence of the taxpayer.

In denying the taxpayer’s claim, the Tax Commission cited a previous decision⁶ regarding a Utah nonresident who worked remotely for a Utah branch of a multinational company. In that decision, the Commission found the taxpayer’s income to be sourced to Utah regardless of the fact that he was not in Utah and worked remotely from another state during the entire audit period. The conclusion in that decision was that the taxpayer “may be performing services within Utah where the employer’s physical location is in Utah or working on accounts assigned to that location.” This would be considered performing services in Utah, regardless of where the employee was physically located at the time of performing services.

Future Impact

The trend of these challenges appears to favor the state or local authority when remote workers maintain connections to the location of the employer. Some states invoke the “convenience of the employer” rules to win their cases. Documentation assists with the burden of
proof requirements, as Utah maintained that corrected Form W-2s would substantiate the out-of-state position. Lacking documentation, the taxpayer has minimal options to provide the necessary proof.

¹ Schaad v. Alder, 2022 Ohio 340 (2022).
² Schaad v. Alder, 2024 Ohio 525 (2024).
³ Manal Morsy v. James Gentile, Case Number CA-22-112051, Ohio Court of Appeals, Eighth Appellate District, Oct. 31, 2022.
⁴ Price v. City of Cincinnati, Case Number 2021-2679, Ohio Board of Tax Appeals, Apr. 22, 2024.
⁵ Utah State Tax Commission Initial Hearing Order Appeal No. 22-204, March 28, 2024.
⁶ Utah State Tax Commission Initial Hearing Order Appeal No. 21-1302, July 19, 2022.

This article is reprinted with the publisher’s permission from JOURNAL OF STATE TAXATION, a quarterly journal published by CCH Incorporated. Copying or distribution without the publisher’s permission is prohibited. To subscribe to JOURNAL OF STATE TAXATION or other journals, please call 1-800-344-3734. All views expressed in this publication are those of the author and not necessarily those of the publisher or any other person.