United States

Ohio bill brings changes to the "bright line" residency test

TAX ALERT  | 

On June 14, 2018, Ohio Governor John Kasich signed House Bill 292, amending how the state will determine residency and reinstated a taxpayer’s direct appeal from the Ohio Board of Tax Appeals (BTA) to the Ohio Supreme Court. A summary of the tax provisions are highlighted below.

Income tax residency test

House Bill 292 alters the state’s approach for determining an individual's state of domicile as it pertains to the portion of the individual’s income subject to Ohio Income tax. Additionally, the bill restricts which factors the Ohio Tax Commissioner may consider when attempting to overcome a taxpayer’s assertion of Ohio nonresidency. These provisions apply to taxable years commencing in 2018.

Nonresidency requirements prior to House Bill 292

Prior to House Bill 292, an individual with fewer than 213 contact periods in Ohio and an abode outside of Ohio was presumed to be a nonresident. The individual may assert nonresidency through submission of an affidavit (Form IT-DA). The affidavit, if truthful and filed by the prescribed due date, establishes an "irrebuttable" presumption that the person is a nonresident.

The Ohio Department of Taxation challenged the above provisions of the affidavit in Cunningham vs. Testa. The department asserted the taxpayer’s affidavit contained a false statement because the taxpayer was claiming the Ohio homestead exemption on its residence in Ohio. The court ruled in favor of the department finding a taxpayer’s statement verifying non-Ohio domicile can be false if it is not supported by common law of domicile. This decision brought about confusion among taxpayers as to whether the common law test of domicile were factors in determining Ohio domicile when the taxpayer filed the affidavit. In order to clarify this confusion, the legislature passed House Bill 292 to simplify non-residency requirements after the Cunningham decision.

New requirement under House Bill 292 for nonresidents

House Bill 292 extends the deadline for filing the statement to the 15th day of the 10th month following the close of the taxable year, (e.g., Oct. 15).

The bill also establishes the following additional objective criteria the taxpayer must satisfy to establish non-resident status; specifically, a taxpayer claiming to be a non-resident:

  • Did not claim a federal depreciation deduction with respect to the out-of-state abode (the deduction is available only for property used in business or held for the production of income – e.g., as rental property);
  • Did not hold a valid Ohio driver's license or identification card;
  • Did not receive the benefit of an Ohio homestead exemption or 2.5 percent tax reduction for the property tax year that began in the person's taxable year (both of which depend on ownership and occupancy);
  • Did not receive a tuition discount based on residency for attending an Ohio institution of higher education.

The bill restricts the parameters available for the commissioner’s deliberation when contesting a taxpayer’s claim of non-resident status. House Bill 292 lists the considerations as:

  1. Number of contact periods
  2. Possession of a full-year abode outside the state, and
  3. Any of the new objective criteria prescribed by the bill (e.g., federal depreciation, drivers license, homestead exemption, tuition).

The bill also provides that these changes are intended to rescind the use of the common law definition of domicile which was upheld in Cunningham v. Testa.

Appeals of Board of Tax Appeals decisions

House Bill 292 allows parties to appeal a decision of the BTA directly to the Ohio Supreme Court if the decision involves a final determination of the commissioner or a municipal corporation's income tax review board. Prior to House Bill 292, it was required that all decisions of the BTA must be filed initially with a state Court of Appeals.

Takeaways

House Bill 292 introduced a number of additional criteria to the state’s bright line test that expands the factors considered when determining a person’s residency status. In addition to the expanded residency test, the bill provides increased flexibility to parties seeking an appeal of a decision of the BTA by allowing for a direct appeal to the Ohio Supreme Court. Ohio taxpayers should speak to their tax advisors with questions. 

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