To provide some context, St. Louis adopted the earnings tax in 1959. The earnings tax is a 1% tax imposed on the earnings of nonresidents of St. Louis “for work done or services performed or rendered in the City.” The plaintiffs were not residents of St. Louis but were employed in the city and had historically paid the earnings tax on their wages. In 2019 and 2020, the plaintiffs sought earnings tax refunds based on the days spent working for their City-based employer virtually from their homes outside of the City. The Collector of Revenue (“the Collector”) for St. Louis granted the refunds. In 2021, the plaintiffs submitted earnings tax refunds for the days they worked virtually in 2020. However, the Collector denied those refund requests. Despite no changes in the law, the Collector stopped issuing refunds for work conducted outside of the City, unless the work was done while traveling. This was a distinction that was not previously made. The plaintiffs filed a lawsuit against St. Louis after the city denied them tax refunds for taxes paid on their wages for days worked outside of the city during the Covid-19 pandemic in 2020.
The key issue in this case was a matter of statutory construction. The judge focused on determining the intent of the legislature in including the phrase “services performed or rendered in the city.” Plaintiffs argued that the phrase “rendered in the city” meant that the earnings tax can only be imposed on nonresidents who are physically present and working in the city. The Defendants argued that the term “rendered” embodied a different meaning in the context of remote work and that the earnings tax is applicable to people working within the City’s physical boundaries as well as to those who deliver services whose benefit is received or rendered within the city.
The judge explained that “for Defendants’ interpretation to work, the statute and ordinance would have to impose the Earnings Tax on nonresidents of the city for work done or services performed or rendered [into] the city. However, that is not what the statute and ordinance provide.” The language of the statute is “very clear and unambiguous” and an ordinance enacting a tax measure must be given a “strict interpretation and construed against the taxing authority and in favor of the taxpayer.” The court highlighted that the Defendants “seemed to operate according to Plaintiffs’ interpretation until the onset of the Covid-19 pandemic.” Instead, the “sudden surge in telework [brought on by the Covid-19 pandemic] caused the Collector to fear a high demand for the Earnings Tax refund and its potentially profound effect on the City's budget. As a result, it seems the Collector unilaterally altered the criteria for the refunds without pursuing any kind of formal rule-making process or any amendments to the existing Earnings Tax statute or ordinance.”
The judge explained that the phrase “services performed or rendered in the city” constrained St. Louis’ application of the tax to only those workers who are physically present inside St. Louis. In holding that St. Louis improperly applied its earnings tax on nonresident employees, the judge explained that the city was attempting to stretch the language of the ordinance beyond its intended meaning: “[St. Louis] unilaterally chang[ed] its interpretation [of the earnings tax], which taxpayers had come to rely upon, without engaging with the legislative process to properly alter the earnings tax statute or ordinance.”
This is another great win for remote employees to add to their pile of Covid-related telecommuting cases, and it illustrates that unless a jurisdiction had in place a “convenience of the employer”-type rule in place before Covid, courts may be unwilling to allow for one retroactively. And of course, even in states like New York where there were special rules in place for remote work, there remains a lot of open audits and potential cases where taxpayers are arguing (correctly in our view) that such rules can’t apply if the employer shuttered their offices, or if the employee was assigned to an office elsewhere, or if the employee never worked in New York at all during the year. So stay tuned for more updates, and hopefully more reports of taxpayer wins!
