By Paul Williams

Law360 (May 18, 2021, 6:32 PM EDT ) An Ohio tax-writing committee approved legislation Tuesday that would block cities from imposing their income taxes on remote workers for 2021 but wouldn't retroactively change a law that permitted cities to tax nonresidents during the coronavirus pandemic in 2020.

The Republican-controlled House Ways and Means Committee voted 12-5 to pass H.B. 157, mostly along partisan lines. The bill would specify that a 2020 law that temporarily deems remote work performed during the pandemic to occur at an employee's principal place of work would allow withholding flexibility for 2021 but not alter the determination of an employee's municipal income tax liability. The bill would end the withholding relief on Dec. 31, 2021.

A previous version of the bill would have specified that the change to the local income tax rule pertained only to withholding relief and not allowed cities to tax remote workers in 2020 or 2021. But the committee adopted a substitute bill Tuesday that declined to address tax year 2020, following testimony in April from local government representatives who cautioned that allowing retroactive refunds for a closed tax year could cripple municipal budgets.

"I believe this sub bill before us today is a very reasonable and rational compromise that seeks to solve the uncertainty that our state currently has over this issue," the committee chairman, Rep. Derek Merrin, R-Monclova Township, said before the vote. The committee also adopted a technical amendment to the measure.

The temporary local income tax change was enacted through H.B. 197 last year and will be in effect until 30 days after Ohio lifts the state of emergency that was issued because of the pandemic. The law has been at the center of a series of legal challenges from teleworkers who claim cities have been using the statute to unconstitutionally tax them while they have worked remotely and haven't traveled to their employers' offices during the pandemic.

Jay R. Carson, a senior litigator at the Buckeye Institute, a free-market research group that is representing the remote workers in those cases, praised the bill's passage. In a statement, Carson said the legislation "protects Ohio's taxpayers by reaffirming the well-established constitutional principle that a city can only tax people who live in that city or work in that city."

The Franklin County Court of Common Pleas dismissed the institute's challenge against the city of Columbus in April, finding that Ohio's General Assembly has the authority to change municipal income tax rules for Ohio residents. That case was the first that the institute lodged against the law, and the organization has since filed a notice of appeal.

Carson told Law360 that the institute is pleased that the bill "corrects the constitutional problem going forward" but is also hopeful "that it might be amended to include more complete relief."

"In the meantime, the Buckeye Institute will continue to advocate for the appropriate 2020 refunds in court," he said.

Most of the committee's Democrats voted against the bill. Rep. Jeffrey Crossman, D-Parma, disagreed with the suggestion that the legislation wasn't retroactive because he said municipalities were required by state law to finalize their 2021 budgets by the end of March.

"It is retroactive in the sense that they budget these funds," Crossman said, referring to the local income taxes cities are currently imposing on remote workers. "And now, they're going to be in a position of not having these funds available to them, so they're going to have to reassess their budgets."

Merrin said that Crossman's points were "well taken" but that the bill seeks to clarify several issues for 2021: where residents owe local income taxes, where an employer should withhold local taxes and how much money municipalities may need to reserve for 2021 refunds given the pending court challenges.

"Whether everyone agrees or not on the best course of action, we will have certainty," Merrin said.

Additionally, Merrin said the bill's Dec. 31, 2021, end date for the withholding relief will ease some concerns that businesses had raised about potentially having the withholding rules change in the middle of a tax year once the state of emergency is lifted. The bill would also specify that a business should apportion or situs wages for municipal net profit tax purposes at an employee's principal place of work through the end of 2021.

But the committee's ranking member, Rep. Lisa Sobecki, D-Toledo, criticized the legislation, saying in a statement that the bill would "decimate local government resources at a time when they're already stretched too thin responding to this once-in-a-century public health and economic crisis."

"HB 157 will force cities and townships alike to make some tough choices," Sobecki said. "This bill should not pass."

Toledo is one of the cities being sued over the local income tax changes in H.B. 197.

A representative of the Ohio Municipal League did not immediately respond to a request for comment. The league had opposed the prior version of the bill that would have permitted the refunds for 2020 but had also supported its Dec. 31, 2021, sunset date for the local income tax rule changes.

The bill's primary sponsor and committee member, Rep. Kris Jordan, R-Ostrander, did not respond to a request for comment.

Counsel for Columbus did not immediately respond to a request for comment.

--Additional reporting by Abraham Gross. Editing by Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.