Client Alert: New Bright-Line Test for Ohio Income Tax Purposes

On June 14 of this year, Governor Kasich signed House Bill 292 into law which amended the Ohio statute used for determining residency for Ohio income tax purposes. The new rules are effective for all tax years beginning on or after January 1, 2018. Under the law as it existed prior to the newly enacted amendments, there was supposedly an irrebuttable presumption created that a taxpayer would be considered a non-resident if the taxpayer had a residence outside of Ohio for the entire year; the taxpayer had no more than 212 contact periods (overnights) in Ohio; and the taxpayer timely filed an Affidavit of Non-Ohio Residency with the Ohio Tax Commissioner. The statute seemed pretty clear on its face what an individual had to do to establish himself as a non-Ohio resident until an Ohio Supreme Court case was decided in 2015. In the Cunningham v. Testa case, the taxpayer had fewer than 212 contact periods, had a home in another state for the entire year and had filed the Affidavit of Non-Ohio Residency.  However, the taxpayer had also filed an application to obtain the homestead exemption for his residence in Cincinnati which included a declaration by the taxpayer that his Cincinnati home was his principal place of residence. The Ohio Supreme Court decided that the Tax Commissioner was entitled to look at other facts in determining whether or not the taxpayer's statement in the Affidavit of Non-Ohio Residency that he was not domiciled in Ohio at any time during the tax year was accurate or false. This case decimated what was considered the bright-line test for determining non-residency. The new amended statute signed into law this past year re-establishes the bright-line test for establishing non-residency but adds several more requirements which must be met in order to obtain the irrebuttable presumption. The requirements which must now be met to obtain the irrebuttable presumption are as follows:

1. Taxpayer has fewer than 212 contact periods in the State of Ohio which need not be consecutive.
2. Taxpayer during the entire year had an abode outside the State of Ohio for which the individual did not claim a depreciation deduction on the taxpayer's federal income tax return.
3. Taxpayer did not have an Ohio driver's license or identification card at any time during the taxable year.
4. Taxpayer did not claim the homestead exemption for an Ohio residence during the taxable year.
5. Taxpayer did not pay in-state tuition if enrolled in a state institution for higher education during the taxable year.
6. Taxpayer files a statement with the Tax Commissioner on or before October 15 of the following year on a form prescribed by the Tax Commissioner verifying that he has met the first five requirements listed above.

The presumption that the taxpayer was not domiciled in Ohio is irrebuttable unless the statement provided by taxpayer is false with respect to any of the first five requirements listed above. Under the newly revised statute, so long as the taxpayer has met all six of these requirements, the Tax Commissioner will not be able to challenge the irrebuttable presumption that the taxpayer was a non-resident. This should close the door on any further attempts by the Tax Commissioner to challenge a taxpayer's non-residency status on common law principles of domicile when the taxpayer has met all of the statutory requirements. If the Tax Commissioner finds that the taxpayer has made a false statement with respect to any of the first five requirements, taxpayer will be presumed to have been an Ohio resident for the entire taxable year. If taxpayer knowingly makes a false statement under this statute, he is guilty of perjury.  Furthermore, if the Tax Commissioner challenges the number of contact periods which taxpayer claims to have had in Ohio, the taxpayer bears the burden of proof to verify the number by a preponderance of the evidence.