Recent Developments

For Ohio individual income tax purposes, a "resident" is an individual who is domiciled in Ohio. Prior to 1993, the determination of an individual's state of domicile for Ohio individual income tax purposes was based on the application of the somewhat unclear common law facts and circumstances test developed under case law. In 1993 a mechanical, bright-line Ohio residency test in ORC Sec. 5747.24 was implemented by the Ohio legislature in order to provide more certainty concerning the determination of an individual's domicile status for Ohio individual income tax purposes.

Recent legislation effective March 23, 2015 amended the bright-line Ohio residency test to the benefit of taxpayers by increasing the number of Ohio contact periods permitted in order to qualify for classification as a non-Ohio resident. On the other hand, a recently decided Ohio Supreme Court case raises doubt whether the bright-line residency test continues to provide a mechanical safe harbor from the common law facts and circumstances test. Cunningham v. Testa, Slip Opinion No. 2015-Ohio-2744 decided July 8, 2015

The bright-line residency test in ORC Sec. 5747.24 provides that an individual who has (i) 182 or fewer contact periods in Ohio during the taxable year (increased to 213 or fewer effective March 23, 2015), (ii) a permanent abode outside Ohio throughout the entire taxable year and (iii) timely files the required annual Affidavit of Non-Ohio Residence/Domicile (the "Affidavit") is presumed not to be an Ohio resident for Ohio individual income tax purposes for that taxable year. This presumption is irrebuttable unless the individual fails to timely file the required annual Affidavit or makes a false statement (emphasis added) in the Affidavit. In the case of a failure to file or a false statement, the individual is presumed to have been domiciled in Ohio the entire taxable year unless the individual can rebut the presumption under the common law facts and circumstances test.

As discussed below, the Cunningham case allowed the Ohio Tax Commissioner to consider common law facts and circumstances to conclude that the Affidavit contained a false statement. By allowing consideration of common law facts and circumstances, the Cunningham case may significantly erode the certainty of the mechanical safe harbor aspect of the bright-line test for Ohio residency, even though the Ohio legislature arguably intended that the bright-line test would avoid the need to consider common law facts and circumstances. The common law facts and circumstances factors include consideration of factors such as voter registration, driver’s license, using an Ohio address when filing tax returns, bank accounts, professional advisers, etc. to establish the state of residence.

The Cunningham Case

In the Cunningham case, the annual Affidavit contained the required statement by the taxpayer that he "was not domiciled in Ohio at any time during" the tax year in question. The Ohio Tax Commissioner took, and the Ohio Supreme Court upheld, the position that this was a false statement, primarily because in order to obtain an Ohio real property tax benefit the taxpayer had recently signed an Ohio homestead-exemption application claiming under penalties of perjury that his Cincinnati house was his principal residence.

The taxpayer argued and the Ohio Board of Tax Appeals had agreed that the statutory language permits a finding of falsity in only two instances, for making a false statement pertaining to the number of contact periods in Ohio and/or having a residence outside Ohio. That position would provide a mechanical safe harbor for the bright-line residency test without resort to common law facts and circumstances. Importantly, the Ohio Supreme Court in Cunningham rejected that position and opened a wide door for challenges to non-Ohio resident status by the Ohio Tax Commissioner based on common law facts and circumstances.

In the absence of new legislation to limit the holding of the Cunningham case, taxpayers will need to consider common law facts and circumstances factors when signing the required annual Affidavit. For example, claiming an Ohio homestead-exemption, using an Ohio address for tax returns, being a registered voter in Ohio or having an Ohio driver’s license, etc. may be factors used by the Tax Commissioner to hold that the required statement concerning non-Ohio domicile in the Affidavit is a false statement. If the Affidavit makes a false statement the taxpayer is presumed to be domiciled in Ohio. Although ORC Sec. 5747.24 states that an individual who knowingly makes a false statement in the annual Affidavit is guilty of perjury, the Cunningham case did not directly address that issue.

Review of the Bright-Line Test Requirements

Whether an individual is presumed to be domiciled in or out of Ohio under the bright-line test depends in large part on the number of "contact periods" the individual has in Ohio during the taxable year. The definition of a "contact period" is spending at least some portion, however minimal, of two consecutive days in Ohio while away overnight from an abode located outside Ohio. In the event of a challenge by the Ohio Tax Commissioner, the individual bears the burden of proof, by a preponderance of the evidence, to support the number of contact periods spent outside of Ohio during the taxable year. Adequate records such as diaries and credit card receipts must be maintained in order to meet this burden.

The number of contact periods is divided into two levels: 0-182 and 183 or more (increased to 0-212 and 213 or more effective March 23, 2015). Under the safe harbor provision, an individual who (i) has 182 or fewer contact periods in Ohio during the taxable year (increased to 212 or fewer effective March 23, 2015), (ii) has a permanent abode outside Ohio throughout the taxable year and (iii) timely files the required annual Affidavit without making a false statement is irrebutably presumed not to be an Ohio resident for Ohio individual income tax purposes for that taxable year.

An individual who has 183 or more contact periods in Ohio (increased to 213 or more effective March 23, 2015) is presumed to be an Ohio resident unless the individual can rebut the presumption with clear and convincing evidence to the contrary based on common law facts and circumstances.

Also, the bright-line residency test does not apply to an individual changing domicile from or to Ohio during the taxable year; such an individual is domiciled in Ohio for that portion of the taxable year before or after the change.

Potential Traps Under the Bright-Line Test

One potential trap under O.R.C. Sec. 5747.24(B) is that there is no provision to extend the date for filing the required annual Affidavit, even if the taxpayer qualifies for an extension for filing the taxpayer's Ohio individual income tax return. While a federal individual income tax filing extension automatically extends the time for filing an Ohio individual income tax return, there is no such extension for filing the required Affidavit under O.R.C. Sec. 5747.24(B).

A second potential trap as discussed above is a finding by the Ohio Tax Commissioner that the annual Affidavit contains a false statement regarding non-Ohio domicile status based on consideration of common law facts and circumstances.

In summary, unless an individual who otherwise qualifies under ORC Sec. 5747.24 to be presumed not to be domiciled in Ohio fails to file the required annual Affidavit, or as described above, makes a false statement in the Affidavit, the bright-line test presumption of non-Ohio residency is irrebuttable. If, however, the individual fails to timely file the required annual Affidavit or makes a false statement in the Affidavit, the individual is presumed to be domiciled in Ohio unless the individual can rebut the presumption under the common law facts and circumstances test. Until and unless the Ohio legislature takes action to limit the holding of the Cunningham case, however, establishing non-Ohio residence for Ohio individual income tax purposes under the bright-line test will not provide a mechanical safe harbor from consideration of common law facts and circumstances.