Supreme Court dismisses lawsuit alleging double taxing of worker incomes in Ohio

Without offering an oral or written explanation, the Ohio Supreme Court dismissed a case Wednesday that was brought by two Summit County taxpayers alleging widespread double taxation of mostly low-income Ohio workers.

Akron-based Community Legal Aid said the case was about more than its two clients suing Ohio Treasurer Robert Sprague and Tax Commissioner Jeff McClain. It was a broader effort to force state government, through what is legally called a mandamus action, to stop double charging workers with income taxes deducted from paychecks and no W-2s forms to show what they've already paid when they file their tax returns.

Without the W-2s, the state records them as paying nothing and automatically charges them in full, individual tax records filed with the lawsuit show.

“The state of Ohio’s systemic failure to properly credit individual employee taxpayers’ accounts cannot be remedied by settling the [two plaintiffs’] tax accounts because it affects any and all Ohio taxpayers who are unable to provide W-2 information on their state tax return,” Dana Goldstein, the Legal Aid attorney on the case, wrote in the original complaint filed last August.

A spokesperson said Treasurer Sprague is not commenting beyond what state attorneys have filed in court. And the scope of the issue has been difficult to gauge.

Who's getting double taxed?

A Beacon Journal public records request filed with the Ohio Department of Taxation this year uncovered 666,825 tax returns from 2019 that listed income but no tax withholdings from employers. The vast majority of these taxpayers likely aren't being double taxed because, as the state pointed out, their income may not come from employers who are required to deduct taxes but from unemployment, Social Security, insurance checks, lottery winnings, gambling proceeds or other sources that can avoid being taxed until filing returns the next year.

After filtering out high-earners with no tax withholding, Community Legal Aid Executive Director Steve McGarrity said his organization thinks about 20,000 people are double-taxed annually. And many don't know it.

About the case:Community Legal Aid and local residents sue Ohio for allegedly double-taxing incomes

The silver lining in suing the state and losing, McGarrity said, is that the Department of Taxation updated its guidance to require all employers, not just the big ones who were already doing so, to provide employee-level data about what's withheld. The state should now know how much each worker paid throughout the year, even if a worker lacks a W-2 when filing, McGarrity said.

But it's still on the workers to request the refund.

"We don't consider this fight over," McGarrity said. "And our hope is that, for individual taxpayers who have concerns or issues, you should reach out to us [at 330-535-4191]. And we would highly encourage people to call the Department of Taxation directly [at 1-800-282-1780]."

State prevails on sweeping legal action

The double-taxation issue “has a disparate impact on low-income individuals, who are more likely to be in situations where W-2 information is not provided or is lost or destroyed,” Goldstein wrote in her complaint a year ago when Legal Aid took on its two clients: a man who said he couldn’t get another W-2 from his former employer — a dollar store chain that went out of business — and a domestic violence victim who fled her home and an abusive relationship without time to collect her tax documents. Each provided proof that they were forced, under penalty of law, to double pay state income taxes when they couldn’t produce their old W-2s.

Without her W-2, the woman listed $0 in tax withholdings on her return. The man put "unknown," which his return shows was translated to $0.

In a request this May to dismiss the case, state attorneys argued that the pair of plaintiffs failed to exhaust all other avenues before suing. They could have petitioned for a reassessment of their tax bills or went to the Board of Tax Appeals, the state attorneys said.

In court, though, the state did not deny the possibility that workers being double taxed. But they argued that claims of widespread double taxation were not “fairly traceable” to actions taken — or not taken — by Sprague or McClain.

The mandamus action, if successful, would have forced the state to adopt new policies and procedures to avoid future double taxation and quickly refund workers if they’re being deducted more than they will owe.

At this point, it's more feasible for workers without W-2s, who suspect they've been overtaxed, to call the department of taxation than to file individual lawsuits, which may only work "if you're being represented by a legal aid lawyer," McGarrity said. "So, the thousands of people that aren't [represented by counsel], this [mandamus action] was our attempt to get the court to recognize that there's a systemic problem that needs to be resolved here that people shouldn't need to hire a legal aid lawyer in order for the state of Ohio, to say, 'I'm holding $500 of your money. And I'm going to let you have it back now.'"

And filing a class action lawsuit is not possible, at least for Community Legal Aid, which is prohibited from doing so per the public funding it receives through the Legal Services Corporation.

Legal Aid's attorneys said they previously brought the double taxation issue to the attention of state officials and offered solutions. The nonprofit group decided to sue after the state did nothing to fix the alleged problem.

The Supreme Court pushed the case into mediation, which put the litigation on pause for eight months until May when the two sides failed to reach an agreement and the state filed its motion to dismiss. Legal Aid filed its motions opposing the dismissal request in June.

The case was quiet until the announcement Wednesday morning that the Supreme Court would toss it out.

Rep. Lisa Sobecki (D-Toledo) introduced House Bill 711 more than two months ago. The legislation, which has not yet been assigned to a committee by House leadership, would require "the Tax Commissioner, upon request, to provide a report of an employee’s compensation and withheld income taxes for a year," according to a detailed analysis of the bill by the Legislative Service Commission.

Under current law, the analysis says, "this information is confidential and generally may not be divulged by the Department of Taxation."

Reach reporter Doug Livingston at dlivingston@thebeaconjournal.com or 330-996-3792.

This article originally appeared on Akron Beacon Journal: Supreme Court dismisses Legal Aid lawsuit on double taxing workers W-2