Rhodes lives in the suburbs of Cincinnati, Ohio and commutes to the city around three times a week. He pays a municipal income tax as a result of making an earning inside city limits.
But on the two days Rhodes works from home in Hamilton County’s Delhi Township, he’s still on the hook for the city’s 1.8% municipal income tax.
Pandemic-related emergency state legislation allowed the city to continue to assess that tax during the pandemic, according to the city.
“I thought it was ridiculous,” said Rhodes, later adding “the point is taxation without representation and the ability of the city to tax non-residents who have no say.”
‘It’s great to be an elected official and spend other people’s money. That’s the most addictive substance in the world.’
He estimates he’s paid $2,100 to $2,200 in city taxes.
So Rhodes is suing the city in Ohio state court, seeking a refund on the city taxes he was charged and a declaration that the city breached its city code. He’s joined in the case by two other taxpayers, including one who lives in Kentucky and pays Cincinnati taxes.
“It’s great to be an elected official and spend other people’s money. That’s the most addictive substance in the world,” Rhodes said.
Rhodes, to be clear, is also an elected official, serving as the Hamilton County Auditor. He leads an office that, among other things, pays county bills and sets property values in the county surrounding Cincinnati. Rhodes is suing as a regular taxpayer, not as an elected official, he noted.
Supreme Court refused to hear case in Massachusetts
He’s not the only one who’s been trying to avoid the long arm of the taxman as it reaches for remote workers’ earnings. Far from Cincinnati, the United States Supreme Court on Monday ended another legal fight over pandemic-era tax rules for remote work. The court said it would not consider a case challenging Massachusetts’ decision to keep taxing New Hampshire residents who stopped their inter-state commute to Massachusetts offices last spring.
But as the pandemic keeps scrambling work arrangements and taxpayers push back on income-tax obligations from places where their work is located but where they don’t live, more cases similar to Rhodes’ complaint are likely to emerge.
‘The dam has been broken.’
“We’re likely see the issue spread as more and more people work remotely,” said Richard Pomp, a professor at the University of Connecticut School of Law and author of the textbook “State and Local Taxation.”
“The dam has been broken,” he said.
Pomp has been consulted by several accountants and non-tax attorneys with Connecticut clients who are disputing 2020 tax bills from New York, which said they owed tax even though those people were working from home. Those taxpayers might have a valid basis if those disputes turn into lawsuits later on, Pomp says.
As a general matter, many states will levy income taxes on people, residents and non-residents alike, who are making money in state bounds.
But there are a wide variety of state rules on when those tax obligations kick in for non-residents. Now, COVID-19 is injecting more complexity. Namely, what happens when people work away from the office because of public health requirements or employer rules?
And what happens to tax rules when hybrid office-home work schedules become further engrained in the workplace?
“It’s just very complicated and every state has their own special rules,” said Eileen Sherr, director of tax policy and advocacy at the American Institute of CPAs, a professional organization.
The pandemic shined a light on how that web of rules needs simplification, she said.
For example, one recently-introduced bill would set uniform timetables for when non-resident income tax obligations start and it would also give employers the choice to withhold for state taxes in the state where the worker is located.
Right now, that can’t be done in certain states, Sherr explained.
Massachusetts vs. New Hampshire tax fight
Rhodes filed his lawsuit in the Hamilton County Court of Common Pleas just days before the Supreme Court said it would not take New Hampshire’s case against Massachusetts.
Before the pandemic, Massachusetts said non-residents were subject to state income tax on the money they made within the state. As the pandemic struck, Massachusetts officials said non-residents who were commuting to employers in the state would still be subject to tax even if they were working from home, across state lines.
New Hampshire, which has no income tax, called that a “direct attack” on the state and wanted the Supreme Court to take the case. States including New Jersey and Connecticut urged the court to take the case and side with New Hampshire.
“In a time already riddled with uncertainty, this case demands prompt resolution,” the states said in their court filing.
Massachusetts noted in court papers that it recently lifted emergency orders — which, in turn, wind down the taxation rule at issue.
There’s nothing in the Supreme Court order refusing to hear the New Hampshire-Massachusetts matter that would stop New Hampshire taxpayers themselves from banding together to sue Massachusetts, Pomp noted.
Rhodes’ case aims at parts of Cincinnati Municipal Code, saying the city’s income tax “is specifically limited to work done, services performed or rendered, or activities conducted within the city of Cincinnati.”
‘There is no refund opportunity when filing a tax return for 2020 if you are working at home due to COVID-19.’
On its website, the City said under one state law “employers were expected to withhold Cincinnati tax for employees working from home rather than their normal work location within Cincinnati, regardless of the location of their home.”
The rule applied during the public health emergency and then another 30 days. “Therefore, there is no refund opportunity when filing a tax return for 2020 if you are working at home due to COVID-19.”
Ohio Governor Mike DeWine, a Republican, lifted the state of emergency, effective June 18.
Cincinnati officials did not respond to a request for comment. In correspondence with Rhodes’ lawyer before the lawsuit’s filing, lawyers for Cincinnati said the city could continue imposing the tax because its position was “fully consistent” with Ohio law.
Other taxpayers are challenging taxes
In Ohio, other cases have been challenging the assessment of municipal income tax.
For example, one taxpayer case sued over Columbus sticking with the income tax for non-residents during the pandemic. A judge dismissed the case and it is now being appealed, according to the Buckeye Institute, an Ohio-based think tank focused on free market public policies.
Curt Hartman, one of Rhodes’ attorneys, said the case dealt with the larger issue of taxing across borders. “If they can do it now, they can do it without a pandemic. The precedent is dangerous,” he said.
“Unchecked, there’s no telling where it would lead to,” Rhodes said.