Suit: Ohio illegally double-taxes residents unaware how much employers withhold

COLUMBUS — Two Northeast Ohio taxpayers are seeking to stop what they say is a state tax policy they claim results in thousands of taxpayers who don’t have W-2 forms being “double-taxed.”

Their lawsuit, filed with the Ohio Supreme Court, states that when Ohio taxpayers are unable to provide W-2 information on their state tax returns (either because it was lost, destroyed, or never issued in the first place), the state instructs them to list on their tax filing that no state income tax was withheld by their employers — even when their employers did withhold tax.

Plaintiffs James Palm of Akron and Sara Pearson of Ravenna tried in 2020 to pay their state income tax for previous years, but neither had W-2s to show how much state income tax had been withheld from their paychecks. Palm says he couldn’t get his W-2s because the Dollar Tree store he worked at closed down, and Pearson says her estranged husband either destroyed her W-2s or arranged to have them mailed to his mother’s house.

According to the lawsuit, filed Aug. 5, both were able to find out from the IRS how much was withheld in federal income tax. But when Palm called the Ohio Department of Taxation to find how much his employer withheld in state income tax, he was told that the state didn’t keep such information. Instead, he was told by a tax department employee to report that no money had been withheld; subsequently, the state now claims he owes $49.12 in unpaid income taxes.

Meanwhile, when Pearson filed her taxes, she put “unknown” in the box for state income tax withholding; the lawsuit says the state changed that to “zero” and that Pearson should be entitled to a tax refund.

Dana Goldstein, an attorney with Akron-based Community Legal Aid who is representing the plaintiffs, said in an interview that for years, Ohio has been “double taxing” Palm, Pearson, and likely thousands of other Ohioans in similar situations.

Goldstein said the state’s policy particularly hurts poorer Ohioans, as they are less likely to get W-2s every year for a number of reasons (ranging from that they are more likely to hold seasonal or part-time jobs to that they tend to move more often than richer residents).

“It’s a systemic problem that’s not being addressed,” she said in a statement. “It’s a problem that creates a double collection of taxes and it primarily falls on the shoulders of those least able to pay the tax.”

In addition to addressing Palm’s and Pearson’s cases, the lawsuit also asks the Ohio Supreme Court to — among other things — order the state to start keeping records showing how much state income tax was withheld from each taxpayer.

Ohio Department of Taxation Gary Gudmundson declined to comment on the lawsuit or provide any information about what the state’s policy is for taxpayers who are filing returns without W-2s.