Who is authorized to tax the income of a commuter who doesn’t commute? This question—born of the pandemic and currently pending before the Supreme Court of Ohio—could be coming to a tax bill near you, and soon.
Following the outbreak of Covid-19 in 2020, government orders forced millions of employees to work from home instead of at their usual offices. These orders accelerated a trend which had already begun toward remote and hybrid work and—three years later—is all but entrenched.
While some companies have begun requiring employees to return to the office, the outdated ways of packing folks into tight cubicles in downtown high rises will never be the same.
Benjamin Franklin famously observed that “in this world nothing can be said to be certain, except death and taxes,” so it should come as little surprise that along with the changes in assigned duty stations came a corresponding attempt by government authorities to prove old Uncle Ben right.
Most Americans pay state and local income taxes based upon where they reside. Accordingly, the shift to remote work made no difference to their tax liability. But some employees are subject to commuter taxes, which are assessed based upon where the work itself is performed.
Commuter taxes raise their own public policy concerns—after all, commuters have no say in how those tax dollars are used because they cannot vote in those jurisdictions. The antiquated justification for commuter taxes is that employees receive some tangible benefits while they are physically in the city, i.e., if an employee has a medical emergency while at work, it would be the city’s emergency services that would respond.
But what happens when commuters are no longer commuting to those cities?
In addition to the city no longer providing tangible services to the now non-commuting employee, if that same employee has a heart attack while working from home, it is the safety services in the residential jurisdiction that would respond and should therefore receive the revenue.
Taxing authorities for the office locations have quickly run into a legal problem: Governments may tax only people or property over which they have jurisdiction. Cities or states can tax their own residents for any income earned and nonresident commuters only for work performed within their jurisdictions.
This limitation makes sense. Otherwise a cash-hungry government could find tenuous pretextual grounds to tax nonresident income, violating basic notions of due process, and creating the risk that the same income would be taxed multiple times by different governments.
When Massachusetts issued a rule requiring employees who had previously worked in Massachusetts but were now working elsewhere due to Covid-19 to pay Massachusetts income taxes anyway, its neighboring New Hampshire sensibly filed a case in the United States Supreme Court on behalf of its citizens who were neither living nor working in Massachusetts. Unfortunately, taxpayers got no clarification because the Supreme Court declined to hear New Hampshire’s complaint, leaving Massachusetts’ unconstitutional money grab in place for the time being.
As Justices Thomas and Alito lamented, the court should have taken the case. The decision not to take it does not set a legal precedent, and—accordingly—we do not know how the Supreme Court would rule in such a case. All we can say for sure is that Massachusetts has done a full 180 since the Revolution and now quite ironically favors taxation without representation.
Massachusetts was not alone in seeking to tax beyond its jurisdictional borders either.
Ohio, for example, allowed municipalities to tax the income of workers who do not live in—and in fact were legally prohibited from working in—those same municipalities under Ohio’s stay-at-home order. The bill absurdly “deemed” all work performed elsewhere during the emergency order to have been performed at the employee’s principal place of work for the purposes of levying income taxes on it. If you stepped foot in your office, you were subject to being arrested and charged with a crime, but they were still going to pretend that you were in your office so as to tax you all the same. George Orwell, call your editor.
The Buckeye Institute challenged a half dozen cities across Ohio in court for these actions—most recently Cincinnati in Schaad v. Alder, which had its oral arguments before the Ohio Supreme Court on March 1.
Since 1950, the Ohio Supreme Court has consistently held that the Constitution’s Due Process Clause allows municipalities to tax only two types of income: income earned by the municipality’s own residents and income earned by nonresidents for work physically performed within the municipality’s geographical borders.
These avaricious cities’ brazen efforts to collect income taxes from nonresidents who did not work in their jurisdictions are unconstitutional, deprive smaller municipalities of revenue owed to them, and violate the easy-to-follow real estate maxim—location, location, location. Cincinnati may tax work performed by nonresidents within its own city limits, but not work performed by nonresidents in Cleveland, Columbus, Toledo, or even where Mr. Schaad did his job—in his hometown of Blue Ash.
Considering that some 41 out of 50 states levy income taxes combined with the dramatic rise in remote work arrangements, which make it easier and more common for employees living in one city or state to work for an employer based in another city or state, all eyes should be on the Ohio Supreme Court as we await its decision in this case. How it rules in Schaad v. Alder will very likely set a precedent for how the income of remote workers nationwide is taxed going forward.
Robert Alt is the President and CEO of The Buckeye Institute in Columbus, Ohio, and the attorney who argued the Schaad v. Alder case before the Ohio Supreme Court.
