SUCCESSIONS

Ohio Supreme Court “Blurs” Bright Line Tax Residency Test

Court Confirms Other Factors are Still Important

Until recently, many advisors be­lieved that satisfying three mechanical statutory requirements [1] established a “bright-line” test as to whether or not a taxpayer was an Ohio resident for income tax purposes. Specifically, the statute pro­vides that a taxpayer is not an Ohio resi­dent for tax purposes if:

  1. The taxpayer has 212 or less “contact periods” in Ohio during the taxable year;
  2. The taxpayer has at least one abode outside of Ohio; and,
  3. The taxpayer files an Affidavit of Non-Ohio Residency/Domicile with the Tax Commissioner on its pre­scribed form verifying (i) the tax­payer is not domiciled in Ohio during the taxable year; and, (ii) the taxpayer has at least one abode out of Ohio for the entire taxable year.

However, the statute also provides that if the Affidavit contains a “false state­ment” or is not filed within a prescribed time, the taxpayer is presumed to be an Ohio resident and has the burden of prov­ing otherwise.

Before the enactment of the statute, income tax domicile was determined by a common law analysis of the taxpayer’s particular circumstances. To simplify this determination, the statute was enacted and generally thought to replace the subjective common law test. However, the recent Ohio Supreme Court decision in Cunning­ham v. Testa, dismissed the notion that merely satisfying the three statutory ele­ments is the exclusive test determining taxpayer domicile.[2] Instead, the Court held that even if the three elements are satisfied, the common law factors still de­termine if a “false statement” is included in the Affidavit.

Contrary to recent commentary, the Cunningham decision should come as no surprise and is consistent with our past ad­vice to clients who are residents of other states but spend time in Ohio: simply meeting the three mechanical tests is not enough, you must also act in a man­ner consistent with being a resident of another state.

In Cunningham, Dr. Cunningham clearly met the first three requirements under the statute. However, based on spe­cific facts relating to the Cunningham’s activities, the Ohio Department of Tax de­termined that the Affidavit contained false statements. For example, after filing the Affidavit with the Ohio Department of Tax, the Cunningham’s filed for Ohio homestead exemption with their Ohio county auditor indicating that their Ohio residence was their principal place of resi­dence and that the out-of-state residence was a second or vacation home. They also had all utility bills for the out-of-state home sent to their Ohio home year-round, filed a federal tax return listing their Ohio residence as their home address, and maintained Ohio driver’s licenses. Based on these, and other facts, the Tax Com­missioner determined that the Affidavit contained “false statements” as to the domicile of the taxpayer and, therefore, the taxpayers were presumed to be Ohio residents. Ultimately, the Ohio Supreme Court agreed.

Contrary to recent commentary, the Cunningham decision should come as no surprise and is consistent with our past ad­vice to clients who are residents of other states but spend time in Ohio: simply meeting the three mechanical tests is not enough, you must also act in a man­ner consistent with being a resident of another state.

As we’ve suggested in the past, to help avoid Ohio tax domicile you should accomplish as many of the following “Do’s” and avoid as many “Do Not’s” as you can:

 

DO DO NOT
Continue to have less than 213 contact periods in Ohio Have more than 212 contact periods in Ohio
Maintain your property outside of Ohio Sell or leave your non-Ohio property before you have acquired a replacement
Obtain a driver’s license in other state Maintain an Ohio Driver’s License
Register all vehicles & license plates in other state Keep vehicles registered in Ohio or maintain Ohio license plates
Register to vote in other state Stay registered to vote in Ohio
File for Homestead in other state (if applicable) Make an Ohio Homestead Election for your Ohio property
Request that the county auditor remove the 2.5% real prop­erty tax rollback with respect to any Ohio residence Represent yourself as an Ohio citizen
File a Declaration of Domicile in the county of your new state Claim to be an Ohio Resident in any licenses, contracts, applica­tions, etc.
Use other state address for all contracts, applications, etc. Join or maintain Ohio memberships as other than a non-resident member
Keep receipts of where you purchased good to substantiate your contact periods Pay in-state tuition for Ohio schools
Establish healthcare relationships in another state Have mail sent to your Ohio address more than 212 days
Move personal effects to new residence Keep inadequate records of contract periods
Obtain pet, hunting and fishing licenses in your new state and obtain them as a Non-Resident if you need them for Ohio  
Change address on credit cards, bills, and insurance  
Join local organizations in your new resident state  
Revise estate planning documents to reflect your change in location  
Use the address of your home in other state for all tax and governmental filings  
Establish a bank account with a local bank in other state  
Convert Ohio club membership to “non-resident” status  

[1] Ohio Revised Code §5747.24(B)(1)

[2] Cunningham v. Testa, Slip Opinion, 2015-Ohio-2744.