Ohio Public Law Update; Tax Sharing Provisions

    View Authors December 2004
    "New Employee" Defined by Ohio Supreme Court for Income Tax Sharing Provisions of Revised Code Section 5709.82

    On December 17, 2004, the Ohio Supreme Court, in Massillon City School District Board of Education v. Massillon, ___ Ohio St. 3d ___, 2004 - Ohio - 6775, held that persons employed in the construction of real property exempted from taxation under Ohio's enterprise zone legislation and persons "first employed at the site" of that real property and who have not had their income taxed by the city in which the enterprise zone is located are "new employees" within the meaning of Revised Code Section 5709.82(A) for purposes of calculating the $1 million payroll threshold test relating to tax abatement and tax increment financing projects.

    Under Section 5709.82(C)(2), if the payroll from "new employees" resulting from the implementation of certain tax abatement and tax increment financing programs in municipal corporations equals or exceeds $1 million "in any tax year for which such property is exempted," the legislative authority of the municipal corporation and the affected board of education (not including joint vocational school districts) are required to attempt to negotiate an agreement to compensate the school district for all or a portion of the tax revenue the school district would have received had there been no property tax exemption. If such negotiations fail within a six-month period, the municipal corporation must pay the school district a portion of the income taxes derived from "new employees," as calculated under Section 5709.82(D). The definition of "new employees" includes certain construction workers.

    The city of Massillon argued that the payroll of "new employees" for an enterprise zone tax abatement project is only calculated for purposes of the $1 million payroll threshold test in tax years for which property is actually reflected as exempted on the property tax duplicate (which is the time period from which the tax exemption would run). Under that interpretation, the payroll of construction workers might not be counted as "new employees" since construction is frequently completed by the date property is exempted on the tax duplicate. Instead, the Court held that the date on which a municipal corporation formally approves an enterprise zone agreement is the date on which an exemption commences for the limited purposes of determining when a construction worker becomes a "new employee" under Section 5709.82(A). Thus, the payroll of construction workers is included in the calculation of the $1 million payroll threshold, beginning with the date of formal approval of the enterprise zone agreement by the municipal corporation. If that threshold is met, unless otherwise agreed, a portion of the income taxes derived from the payroll of construction workers from that date will be paid to the affected school district.

    The Court further determined that if a company enters into an enterprise zone agreement and transfers employees from a site outside the city to a new location in the city, those transferred employees are "new employees" within the meaning of Section 5709.82(A), provided such transferred employees have not been subject to the city's income tax within the two previous years. As a result, the payroll of those transferred employees is likewise included in the calculation of the $1 million threshold.