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ST. LOUIS — City officials on Friday said they had settled a lawsuit challenging the way they handled earnings tax refunds for remote workers during the pandemic, and will start allowing area residents — and area businesses — to seek refunds in arrears, a move that could cost the city tens of millions of dollars.

Beginning this summer, people who worked for St. Louis-based companies from homes outside the city will be able to seek repayment for earnings taxes paid for the past four years, Collector of Revenue Gregory F.X. Daly said in a news release.

The settlement also applies to claims against the city’s 0.5% payroll tax, paid by employers on each employee.

Bevis Schock and Mark Milton, attorneys for the plaintiffs, lauded the city’s decision as “the right thing.�

“Despite the short term loss of revenue,� they said in a statement, “the City’s hope for a revival depends on the public’s belief that the City’s tax laws, and all other laws, are being applied fairly and as they are written.�

The decision is a remarkable twist in a three-year legal saga. For much of that time, the city argued that nonresident workers had no right to the usual refunds for work done outside the city as officials sought to protect a critical, $250-million-per-year revenue stream. And even after courts began to rule in favor of six area residents who sued to recuperate taxes paid during the pandemic, city officials fought to avoid decisions forcing them to offer refunds in arrears to the general public.

But now, it appears the city tax collector has decided to offer them voluntarily.

Officials had already prepared, to some extent, for broader impact. They assumed a $26 million hit to earnings and payroll tax revenue for the upcoming fiscal year, which starts July 1.

Daly’s office painted a more optimistic picture in Friday’s statement. Last year, the office estimated the cost of paying out refunds for past years at between $25 million and $50 million per year. But on Friday, it said it expected refunds for 2020-2023 to cost less than $26 million, all told.

A Daly spokesperson said the office figures that most pandemic teleworkers have returned to the office. Just 2,100 people have filed for refunds from 2020-2022.

City officials are watching closely.

“No hit to the city budget is a good hit,� Aldermanic President Megan Green said.

“The city has to tighten its belt,� added Alderman Tom Oldenburg, of St. Louis Hills.

Mayor Tishaura O. Jones declined comment Friday, but said she would hold a press conference on the matter on Monday. A spokesperson said Jones would address the long-term implications of the settlement then.

Meanwhile, State Rep. Jim Murphy, the south St. Louis County Republican who led efforts in Jefferson City to force the collector to refund remote workers, cheered the settlement. He said he’d still like to eliminate the earnings tax someday, when a replacement revenue stream is found. But he said Friday’s announcement alleviated the need for immediate action at the Capitol.

“Now we can go on,� he said.

The city’s earnings tax — a 1% assessment on income earned by all city residents, businesses operating in the city and any nonresidents who work in the city — has been a topic of debate for decades.

City officials have long argued they need the tax to pay for critical services like police, firefighters and filling potholes. Conservative politicians and businesspeople have said it encourages people and companies to locate elsewhere.

The fight at the heart of this case arose early in the COVID-19 pandemic.

In previous years, the city had issued rebates to thousands of workers for days they traveled or worked outside St. Louis. The collector refunded a total of $2.9 million to an estimated 4,000 people in the year before the pandemic.

But things changed in 2020, when many high-income, white-collar workers traded downtown cubicles for home offices.

Daly, the tax collector, said at the time that the pandemic had brought about a “whole different set of circumstances� from previous years. He reasoned that workers were still working for companies based in the city, using the remote working software provided from those bases. He started refusing refunds.

In March 2021, residents Nicholas Oar and Kos Semonski, of St. Charles County, and Mark Boles, of St. Louis County, sued.

In January 2022, attorneys for Daly’s office convinced a judge to dismiss much of the lawsuit on procedural grounds, including the class-action threat that could have added many more claims to the case.

But when city Circuit Judge Jason Sengheiser examined last year the remaining claims in the suit, he found the collector’s pandemic policy on remote work wanting.

The law, he said, allows for an earnings tax covering work “rendered in� the city but not “rendered into� it. He ordered the city to pay back the plaintiffs, who by then numbered six.

Last month, a three-judge panel in the Missouri Court of Appeals at St. Louis seconded that.

Appellate Judge Michael S. Wright, who wrote the opinion, said that to reverse Sengheiser’s decision would require rewriting the law. “This we cannot do,� Wright wrote.

The judges did not, however, revive the class-action push. Wright wrote that the Missouri Supreme Court previously ruled that the state law governing tax refunds does not allow for class-action suits, and Wright said the appeals court was bound by that ruling.

And because deadlines to file for refunds for the pandemic years — or file separate lawsuits — had long since passed, it appeared that many of those affected by the collector’s decision could be out of luck.

But Schock and Milton, the plaintiffs’ attorneys, pressed Daly to ignore that. He collected taxes he shouldn’t have, the attorneys said, and he should refund them regardless of the judges’ order.

This week, Daly agreed to a version of that.

In his release Friday, he said a window to for tax years 2020-2022 will open on July 1 and last 90 days.

The window to seek a refund for 2023 taxes will remain open through April 15, 2025.

Daly agreed to similar terms for payroll taxes, the 0.5% tax paid by employers for each of their employees. AT&T sued in 2022 over the issue. That case remains pending. Mark Leadlove, an attorney for AT&T, said he was reviewing Friday’s settlement and could not yet comment further.

Appeals already filed and supported will be honored, Daly said; taxpayers do not need to refile them.