Derek K. Heyman, PhD, JD, CPA - Attorney
Cities Win Round Two vs. Buckeye Institute Regarding Municipal Income Tax
Ohio’s Tenth District Court of Appeals has weighed in on the challenge to the municipal income tax provisions of H.B. 197 brought by The Buckeye Institute (“Buckeye”). On November 30, 2021, the court affirmed the Franklin County Court of Common Pleas’ dismissal of Buckeye’s complaint. Roughly two weeks later, on December 16, the Court of Common Pleas of Lucas County granted the defendants’ motions to dismiss similar complaints brought by Buckeye on behalf of individual taxpayers in the cities of Toledo and Oregon, Ohio.
The complaints were brought against Section 29 of H.B. 197 (“Section 29”), the provision that Buckeye and others allege to have required businesses to continue withholding employees’ income taxes to the employees’ primary place of work (usually the city in which the employer’s office is located), even though the employees were working from home due to the COVID-19 emergency declared by Executive Order 2020-01D and the Ohio Department of Health’s stay-at-home order. For more information on Buckeye’s complaint in the Franklin County Common Pleas decision, including observations on the merits of Buckeye’s position, please see our Buzz covering the Common Pleas decision. Among the observations in that Buzz is a different interpretation of the language from Section 29, according to which this provision merely expanded a safe harbor for not being required to withhold at a location other than the primary work location.
The Tenth District’s Analysis
The Tenth District determined that “the General Assembly acted within its authority in enacting Section 29 of H.B. 197 and Section 29 is not ‘clearly incompatible’ with due process clause tax limitations.” To reach this conclusion, the court addressed the three assignments of error in Buckeye’s appeal.
Buckeye had asserted that Section 29 was an expansion of municipal taxing power because it allowed municipalities to tax income from work performed outside the municipalities’ borders, whereas the Ohio Constitution, in sections 6 and 13 of Article XVIII, grants the legislature power to limit or restrict, but not expand, municipalities’ taxing powers. In evaluating this assertion of constitutional infirmity, the Tenth District applied a strong presumption of constitutionality for acts of the General Assembly, as required by judicial precedent, under which “it must appear beyond a reasonable doubt that the legislation and constitutional provisions are clearly incompatible.”
The Court found persuasive authority that the General Assembly may require an Ohio city to subject income earned outside its borders from the First District Court of Appeals’ decision in Time-Warner Cable v. City of Cincinnati, 2020-Ohio-4207. In that case, the First District found that the General Assembly had taken “clear and affirmative measures to limit the City’s taxing authority in the manner it sought.” Although extraterritorial taxation was involved in that the statute required the city accept a consolidated return that included affiliated entities that were not performing business in the city, the First District held that the General Assembly had not expanded the city’s taxing power, but limited it by requiring the city to accept taxpayers’ consolidated returns.
The Tenth District also discusses Article II, Section 1d of the Ohio Constitution, which grants authority to the General Assembly to pass “emergency laws necessary for the immediate preservation of the public peace, health or safety.” H.B. 197, passed in response to the COVID-19 pandemic in its early days, was such an emergency measure. In the Tenth District’s opinion, the emergency nature of the legislation in question strengthens the argument that the General Assembly acted within its constitutional authority when it intervened in the standard municipal taxation and withholding framework established by preexisting law (R.C. Chapter 718). Given the Time-Warner Cable precedent for viewing state intervention as a limit or restriction even where a municipality’s reach in taxation is expanded outside its borders, and the constitutional authority to pass emergency legislation in response to a crisis, the Tenth District found that the General Assembly had authority under the Ohio Constitution to enact Section 29 of H.B. 197.
The next assignment of error rejected by the court was the assertion that Section 29 violates the U.S. Constitution’s Due Process clause as interpreted by the Ohio Supreme Court. The Tenth District begins by distinguishing the cases cited by Buckeye: Angell, Hillenmeyer, and Willacy. Those three cases involved the question of whether city tax laws violate due process, while the law at issue is a state law enacted as an emergency measure. The court notes that this distinction is sufficient to reject the assignment of error, but goes on to address additional reasons the assignment fails: Buckeye had brought a facial challenge to the law in question, asserting that “due process requires local taxation based on the physical location of the taxpayer when the services were performed without exception.” The court is able to imagine numerous exceptions under which Section 29 had no impact on employees or employers, for example those in essential businesses that were allowed to remain open at their usual location, or employees who live in the same city as their regular place of work.
Moreover, the presumption of a statute’s validity under due process provides a low bar for the law, and a correspondingly high bar for the law’s challenger. The law must only be found to have a rational relationship with its purpose. The law in question had such a relationship, because it allowed the tax withholding system to function smoothly for employers and for those cities receiving tax payments during the disruption caused by the stay-at-home order. Buckeye had asserted that the rational relationship cannot overcome the complete prohibition of a municipality taxing an employee working beyond its borders, and cited Hillenmeyer and Willacy in support. However, the court interprets the rule from these decisions as being less “rigid” than Buckeye argues: in the court’s view, it is not clear that the income earned from working from home is not still “reasonably associated with the activity of an employer’s office,” activity which continues to benefit from municipal services in the office’s location. Because the Tenth District takes a broader view than Buckeye does of when income is connected with a municipality, Buckeye fails in establishing the strict requirement that work must be performed within a municipality’s borders to be subject to the municipality’s tax. As a result, Buckeye is not able to overcome the presumed validity of the law passed by the General Assembly.
Finally, Buckeye’s assignment of error stating that the trial court erred in “relying on Ohio’s ‘Twenty Day Rule,’ codified at R.C. 718.011, to find that Ohio law recognizes the legislature’s authority to allow municipalities to engage in extraterritorial taxation” is rejected by the Tenth District, which explained that the trial court discussed but did not rely on the Twenty Day Rule as the basis for its decision.
Curcio v. Hufford
The more recent decision, from Lucas County, also went against the plaintiffs who challenged Section 29. Again, the presumption of constitutionality put a high burden of proof on the challengers, who are required to establish their assertion beyond a reasonable doubt. As in the Tenth District’s decision, the Lucas County Court of Common Pleas distinguished the Hillenmeyer and Willacy decisions in rejecting the due process challenge brought by Buckeye on behalf of the plaintiffs. The Curcio court also found, using reasoning similar to that of the Tenth District, that the General Assembly was within its constitutional powers in enacting Section 29. Buckeye is appealing this decision to Ohio’s Sixth District Court of Appeals, according to Buckeye’s website.
Conclusion and Next Step
The decisions of the Tenth District and the Lucas County Court of Common Pleas will be unsatisfying to those who read cases such as Hillenmeyer as standing for a stronger proposition regarding the location-of-work requirement, nor will they satisfy those who read Section 29 as merely expanding the 20 Day Rule for withholding. The latter reading was not addressed by Buckeye and thus not addressed by the courts hearing their complaints and appeals. Buckeye has recently asked the Ohio Supreme Court to review the Tenth District’s decision. They are supported this time by an amicus brief from members of the General Assembly, whose counsel for this purpose was ZHF. In their brief, the members argue that Section 29 was intended to apply only to the withholding obligations of employers, not to where an employee’s wages are taxable.
If you would like to discuss municipal tax issues, please contact Derek Heyman, Tom Zaino, Steve Hall, or any other ZHF professional.
 Buckeye Inst. v. Kilgore, 2021-Ohio-4196.
 Joel Curcio, et al, v. Kathleen Hufford, et al., Lucas Cty. Common Pleas, Case No. CI-2021-1522.
 Buckeye at ¶ 1.
 Buckeye at ¶ 18, citing State ex rel. Dickman v. Defenbacher, 164 Ohio St. 142 (1955) and Ohio Revised Code § 1.47.
 Buckeye at ¶¶ 27-28.
 See 133 H.B. 197, Sec. 40, quoted by the Tenth District at Buckeye ¶27.
 Angell v. Toledo, 153 Ohio St. 179 (1950).
 Hillenmeyer v. Cleveland Bd. of Review, 2015-Ohio-1623.
 Willacy v. Cleveland Bd. of Income Tax Review, 2020-Ohio-314.
 Buckeye at ¶ 34.
 Buckeye at ¶ 36.
 Buckeye at ¶ 37.
 Buckeye at ¶¶ 42-43.
 Buckeye at ¶ 46.