Enlarge /. The arm of the law can indeed be long.
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Imagine for a moment that you – like so many in the COVID era – are working from a comfortable guest room in your New Jersey home. Your employer is nominally based in New York City, but thanks to the pandemic, you didn’t even cross the Hudson River in the past year. So how is it that New York claims you owe it loads of money for state taxes?
Maybe that doesn’t sound awful; After all, New York tax rates aren’t that different from New Jersey’s. Instead, imagine you took the teleworking opportunity to move to an income tax-free state like Texas. Come tax time, schedule a big fat gentleman on a state tax bill. And yet, New York could charge a state tax on your income. Now we’re talking about a serious – and perhaps totally unplanned – financial blow.
Welcome, telecommuter, to the nightmare that can arise when you and the state disagree about where you work.
Butt in seats
By and large, you pay income tax not only to the federal government, but to the state in which you work and live. If you live and work in Colorado, you pay Colorado income tax. If you live and work in Texas, you don’t pay any income tax.
This gets a little more complicated when you live and work on opposite sides of a state border. For example, a large number of workers in Washington, DC live in neighboring Virginia or Maryland, as do many workers in the Philadelphia area of New Jersey. Roughly a century into the auto-commuting era, most – not all, but most – of the states where workers are likely to live and work in two different jurisdictions have some kind of reciprocal arrangement for handling state income tax.
However, a teleworking workforce turns traditional notions of who “works” where on its head. The tech hub of San Francisco, for example, has a record number of people pulling themselves together and turning away from sky-high real estate prices in the city as companies slowly move to permanent teleworking. While the majority of these workers remain in California, many others are striving for lower cost living tech hubs like Austin, Texas, or Denver. Others look further afield and head to Savannah, Miami, or even Puerto Rico.
Most states don’t care how far the “home office” you report to at Zoom is from your literal home office. If you work for Facebook in California but do it 100 percent in a cozy New Hampshire mountain cabin, congratulations! You don’t have to pay income tax because New Hampshire doesn’t have one.
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However, a handful of states have extremely strict definitions of where your “work” takes place. If you’re working full-time for a New York-based company from the same cozy New Hampshire cabin, beware: both states may be trying to claim you “work here” for tax reasons. This could leave you stuck in the middle and clear the mess.
Employer comfort
About half a dozen states have a variation on an “employer convenience rule”. Generally speaking, if your employer lets you work from home outside of the state, if your employer does not require you to work from home, these rules say you must pay income tax as if you were sitting in the employer’s office.
Five states – Connecticut, Delaware, Nebraska, New York, and Pennsylvania – have had some kind of rules for the convenience of employers since before the pandemic. A sixth, Massachusetts, added one in 2020 specifically related to teleworking due to COVID-19. And the Arkansas tax authorities issued a statement last year stating that non-state workers for Arkansas companies are also subject to a similar rule, but one that is not currently codified in state law.
New York is widely considered to be by far the most aggressive state when it comes to collecting state income taxes from employees who neither live nor work in the Empire State. In 2020, COVID-specific guidelines were issued stating, “If you are a non-resident with head office in New York State, your teleworking days will count as work days in the state during the pandemic unless your employer has a reputable one Employer office set up your teleworking place. “
If you do not live or physically work in New York, but your employer is based in New York, you and your employer must determine whether your home office, wherever it is, qualifies as a “bona fide employer office”. (See the state’s checklist.) The main factor in determining whether you qualify is access to specialized facilities, as described in the New York Guide:
For example, if the employee’s duties call for using a test track to test new cars, and a test track is not available in the employer’s offices in New York City but is available near the worker’s home, the home office will do the factor. If the employee’s duties require the use of specialized scientific equipment that is located at the employee’s home (or in a facility near the employee’s home) but that could be physically located at the employer’s New York office, then that would be Home office does not meet this factor.
The first example here is a real one handy enough. Consumer Reports is based in Yonkers, NY, but its well-known auto test facility is in Connecticut. Consumer Reports employees who require test track access to do their jobs therefore have a necessary reason to work from home in Connecticut for New York tax law. For employees who do not meet this primary factor, such as For example, the hypothetical scientist whose microscope is set up at home, your home office must meet a variety of secondary and tertiary factors in order to be considered a necessary extra-government site under state law.
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States across the country are facing major lost revenue in 2020 and 2021 as economic activity declined during the pandemic. A shortage of commuters means less refueling and less gas tax; a lack of open restaurants means less food taxes; closed shops mean less sales tax; fewer travelers mean no hospitality tax and so on. So states are doing all they can to raise the money they can, and the rules for the convenience of employers make income tax a fair game.
If you think this is a disaster for millions, then you have plenty of company. And since states are what they are, there are only two real ways to change the situation: Congress or the courts.
Battle lines
Professor Edward Zelinsky described himself to Ars as both a “gray-haired figurehead” and the grandfather of the movement dealing with these government tax issues. It’s an apt description.
Zelinsky is one of the million workers whose offices are in one of New York City’s five boroughs – in his case at Yeshiva University’s Cardozo School of Law in the West Village, where he teaches tax law. Like millions of other workers across the country, Zelinsky sometimes works from home when he doesn’t urgently need to go to the office or classroom. Like many of the other 20 million people in the New York City area, he doesn’t live in New York, but in a neighboring state – Connecticut.
With this arrangement he is way ahead of the pandemic curve. He has been working part-time from his home in Nutmeg and commuting to his New York office part-time since the 1990s. In the 1990s, he split his tax returns for a number of years, arguing that Connecticut should be withheld tax for his work in Connecticut and New York should be withheld tax for his work in New York, rather than by both states for the time which he had worked at home to be double taxed. But New York disagreed.
Zelinsky pursued his appeal on the legal ladder, and his case ended in the New York Court of Appeals, where he ultimately lost in 2003. He moved to the Supreme Court to accept the case, but turned it down. (“I wasn’t surprised,” he said to Ars.) However, recent events eventually forced the Supreme Court to look into the rules for the convenience of employers.
In October, New Hampshire filed a lawsuit against neighboring Massachusetts in the US Supreme Court (the original state-versus-state court). In its complaint (PDF), New Hampshire – which has no income tax – claims that the Massachusetts income tax on remote New Hampshire workers is “a direct attack on a defining feature of New Hampshire state sovereignty”.
By introducing income tax for remote workers, the lawsuit states: “Massachusetts unilaterally introduced an income tax in New Hampshire that New Hampshire, in its sovereign discretion, deliberately did not collect.” Bay State’s measures to tax New Hampshire residents working in New Hampshire are in violation of both the trade clause and the due process clause, the lawsuit said, and “effectively negate the explicit financial incentive (tax savings) that the successful Competition in New Hampshire drives capital and labor. “