How St. Louis illegally taxed remote workers (including in Southeast Missouri) and how you can get your money back

Ever since the pandemic began, St. Louis has been subjecting taxpayers who neither live nor work in the city to legally baseless earnings tax assessments. Forced by litigation and the threat of state preemption to make amends, the city is hoping that taxpayers will not notice or not bother to take advantage of the brief three-month refund filing window that went into effect in the beginning of the month. But eligible taxpayers should not reward this cheap trick — they should go get the money that they are owed.

With the onset of the COVID-19 pandemic, cities across the country had to figure out a way to adjust to rapid changes — just as businesses and workers did. Taxpayers who previously commuted into the city and benefited from the services that St. Louis’s earnings tax funds suddenly stopped doing so. That meant St. Louis no longer had the legal power to tax those workers’ earnings.

But while just about every city dealt with this issue, St. Louis came up with a solution — it would simply tax those workers anyway. The city pretended nothing had changed, and informed remote workers that they owed the 1% earnings tax as if they were still working in St. Louis.

Inconveniently, the statutory language behind the earnings tax made clear that St. Louis could do nothing of the sort. The earnings tax applied to “work done or services performed or rendered in the city,” a clear contradiction of St. Louis’s claims that remained ignored in the four years that the city continued to claim the right to tax remote workers.

After repeated court losses over this rather obviously illegal application of its earnings tax, St. Louis finally entered into a settlement agreement in the middle of June. Under the terms of this agreement, St. Louis agreed to set up a process to refund nonresident taxpayers unfairly taxed under its scheme between 2020 and 2023.

However, rather than simply returning its ill-gotten gains automatically, St. Louis contrived to minimize the damage to its finances. Eligible taxpayers must file refund claims between July 1 and Sept. 30 to receive a refund, an arbitrary amount of time in which taxpayers are unlikely to be thinking about their income taxes. Many will not even hear about it, while clearly, St. Louis is counting on more deciding that filing for a refund is not worth the hassle.

When the Missouri state legislature nearly passed legislation to force St. Louis to issue refunds, it estimated that as many as 165,000 nonresident taxpayers could be eligible for up to $98.4 million in refunds, while the city has argued that refunds could cost it closer to $150 million. Given these far loftier figures, it is notable that St. Louis has thus far only budgeted a fraction of those amounts — $26 million — for refunds under the settlement agreement.

Even in Southeast Missouri, there are plenty of eligible taxpayers. Census data shows that in the first couple years of the pandemic, between 3,000 and 3,500 taxpayers lived in Southeast Missouri while working for a St. Louis-based business. Just about all of these taxpayers — as well as others in subsequent years — are likely eligible for refunds in at least one year.

In the first week that taxpayers were eligible to submit refund claims, St. Louis announced that it had received a mere 113 claims. Even factoring in the 2,100 refund applications St. Louis received before the settlement agreement was reached, the city’s last-ditch scheme appears on track to pay off.

Taxpayers should not allow this to happen. At the National Taxpayers Union Foundation, we have put together an explainer designed to walk eligible taxpayers through the process of claiming the refund that they are owed, complete with sample refund forms. No taxpayer should miss out on recovering their own money because the process was too complicated, or they did not even know they could.

In the meantime, state legislators should not buy the idea that this makes everything right. House Bill 1516, which would have established a state-mandated process for issuing refunds and prohibited similar assessments in the future, passed the state House of Representatives by a wide margin this past year, though it was not voted on by the Senate before the session ended. St. Louis’s abridged refund process should not preclude similar efforts next year.

But until that happens, taxpayers who were wrongly strongarmed into paying an illegal tax assessment should not be shy about getting their money back. St. Louis should not be rewarded with taxpayer dollars for doing something it should have known was wrong the whole time.

Andrew Wilford is the director of the Interstate Commerce Initiative and a senior policy analyst at the National Taxpayers Union Foundation.