Since the onset of the pandemic, states and localities have seemed only to use remote work situations to expand the reach of their tax jurisdictions, never to restrict it. Remote workers will, therefore, be happy to see the courts act to rein in one of the more aggressive interpretations of remote workers’ tax obligations.
During the pandemic, many workers who previously went into the office found that they were no longer expected to do so — and in some cases, not allowed to do so. But in many cases, the jurisdictions that enjoyed the income tax revenue from these workers found that they did not want to let workers leave their tax web that easily.
One such worker was Dr. Manal Morsy. Prior to the pandemic, Dr. Morsy traveled from her home outside Philadelphia nearly 400 miles to stay in Cleveland, where she worked during the week, then commuted back to Philadelphia for the weekends. During the pandemic, she worked exclusively remotely from her home in Pennsylvania, as she had to do.
Ohio, however, not only has state-level income taxes, but also allows local jurisdictions to impose income taxes as well. At their urging, in 2020 Ohio passed a law “deeming” employees who switched to working remotely during the pandemic to have been working from their previous office location.
As a result, Dr. Morsy was considered to still be subject to Cleveland’s 2.5 percent income tax rate, even though she worked exclusively outside of Cleveland. In fact, she has not even set foot in Ohio since the pandemic began in early March 2020. On top of this, given that Dr. Morsy was physically working in Pennsylvania during this time, she owed full Pennsylvania income tax, with no credit given for taxes paid to Cleveland.
Cleveland’s assessment was challenged by the Buckeye Institute, an Ohio public interest organization, which claimed that Cleveland’s taxation of remote workers with no physical presence in Cleveland violated the Commerce Clause of the Constitution. Earlier this week, a Cuyahoga County judge agreed with the Buckeye Institute’s arguments, ordering Cleveland to refund its unconstitutional tax collections of remote workers’ income.
While that represents a great win for taxpayers, Cleveland is far from the only tax jurisdiction grasping at remote workers’ tax revenue. Four states — New York, Delaware, Pennsylvania, and Nebraska — impose a so-called “convenience of the employer rule,” whereby in-person workers who switch to working remotely in another state are deemed to still be working in-state for tax purposes. Connecticut imposes a retaliatory version against the four above states, Massachusetts had one in effect during the pandemic, while New Jersey is considering instituting a convenience rule as well.
These rules not only defy logic, they disconnect the worker from the ostensible purpose of taxes. In theory, Americans pay taxes to their state and local governments because they benefit in some way from the services they provide — be it roads, police, or fire departments. Americans working remotely in a completely different state never benefit from those services at all.
What’s more, as these workers are nonresidents, they lack the ability to influence the taxes they pay at the ballot box. Targeting nonresidents for increased tax obligations might be good electoral politics — raising revenue without the backlash from voters — but it is bad for interstate commerce and, more importantly, deeply unfair.
While the Buckeye Institute’s victory in this specific case is an important one, there is much more work to be done. As remote work appears to be here to stay, tax authorities must endeavor to ensure that remote workers’ tax obligations are not caught in a tug-of-war between grasping tax jurisdictions.