Supreme Court of Ohio Rules Extraterritorial Municipal Income Taxation Constitutional During Covid-19 Emergency

On February 14, 2024, the Supreme Court of Ohio issued a 5-2 decision holding it was constitutional for a municipality to continue levying income taxes on employees performing work beyond municipal boundaries during the COVID-19 pandemic where such workers would have otherwise been working within the municipality, but-for stay-at-home orders.  Schaad v. Alder, Slip Opinion No. 2024-Ohio-525. 

In March of 2020, following Governor DeWine’s declaration of a state of emergency due to the COVID-19 pandemic, the Ohio General Assembly passed emergency legislation, House Bill 197, which addressed a myriad of issues related to the pandemic. Section 29 of H.B. 197 reads in part:

“During the period of the emergency declared by Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, any day on which an employee performs personal services at a location, including the employee's home, to which the employee is required to report for employment duties because of the declaration shall be deemed to be a day performing personal services at the employee's principal place of work.” 

This provision granted Ohio municipalities the ability to continue taxing the work-from-home earnings of employees who lived in another jurisdiction but, if not for the pandemic, would have been physically working within their corporate boundaries.  This extraterritorial taxation right was limited to the term of Governor DeWine’s COVID-19 emergency declaration, plus an additional thirty days thereafter. The Governor’s emergency declaration ended June 18, 2021. 

In 2020, Josh Schaad was an employee of a Cincinnati-based company who, before the pandemic, worked primarily from his employer’s office in Cincinnati. After the Ohio Department of Health issued its stay-at-home order in March of 2020, Mr. Schaad was directed by his employer to primarily work from home, with the occasional opportunity to return to the office.  Mr. Schaad was working full-time from his Blue Ash, Ohio home by June of 2020. 

Throughout 2020, Mr. Schaad’s employer withheld local income taxes from his paychecks based on the City of Cincinnati’s 1.8% tax rate, as the employer had routinely done in years past. Mr. Schaad, however, claimed he should have been subject to the City of Blue Ash’s 1.25% income tax with respect to days on which he worked from home in 2020. He sought a refund for municipal income taxes withheld by his employer and submitted to Cincinnati for the days he worked from home. When his refund was denied, he sued Cincinnati’s finance director, alleging the constitutional Due Process Clause of the Fourteenth Amendment prevented Cincinnati from collecting income taxes for work performed outside city limits, and Ohio law does not empower the General Assembly to authorize such extraterritorial taxation.

The Court first rejected Mr. Schaad’s Due Process argument. Applying a rational basis level of review, the Court determined the General Assembly had a “legitimate interest in ensuring that municipal revenues remained stable amidst the rapid switch to remote work that occurred during the pandemic.” Id. at ¶ 21.  Mr. Schaad based his Due Process arguments against extraterritorial municipal taxation on federal court precedent regarding interstate taxation (the power of one state to tax citizens of another state).  However, this case concerned intrastate taxation. Id. at ¶ 36.  The  federal case law to which Mr. Schaad cited has never been applied in the context of intrastate taxation, and the Ohio Supreme Court declined to extend the law to limit the local income taxation at issue here.

Mr. Schaad also argued that several Ohio cases supported his position. Those cases reviewed various municipal tax ordinances and the extent to which a municipality may tax the income of citizens who work within the municipality, but are residents of other jurisdictions. Id. at ¶ 37.  The Court distinguished those cases from the Schaad situation and found them irrelevant to the legal issue here.  “Our case is different . . . because it involves a state law that directed how municipal taxes were to be allocated among political subdivisions of the state. The relevant inquiry is not the extent of the power that has been delegated to the political subdivision by the state but the power of the state itself to regulate taxes within its borders.” Id. at ¶ 38.

The Court similarly found without merit Mr. Schaad’s argument that the General Assembly lacked authority to permit extraterritorial taxing.  The Court noted the Ohio Constitution confers all legislative power of the state on the General Assembly to enact any law that does not conflict with the U.S. or Ohio Constitutions. Id. at ¶ 14.  Municipalities may exercise “such powers as have been expressly granted to them by the Ohio Constitution or the General Assembly”.  Id. at ¶ 15 (emphasis added).  Further, the Ohio Constitution specifically authorizes the General Assembly to restrict the municipal power of taxation.  The Court reasoned the General Assembly also possesses the inverse power to expand municipal taxation powers (and nothing in Ohio’s constitutional Home Rule provision prevents the General Assembly from granting municipalities additional taxing powers). “Essentially, what Section 29 [of H.B. 197] does is empower a municipality that is not the one where the employee performs his work to collect a tax from that employee.  At the same time, it prevents the municipality where the employee is actually working from collecting a tax from that employee.” Id. at ¶ 47.  This act falls squarely within the General Assembly’s authority under Ohio law.