Rhodes lives in the suburbs of Cincinnati, Ohio and commutes to town about three times a week. He pays municipal income tax because he earns within the city limits.
But on the two days that Rhodes works from home in Hamilton County’s Delhi Township, he still has to pay the city’s 1.8% municipal income tax.
Courtesy Dusty Rhodes
The pandemic-related emergency legislation allowed the city to continue to assess this tax during the pandemic, the city said.
“I thought it was ridiculous,” said Rhodes, and later added, “the point is the unrepresentative taxation and the city’s ability to tax non-residents who have no say.”
Rhodes is suing the city in Ohio state court for a refund of city taxes and a statement that the city violated its city rules. He is assisted in the case by two other taxpayers, including one who lives in Kentucky and pays Cincinnati taxes.
“It’s great to be an elected officer and spend other people’s money. It’s the most addictive substance in the world, ”said Rhodes.
Rhodes, to be clear, is also an elected official who serves as Hamilton County’s auditor. He runs an office that pays district accounts and sets property values in the county of Cincinnati, among other things. Rhodes is suing as a regular taxpayer, not an elected official, he noted.
He’s not the only one trying to bypass the tax officer’s long arm when it comes to teleworking income. Far from Cincinnati, the United States Supreme Court on Monday ended yet another lawsuit over pandemic-era tax rules for remote work. The court said it would not consider a case that would challenge Massachusetts’ decision to continue to tax New Hampshire residents who suspended their interstate shuttles to the Massachusetts offices last spring.
But as the pandemic keeps messing up work arrangements and taxpayers pushing back income tax obligations from places where their work is but where they don’t live, more cases similar to the Rhodes complaint are likely to emerge.
“We’ll likely see the problem spread as more people work remotely,” said Richard Pomp, professor at the University of Connecticut School of Law and author of the textbook State and Local Taxation. “The dam is broken,” he said.
Pomp was consulted by several accountants and non-tax attorneys with Connecticut clients contesting New York 2020 tax bills that said they owed tax even though those individuals were working from home. Those taxpayers could have a valid basis if those disputes later turned into lawsuits, says Pomp.
In general, many states levy income taxes on individuals, residents, and non-residents who make money within the state.
However, there are a variety of government regulations about when these non-resident tax obligations take effect. Now COVID-19 is leading to more complexity. What happens when people work outside of the office due to health regulations or employer regulations?
And what happens to the tax regulations if the hybrid working time models between office and home continue to solidify in the workplace?
“It’s just very complicated and every state has its own special rules,” said Eileen Sherr, director of tax policy and advocacy at the American Institute of CPAs, a professional organization.
The pandemic has shed light on how this web of rules needs to be simplified, she said.
For example, a recent bill would set uniform schedules for non-residents to become liable for income tax and allow employers to withhold state taxes in the state where the employee is resident.
At the moment, that’s not possible in certain states, Sherr explained.
The Massachusetts vs. New Hampshire tax battle
Rhodes filed his lawsuit in the Hamilton County Court of Common Pleas just days before the Supreme Court said he would not take the New Hampshire v Massachusetts case.
Prior to the pandemic, Massachusetts said non-residents were subject to state income tax on the money they made within the state. When the pandemic broke out, Massachusetts officials said non-residents commuting to employers in the state would be subject to tax even if they worked from home across state lines.
New Hampshire, which has no income tax, called this a “direct attack” on the state and wanted the Supreme Court to take the case. States like New Jersey and Connecticut asked the court to take the case and side with New Hampshire.
“At a time already marked by uncertainty, this case requires a quick resolution,” states said on their court records.
Massachusetts noted in court records that it recently overturned emergency ordinances – which in turn overturns the disputed tax rule.
There’s nothing in the Supreme Court decision refusing to hear the New Hampshire-Massachusetts matter that would prevent New Hampshire taxpayers themselves from banding together to sue Massachusetts, Pomp noted.
Rhodes’ case targets portions of the Cincinnati City Code, stating that the city’s income tax is “specifically limited to work, services or activities performed within the city of Cincinnati.”
On its website, the city said under state law that “employers were expected to withhold Cincinnati tax for workers who work from home rather than from their normal Cincinnati place of work, regardless of their home location . “
The rule applied during the public health emergency and then for another 30 days. “That’s why there is no refund option when filing a tax return for 2020 if you work from home due to Covid-19.”
Ohio Governor Mike DeWine lifted the state of emergency effective June 18.
Cincinnati officials did not respond to requests for comment. In correspondence with Rhodes’ attorney prior to filing the lawsuit, Cincinnati attorneys said the city could continue to levy the tax because their position was “fully compatible with Ohio law.”
Other taxpayers are challenging taxes
In Ohio, other cases have challenged local income tax assessment.
For example, in one case, taxpayers sued Columbus for sticking to income tax for non-residents during the pandemic. A judge dismissed the case and is now on appeal, 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 addresses the larger problem of cross-border taxation. “If you can do it now, you can do it without a pandemic. The precedent is dangerous, ”he said.
“Out of control, there is no telling where it would lead,” said Rhodes.