Stephen K. Hall, JD, LLM – Member
BTA Determines that City Income Tax Withholding is Separate from Tax Liability
Analysis and conclusion affects “work from home” wages paid during COVID-19 pandemic, concluding that many cities are mis-reading COVID-19 legislation in Section 29 of HB 197 from March 2020.
The Ohio Board of Tax Appeals issued its decision in Tammy Aul Jones v. City of Massillon on March 29, 2021 and concluded that Ms. Jones, a postal worker who did not live in Massillon, but spent 40% of each work day reporting to the Massillon post office and spent 60% of each work day delivering mail to locations outside the city limits of Massillon, was only subjected to tax on 40% of her wages by the City of Massillon. The City of Massillon had asserted that she owed tax to Massillon based on 100% of her wages, when only 40% of the wages were earned there, because of the City’s view of the relevance of her “principal place of work.” The BTA rejected the City’s view, and issued a concise, well-reasoned decision, in which it stated that the tax due from a non-resident employee must be measured “for work done, services performed, or rendered, or activities conducted within Massillon.” The BTA explicitly rejected the City’s strained reading of an employer withholding de minimis safe harbor (commonly referred to as the “20-Day Safe Harbor Shield for Employers”). The Jones v. Massillon decision has enormous implications for those employees who formerly worked in one city, but because of the COVID-19 pandemic have stayed at home, working from their residences, and not working in the city where they formerly earned wages. The City of Massillon had attempted to read an employer withholding provision (“20-Day Safe Harbor Shield for Employers” or “Shield”) as being a taxing provision rather than a safe-harbor withholding exception for employers. The BTA rejected the City’s view and required a city tax refund to be paid to Ms. Jones for the tax paid on wages that were not earned within Massillon. Massillon’s view that the “principal place of work” city is where all the wages may be taxed by a city (even those wages not earned there) was incorrect. The major takeaways from this decision include:
Only the jurisdiction of residence and the jurisdiction where wages are actually earned may tax an employee.
The 20-Day Safe Harbor Shield for Employers does not allow a City to turn the safe-harbor withholding shield into a sword for the government to impose tax on more income that was earned by a non-resident within its borders. The clear language of R.C. 718.011 provides that it is an elective exception for employers to deviate from R.C. 718.03, the default withholding rule for employers. R.C. 718.03 requires that tax be withheld on wages “earned by the employee in the municipal corporation.” The Shield allows for an exception from that general withholding requirement for cities in which the employee works fewer than 21 days per year.
To quote the BTA, the Shield does “not define the employee’s income tax liability and only reference(s) the employer’s duty (or lack thereof) to withhold. Massillon’s arguments conflate an employer’s withholding rules with its authority to tax a non-resident individual.”
Although the Buckeye Institute line of cases being considered now in Ohio address a specific provision inserted into law in Am. Sub. H.B. 197 in the beginning stages of the Pandemic, and regardless of what the final tribunal concludes was intended by the Am. Sub. H.B. 197 language, Jones provides direct guidance that the Shield is not a taxing provision – i.e., it does not impose a tax, it merely allows non-withholding in the “fewer-than-21 day city”, if the employer withheld at the principal place of work city for those fewer than 21 days, at the election of the employer.
ZHF Observation: In light of recent municipal income tax developments culminating from the COVID-19 Pandemic, Jones is very instructive. First, the decision properly describes the difference between withholding and taxability for municipal income tax purposes. Second, the decision begs the question: If a city where an individual works 5 days a week for the entire 52-week year may only tax her on 40% of her income, how can other cities reasonably assert that cities may tax an employee on 100% of income not earned in their cities on any hour of any day? Several Ohio municipalities have asserted that the Am. Sub. H.B. 197 legislation (see Section 29 of Am. Sub. H.B. 197 passed in March of 2020) deems income to be taxed where it was not actually earned. It is ZHF’s view that such municipalities are incorrect in that assertion for two primary reasons: (1) Section 29’s deeming a “day” worked remotely to be a “day” worked in the Principal Place of Work (PPW) city only has application in the context of R.C. 718.011—the Shield. Section 29 failed to deem the income earned in the remote city as earned in the PPW city; and, (2) Even if Section 29 had been intended to permit taxation by a jurisdiction where the income was not actually earned, such effort would exceed the General Assembly’s authority under the Constitution because extraterritorial taxation is not permitted in Ohio. If you have any questions regarding municipal income tax issues, or any other state or local tax issue, please contact Steve Hall, Tom Zaino, Rich Farrin or any ZHF professional.