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St. Louis settles earnings tax case, will allow refunds for pandemic years – St. Louis Post-Dispatch

Attorney Mark Milton, center, surrounded by four of his six clients and with co-counsel for the plaintiffs, Bevis Schock, told reporters at their Clayton office on Friday, June 14, 2024, that they had won their three-year battle against the city of St. Louis in their income tax case. Photo by Laurie Skrivan, lskrivan@post-dispatch.com

By Laurie Scriven, Post-Dispatch

ST. LOUIS — City officials announced Friday they will settle a lawsuit over the handling of income tax refunds for remote workers during the pandemic and allow local residents and businesses to seek backlogged refunds, a move that could cost the city tens of millions of dollars.

Starting this summer, people who lived and worked outside the city for St. Louis-based businesses will be able to seek refunds on income taxes they paid over the past four years, Revenue Officer Gregory F.X. Dailey said in a news release.

The settlement also covers claims against the city’s 0.5% payroll tax that employers pay per employee.

Plaintiffs’ attorneys, Bevis Schock and Mark Milton, praised the city’s decision as “the right thing to do.”

“Despite short-term revenue losses, the city’s hope for recovery rests on public confidence that the city’s tax laws and all other laws are being applied fairly and as prescribed,” they said in a statement.

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The ruling is a surprising development in a three-year legal battle during which city officials, trying to protect a vital $250 million annual revenue stream, have argued that nonresidents who work outside the city aren’t entitled to reimbursement for regular work outside the city. And even after courts began ruling in favor of six local residents who sued to recover taxes paid during the pandemic, city officials fought to avoid rulings that would force ordinary citizens to pay back past-due taxes.

But now it appears the city’s tax collector has decided to offer it voluntarily.

Officials were already bracing for some broader impacts: They were expecting a $26 million hit to revenue and payroll tax receipts for the next fiscal year, which begins June 14.

St. Louis settles income tax lawsuit, grants refunds for pandemic years

Attorney Bevis Schock, right, along with plaintiff co-counsel Mark Milton, announce to reporters on Friday, June 14, 2024, at their Clayton office that they have won a three-year battle against the city of St. Louis in an income tax case.

By Laurie Scriven, Post-Dispatch

Daly’s office offered a more optimistic outlook in a statement Friday. Last year, the office estimated the cost of paying back taxes at $25 million to $50 million per year. But on Friday, the office said it expects tax refunds to total less than $26 million between 2020 and 2023.

A spokesman for Daly said he expects most people who worked remotely during the pandemic have returned to the office, with just 2,100 people filing for refunds between 2020 and 2022.

City officials are watching closely.

“It’s a good blow that there’s no blow to the city’s budget,” said City Council President Megan Green.

“The city needs to tighten its budget,” he added. St. Louis Hills City Councilman Tom Oldenburg.

Mayor Tishaura O. Jones declined to comment Friday but said she would hold a news conference on the matter on Monday. A spokesman said Jones would talk about the settlement’s long-term impact then.

Meanwhile, Rep. Jim Murphy, a Republican from south St. Louis County who led the effort in Jefferson City to force tax collectors to give refunds to those who work from home, welcomed the settlement. He said he would like to one day repeal the income tax if an alternative source of revenue can be found. But he said Friday’s announcement lessens the need for immediate action in the Legislature.

“Now we can move on,” he said.

The city’s income tax, which levies a 1% tax on the income of all city residents, businesses operating in the city and non-residents who work in the city, has been a controversial issue for decades.

City officials have long argued the tax is necessary to pay for essential services like police, fire and pothole repairs, and conservative politicians and businesspeople say the tax encourages people and businesses to move elsewhere.

The dispute at the heart of this case began in the early days of the COVID-19 pandemic.

The city has previously given refunds to thousands of workers for travel and days worked outside of St. Louis, and tax collectors issued refunds totaling $2.9 million to an estimated 4,000 people in the year before the pandemic.

But that changed in 2020 as many high-income white-collar workers left city-center offices for home offices.

Tax collector Daly said at the time that the pandemic created a “completely different situation” than normal. He began denying refunds, reasoning that workers were still working for city-based businesses using remote work software provided by the base.

The lawsuit was filed in March 2021 by St. Charles County residents Nicholas Orr and Kos Semonsky, and St. Louis County resident Mark Boals.

In January 2022, lawyers from Daly’s office persuaded a judge to dismiss much of the lawsuit on procedural grounds, including the threat of a class-action lawsuit that could have added even more claims to the case.

But when city Circuit Judge Jason Sennheiser reviewed the remaining claims in the lawsuit last year, he found the city’s pandemic policies regarding remote work for tax collectors to be flawed.

He said the law allows the city to impose income tax on work done within the city, but not on work “supplied” to the city. He ordered the city to pay damages to the plaintiffs, of which there were six at the time.

Last month, a three-judge panel of the Missouri Court of Appeals in St. Louis upheld that decision.

Writing in the decision, Appeals Court Judge Michael S. Wright said overturning Sennheiser’s ruling would require rewriting the law. “We cannot do that,” Wright wrote.

The justices, however, did not allow the class action lawsuit to be reopened. Wright said the Missouri Supreme Court had previously ruled that state tax refund law does not allow class action lawsuits, and the appeals court should follow that ruling.

State law also requires that anyone seeking a tax refund must file a lawsuit within a short period of time after paying the tax on appeal, and most people affected by the tax collector’s decision were out of luck because they didn’t formally appeal their taxes or file a lawsuit.

But the plaintiffs’ lawyers, Shock & Milton, urged Daly to ignore it, arguing that Daly had collected taxes he shouldn’t have and should pay them back regardless of the judge’s order.

Daly agreed this week.

In a statement on Friday, he said: Request a refund Filing for the 2020-2022 tax years will begin July 1 and continue for 90 days.

You have until April 15, 2025, to claim your 2023 tax refund.

Daly agreed to similar terms on payroll taxes, in which employers pay a 0.5% tax per employee. AT&T filed a lawsuit over the issue in 2022. The case is pending. AT&T attorney Mark Leadlove said Friday he was reviewing the proposed settlement and couldn’t yet comment further.

Daly said appeals already filed and upheld will be honoured and taxpayers will not need to appeal again.

St. Louis will not appeal the income tax ruling, but “serious discussions” are underway.

St. Louis loses income tax appeal, potentially costing city millions of dollars.

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Judge orders city to refund 6% income tax during pandemic; lawyers considering class action lawsuit.