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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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Remote Work Employee Win!

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Yes, you read that right! The first employee win we have seen on the COVID-related telecommuting cases recently came out of Ohio. During the pandemic, many states came out with guidance on how to treat the income employees earned while working remotely, some of which was contrary to their existing rules. Ohio was one of those states that acted quickly, with HB 197 taking effect March 27, 2020. Backdating to March 9, 2020, and lasting until 30 days after the state of emergency ended, Section 29 of HB 197 stated, for municipal income tax purposes, employees were deemed to be performing services at the employee’s principal place of work, rather than where the employee was physically working. This notably applied to both resident and nonresident employees. The alleged intention of the bill was to lessen the burden on employers by not requiring them to change the municipal withholding of their employees. This rule looks a lot like the “convenience of the employer" rule that a few states, including New York, applied before Covid, and that many states migrated to during the pandemic. 

In Morsy v. Dumas, the plaintiff Dr. Morsy, was a resident of Blue Bell, Pennsylvania and employed by Athersys, a Cleveland biotech company. Prior to the pandemic, Morsy commuted to Cleveland and stayed Monday through Friday before returning home to Pennsylvania on the weekends. During that time, Morsy applied for and received municipal income tax refunds from the city for days worked outside Cleveland. Like most of us, Morsy worked from home once the pandemic started, and did not return to Cleveland for the rest of the year. As instructed by HB 197, Morsy’s employer continued to withhold municipal income tax as though she were still working in Cleveland. The city refused her request for a tax refund of the taxes paid to Cleveland for the period of March 13, 2020 through December 31, 2020.

Morsy filed suit arguing HB 197 was unconstitutional and Cleveland did not have jurisdiction or power to tax income earned by nonresidents for work done outside of the city. The Cuyahoga County Court of Common Pleas found HB 197 was not unconstitutional on its face, but was unconstitutional as applied to nonresidents like Morsy. The Court enjoined Cleveland from collecting municipal income tax withholding or payments from income earned outside the city by Morsy and determined she was entitled to a refund for such payments. The Court reasoned “there is no case law that suggests that the legislature can expand the taxing power of a municipality to non-Ohio residents on work performed outside of the state.” The Court also stated that Morsy’s presence in-state during early 2020 did not give ongoing in personam jurisdiction for the entire year, when she was not physically present, and her virtual connection to her employer’s business location did not alter this result.

Morsy is not the only recent case in Ohio challenging the constitutionality of HB 197. There have been a few recent related cases in Ohio, some of which were funded by the Buckeye Institute, including the Schaad v. Alder case which is currently being taken up by the Ohio Supreme Court. In Schaad, the plaintiff is a resident of Blue Ash, Ohio, who worked in Cincinnati pre-pandemic, but primarily from home during the duration of the state of emergency. He challenged the same statute on the grounds that the due process clause prohibited Cincinnati from imposing its municipal income tax on resident’s wages for the days worked from home. The trial court disagreed and held that HB 197 was constitutional, as did the Ohio Court of Appeals. The Court of Appeals found that because Schaad was an Ohio resident and the law at issue was a state statute, no due process violation occurred when the General Assembly passed HB 197. Clearly, Schaad’s resident status was the differentiating feature between these two cases, but we’ll have to wait and see if post Morsy, the Ohio Supreme Court sees his facts differently and delivers a different result.

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