Tax Notes State

In Willacy v. Cleveland Board of Income Tax Review, the Ohio Supreme Court allowed the city of Cleveland to tax stock options granted by an employer to an employee who worked in the city at the time of the grant, even though the employee moved to Florida years before exercising the option.1 The city’s tax was measured by the value of the underlying stock when the option was exercised.

Cleveland’s treatment of the option is consistent with the rules in several other jurisdictions, such as New Jersey and Pennsylvania.2 While this treatment is widespread, it may run afoul of the due process clause of the U.S. Constitution when applied to some fact patterns, as recognized by the dissenting opinion in Willacy.3

As this article will explain, a state or local tax on options imposed on a person who does not work or reside in a jurisdiction at the time the option is exercised, and is measured by the value of the underlying stock at the time the option is exercised, can run afoul of the due process requirement that the tax “be rationally related to ‘values connected with the taxing’” jurisdiction.4 Employees who have exercised stock options while residing in a different jurisdiction than where they worked or resided at the time they were granted the options should closely examine their facts to determine if the statutory treatment of the options is consistent with due process.

This article was originally published by Tax Analysts. To read the full article, download the PDF below.


  1. No. 2018-0794, 2020-Ohio-314 (Ohio Feb. 4, 2020).
  2. See, e.g., Pennsylvania Department of Revenue, “Pennsylvania Personal Income Tax Guide, Gross Compensation” (last visited Apr. 27, 2020) (“the exercise of a stock option is ‘compensation’ in the form of intangible property. . . . The difference between the fair market value of the stock on the date of exercise and the amount paid by the employee to obtain the option, if any, is the amount subject to Pennsylvania tax”). See also Gross Income Tax, 34 N.J. State Tax News 11 (Fall 2005): Nonqualified stock options are taxable as compensation in the same manner as prescribed for Federal purposes. Taxpayers, however, will not realize a taxable gain until the options are exercised. The gain is then measured by the difference between the fair market value of the options at the time of exercise and the taxpayer’s exercise price. Nonresidents are subject to tax on income earned from sources within New Jersey. Included in the definition of New Jersey source income is income earned in connection with a trade,
    profession, or occupation carried on in this State or for the rendition of personal services performed in this State. Regardless of the taxpayer’s current residence, the stock options the taxpayer received while working in New Jersey, or for a New Jersey company, will be taxable as New Jersey source income when exercised. See generally Timothy P. Noonan and Paul R. Comeau, “Multistate Taxation of Stock Option Income – Time for a National Solution?” Tax Notes State, June 30, 2008, p. 1063 (surveying state taxation of options).
  3. Willacy, supra note 1 (Fischer, J., dissenting).
  4. Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 273 (1978) (internal citations omitted).