The following article was originally published in the Ohio Capital Journal and published on News5Cleveland.com under a content-sharing agreement.
Ohio lawmakers are considering a measure that could allow business owners to shift their tax burden for remote workers. Proponents of the idea argue it’s a way to simplify tax filing. But it could also make it easier for businesses to reduce their tax burden.
Current system and changes
State law allows municipalities to levy income taxes on businesses operating within city limits. Businesses determine how much they owe through a formula weighing payroll, sales and property.
But remote work has thrown a wrench into that calculation. The sales and payroll that businesses previously attributed to one office could now be spread over as many cities as they have employees. Ohio Chamber of Commerce general counsel Tony Long explained that presents an administrative nightmare for small businesses.
“Employers would need to track remote work locations of employees determine if the employee was using company property and if sales were generated from that remote location,” he said, adding employers would “potentially face filing requirements to municipalities that they do not conduct business in or have property located in but for the remote worker.”
Long and others noted the potential expense of filing those returns could exceed the amount of tax they owe. To address the problem, businesses could apply their remote workers to a “qualifying reporting location” for the purposes of calculating taxes.
It’s similar to emergency changes made early in the COVID-19 pandemic. Businesses calculated taxes as if workers kept showing up in person even if they actually clocked in from their couch. The current bill, however, gives businesses the ability to change that reporting location at will.
Importantly, the changes only apply to business income tax — not the payroll tax that makes up the biggest share of many city’s local revenues. Still, according to proponents, business income tax makes up roughly 15% of overall tax base.
Potential pitfalls
Rep. Sean Brennan, D-Parma, was quick to zero in on the potential local impact. A former city councilman, he pressed Greg Saul from the Ohio Society of CPAs about the possibility of companies using the measure to “disproportionately decrease their tax burden.”
Saul insisted the intent is to be “revenue neutral,” and the law wouldn’t create new avenues for tax avoidance.
“If that was the business’s goal, I would think that that mechanism is available to them under current law,” Saul argued. “This is really just trying to situs the net profits to a location that the business is at.”
Saul noted townships don’t charge a municipal income tax and businesses could always move out of state. Picking up stakes and moving, after all, is time-honored if cumbersome means of seeking lower taxes.
But if businesses can easily alter an employee’s reporting location by simply changing an election on their tax forms, it’s easy to imagine companies working the angles. Some might go abatement shopping, jumping from one city to another. Others might “shift” workers to that warehouse just outside of town instead of their offices on main street.
Saul argued the measure has a “good faith” clause to avert those moves, but enforcement sounded a bit fuzzy.
“There’s a three-factor formula of how they can choose the remote work location, but the last one is (it) requires the employer to act in good faith when designating a reporting location,” Saul said. “Any city that is concerned about the location can challenge an employer on that point.”
Under the bill, companies should determine reporting location first by the place of business where an employee typically works. If there isn’t one — for instance, because they work from home — the company should next look to the place where their supervisor reports. But if the supervisor isn’t coming into the office either, the company has its pick of locations so long as it makes the designation in “good faith.”
