Ohio Supreme Court Finds Federal Due Process Limitations Do Not Apply to Intrastate Taxation

The BR State + Local Tax Spotlight

By Eugene J. Gibilaro

During the COVID-19 pandemic, many states enacted legislation trying to minimize the negative impact that the pandemic was having on state and local government budgets. It is in the context of the unprecedented circumstances of the pandemic that the Ohio Supreme Court recently considered legislation enacted by the Ohio legislature in March 2020 that provided that, for a limited time, Ohio workers would be taxed by the municipality that was their principal place of work, rather than by the municipality where they actually performed their work.

Over two dissenting opinions, the Court held that the temporary legislation at issue did not violate the Due Process Clause of the U.S. Constitution or Ohio law. Schaad v. Alder, Slip Opinion No. 2024-Ohio-525 (Ohio Feb. 14, 2024). In reaching its conclusion, the Court found that the federal due process requirement that there be a minimum connection between the taxing jurisdiction and the person or transaction it seeks to tax and the federal due process prohibition against taxation of extraterritorial values are “not implicated by the purely intrastate scheme of taxation at issue here.”

The taxpayer lived in Blue Ash, Ohio, and, before the pandemic, worked primarily from his employer’s office in Cincinnati, Ohio. In June 2020, he began working from his home in Blue Ash full time and did not return to the Cincinnati office until December 2020. The taxpayer’s employer withheld Cincinnati income tax for the entire 2020 tax year and the taxpayer sought a refund from Cincinnati for the days that he worked outside of the City from his home in Blue Ash. Cincinnati, through its finance director, denied the refund claim and the taxpayer sued.

In analyzing the taxpayer’s federal due process claims, the Ohio Supreme Court categorized the claims as substantive rather than procedural and, as the taxpayer was not alleging violation of a fundamental right, the Court concluded that the temporary legislation need only pass rational basis review. The Court found that “there was plainly a rational basis for the enactment—Ohio had a legitimate interest in ensuring that municipal revenues remained stable amidst the rapid switch to remote work that occurred during the pandemic.”

Turning to the U.S. Supreme Court’s due process precedents in tax cases, the Ohio Supreme Court concluded that “this strain of [the U.S. Supreme Court’s] due-process jurisprudence does not apply to matters of intrastate taxation.” In casting aside these cases as inapplicable to intrastate taxation, the Ohio Supreme Court declined to consider whether there was a minimum connection between the taxpayer and Cincinnati during the relevant period and whether Cincinnati had “jurisdiction or power to tax” the taxpayer. The Court also dismissed the taxpayer’s claim that Cincinnati had collected an extraterritorial tax because “the federal due process clause is not implicated by the purely intrastate-taxation scheme at issue here.”

The dissents questioned the majority’s conclusion that “federal due process has no place in our deciding whether a municipal tax on nonresidents is lawful given the absence of a fiscal connection between the tax-funded benefits that a municipality provides (e.g., roads, public safety) and a nonresident taxpayer who does not use any of those benefits.” One dissent stated that the Ohio Supreme Court has previously “recognized that there is a role for federal due process to play in matters of municipal taxation.” Stay tuned regarding whether the taxpayer will ask the U.S. Supreme Court to hear the case.

This update is one in a series of updates written for the April 2024 edition of The BR State + Local Tax Spotlight.

© 2024 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.