Changes to the “Bright-Line” Residency Test

Tax Update

Date: May 29, 2007

Please note:

See our July 28, 2015 article, "Ohio Supreme Court Case Erodes Certainty of Bright-Line Test for Ohio Residency," for more current information on this topic. 

If you have questions, please contact Tom Callahan, Mark Conway or Tom DeBrosse.

Overview

Recently enacted legislation (Sub. H.B. 73) changes the statutory “bright-line” residency test for determining whether an individual is treated as an Ohio resident for Ohio individual income tax purposes. This new legislation amends the residency test rules in O.R.C. 5747.24 effective for taxable years beginning on or after January 1, 2007 (the “New Test”). For calendar year taxpayers, the New Test will first apply for filing 2007 Ohio individual income tax returns due on April 15, 2008, and the prior version of the law (the “Old Test”) will continue to apply for filing 2006 returns which are due on April 17, 2007.

“Bright-Line" Residency Test – The Safe Harbor

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 domicile status for Ohio individual income tax purposes was based on the common law facts and circumstances test. A mechanical, bright-line residency test was implemented in 1993 in order to provide more certainty, including a safe harbor provision, concerning the determination of an individual’s domicile status.

Summary of the New Legislation

Under the revised “bright-line” residency test enacted by the new legislation, an individual who has (i) 182 or fewer contact periods in Ohio during the taxable year, (ii) a permanent abode outside Ohio throughout the entire taxable year and (iii) timely files the required statement 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 statement or makes a false statement, in which case the individual is presumed to have been domiciled in Ohio the entire taxable year unless the individual can rebut the presumption with a preponderance of the evidence to the contrary. Note that there is a potential trap with respect to the timely filing of the required statement, as discussed below.

Contact Periods Are Key

Under both the Old Test and the New Test, whether an individual is presumed to be domiciled in or out of Ohio depends in large part on the number of “contact periods” the individual has in Ohio during the taxable year. The New Test carries over the definition of “contact period” from the Old Test, defining a “contact period” as 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 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 New Test eliminates the exemption under the Old Test for up to an additional 30 contact periods in Ohio for time spent to attend to a medical hardship involving the individual or a member of the individual’s family, to attend a funeral for a member of the individual’s family, or to provide uncompensated service to, or raise funds for, an exempt organization under Section 501(c)(3) of the Internal Revenue Code. Under the New Test, each contact period in Ohio is counted regardless of the reason for the contact.

Old Test: Tax Years Beginning Before January 1, 2007

Under the Old Test, the number of contact periods was divided into three levels: 0-120; 121-182; and 183 or more. Under the old safe harbor provision, if an individual had 120 or fewer contact periods in Ohio during the taxable year and at least one abode outside Ohio during the entire taxable year, the individual was presumed not to be domiciled in Ohio. Upon the request of the Tax Commissioner, an individual could be required to provide a statement under penalties of perjury that he or she met the safe harbor requirements. Unless the individual failed to file a statement requested by the Tax Commissioner or filed a false statement, the presumption that the individual was not domiciled in Ohio was irrebuttable.

An individual who had more than 120, but less than 183 contact periods in Ohio during the taxable year was presumed to be domiciled in Ohio. This presumption was rebuttable by a preponderance of the evidence based on the common law facts and circumstances test.

An individual who had 183 or more contact periods in Ohio during the taxable year also was presumed to be domiciled in Ohio. This presumption was rebuttable only by clear and convincing evidence, a very high standard, based on the common law facts and circumstances test.

New Test: Tax Years Beginning on or After January 1, 2007

Under the New Test, the number of contact periods is divided into two levels: 0-182 and 183 or more. Under the new safe harbor provision, an individual who has (i) 182 or fewer contact periods in Ohio during the taxable year, (ii) a permanent abode outside Ohio throughout the taxable year and (iii) timely files the required statement is presumed not to be an Ohio resident for Ohio individual income tax purposes for that taxable year. The favorable increase in the number of contact periods under the new safe harbor from 120 to 182 comes with a catch — a new mandatory filing requirement which presents a potential trap for taxpayers, as discussed below.

An individual who has 183 or more contact periods in Ohio is presumed to be a resident unless the individual can rebut the presumption with clear and convincing evidence to the contrary based on the common law facts and circumstances test.

Also, under the New Test, 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 Trap Under the New Test

In order to qualify for the non-Ohio domicile presumption under the New Test, on or before the 15th day of the fourth month following the close of the taxable year, the individual must file a statement with the Tax Commissioner verifying that during the entire taxable year the individual was not domiciled in Ohio and had at least one abode outside Ohio, specifying the location of each such abode outside of Ohio.

The potential trap is that under O.R.C. 5747.24(B), there is no provision to extend the date for filing the required annual statement, even if the taxpayer qualifies for an extension for filing the taxpayer’s 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 statement under O.R.C. 5747.24(B). Informal discussions with the Ohio Department of Taxation indicate that, absent corrective legislation which the department does not intend to sponsor, the statutory deadline for filing the required annual statement without extension will be enforced.

Unless an individual who otherwise qualifies to be presumed not to be domiciled in Ohio fails to file the required annual statement or files a false statement, the presumption is irrebuttable. If, however, the individual fails to timely file the required annual statement or makes a false statement, the individual is presumed to be domiciled in Ohio unless the individual can rebut the presumption by a preponderance of the evidence to the contrary. Because such a rebuttal is outside the safe harbor of the bright-line residency test, the less certain common law facts and circumstances test applies. To avoid this uncertainty, individuals will need to timely file the required annual statement.