What state do you reside in?
That sounds like an easy question to answer. But when it comes to state income taxes, the seemingly simple can quickly become complex.
Ohio’s “bright line” residency test is a great example. Consider the following statement:
An Ohio non-resident individual who earns or receives income sourced to Ohio is subject to Ohio income tax on that income. A resident of Ohio is subject to Ohio tax on all income earned while a resident of Ohio.
On its surface, the statement seems to make a clear delineation between treatment of residents and non-residents. But it gets complicated when you realize that you could be considered an Ohio resident without living in Ohio!
The bright line test
Ohio law provides that an individual who, during the taxable year, has at least one abode outside Ohio and has no more than 182 contact periods in Ohio is presumed to not be domiciled in Ohio if … and here’s the catch … on or before April 15 (extended to May 31 by statute) of each year, the individual files with the Ohio Tax Commissioner a statement verifying non-domiciliary status for the previous year. The 182 contact period test is commonly referred to as the Ohio “bright line” test for determining residency; so called because it’s supposed to be a clear benchmark.
The contact period
The law defines a contact period as some portion, however minimal, of two consecutive days in Ohio. Basically if you live outside Ohio and are in Ohio for any portion of two consecutive days …for any reason…you have one contact period in Ohio. While you would need to spend almost an entire year in Ohio to meet 182 contact periods, all you need is one to trigger a statement filing requirement. As such, if you fly into Toledo on a Monday, drive immediately to Michigan and stay overnight, return to Toledo on Tuesday and fly home, you have one contact period in – and you must file the statement to establish the presumption of nonresidency.
The affidavit and the deadline
So what happens if you miss the May 31 deadline to file the statement? You are no longer protected by the bright line presumption; in other words, you must prove by a preponderance of evidence that you are not an Ohio resident, even if you clearly did not have the requisite contact periods with Ohio.
Domicile vs. residence
The concepts of domicile and residence can be confusing. Just because you own a home outside Ohio doesn’t mean you’re domiciled outside Ohio, even though you may reside outside Ohio for a given period of time.
Domicile refers to a legal relationship between you and a particular place, requiring two factors to be present: 1. living at a particular place for some period of time and 2. The intent to live there permanently or indefinitely. Case law has consistently held a person can have more than one residence but only one domicile. Domicile controls such things as where you must obtain a driver’s license, where you must register to vote and the creation of other rights and responsibilities. The determination of domicile is a fact-intensive inquiry, the results of which ensure you do not pay more in state income tax than legally required.
Proving your domicile
Before you think proving you’re not domiciled in Ohio is easy, the State, through its administrative code, excludes certain factors from consideration of domicile. In other words, there are factors you can’t use to prove you’re not domiciled in Ohio. The list is extensive, and includes methods many people would typically rely on to establish common law domicile:
• The location of the bank where you or your spouse have your checking, savings or other bank accounts.
• The location of financial institutions who have loaned you or your spouse money personally.
• The location of your credit card issuer.
• The location of investment facilities, brokerage houses, realtors, advisors or consultants you work with.
• The location of law firms, accounting firms or other like professionals you use.
• The location of physicians, doctors, dentists, optometrists, veterinarians, or other health care providers you or your spouse use.
• The location of churches you or your spouse attend 12 times a year or less.
• Location of schools your children attend unless the tuition you pay is based on residency status.
• The location of business entities, or business ventures in which you or your spouse hold board membership, unless you exercise significant control over the entity as defined by law.
• The location, place of business, location of organization or incorporation of any corporation, partnership or other business entity you or your spouse are a shareholder or partner unless you exercise significant control over the entity as defined by law.
Play it safe
The smart way to avoid a headache is to file your statement verifying non-domiciliary status for the previous year. So the moral of the story is – make sure the affidavit is filed on an annual basis.