Enlarge / The arm of the law can be long indeed.
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Imagine for a moment that you work remotely—as so many now do in the COVID era—from a comfortable spare bedroom 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 last year. So how is it that New York claims you owe them a pile of cash for state taxes?
Maybe this doesn’t sound terrible; after all, New York’s tax rates don’t differ so dramatically from New Jersey’s. But imagine instead that you took the opportunity provided by telecommuting to move to a “no income tax” state like Texas. Come tax time, you are planning on a big fat nothingburger of a state tax bill. And yet, New York could still claim state tax on your earnings. Now we’re talking a serious—and perhaps completely unplanned—financial hit.
Welcome, telecommuters, to the nightmare that can result when you and the state disagree about “where” you work.
Butts in seats
Broadly speaking, you pay income tax not only to the federal government but also to the state where you work and live. If you live and work in Colorado, you pay Colorado income tax. If you live and work in Texas, you pay no income tax.
This gets a bit more complicated when you live and work on opposite sides of a state line. Huge numbers of workers in Washington, DC, for example, live in neighboring Virginia or Maryland, just as many workers in the Philadelphia area live in New Jersey. About a century into the car commuting era, most—not all, but most—states where employees have a high likelihood of living and working in two different jurisdictions have sorted out some kind of reciprocity arrangement for handling state income tax.
A telecommuting workforce, though, upends traditional notions of who’s “working” where. Tech-hub San Francisco, for example, is seeing a record number of residents pack up and move away from the city’s sky-high housing prices as firms slowly embrace permanent telework. Although a majority of those workers stay in California, plenty of others are heading to lower cost-of-living tech hubs such as Austin, Texas, or Denver. Others are looking farther afield and heading to Savannah, Miami, or even Puerto Rico.
Most states don’t care how far afield the “home office” you’re reporting to on Zoom is from your literal home office. If you work for California-based Facebook but are doing it 100 percent of the time from a cozy mountain cabin in New Hampshire, congratulations! You won’t have to pay income tax, because New Hampshire doesn’t have one.
A handful of states, however, have extremely strict definitions of where your “work” takes place. If you work full time for a company based in New York from the same cozy mountain cabin in New Hampshire, watch out: both states may try to claim that “you work here” for tax purposes. This could leave you stuck in the middle, cleaning up the mess.
About a half-dozen states have some variation of an “employer convenience rule.” Put broadly, these rules say that if your employer lets you work from your home out of state without it being necessary for you to do so, you need to pay income tax as if you are sitting in the employer’s office.
Five states—Connecticut, Delaware, Nebraska, New York, and Pennsylvania—had some kind of employer convenience rules in place since before the pandemic. A sixth, Massachusetts, added one in 2020, specifically related to telework due to COVID-19. And Arkansas tax regulators last year issued an opinion implying that out-of-state workers for companies in Arkansas are also subject to a similar rule, but one not at this time codified in state law.
New York is widely seen as the most aggressive state by far when it comes to collecting state income taxes from employees who neither live nor work in the Empire State. It issued COVID-specific guidance in 2020 that states, “If you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.”
If you neither live nor physically work in New York but your employer is based in New York, you and your employer must determine if your home office—wherever it is—qualifies as a “bona fide employer office.” (See the state’s checklist.) The primary factor for determining if you qualify is access to specialty facilities, as the New York guide describes:
For example, if the employee’s duties require the use of a test track to test new cars, and a test track is not available at the employer’s offices in New York City, but is available near the employee’s home, then the home office will meet this factor. In the alternative, if the employee’s duties require the use of specialized scientific equipment that is set up at the employee’s home (or at a facility near the employee’s home) but could physically be set up at the employer’s place of business located in New York, then the home office would not meet this factor.
The first example here is, handily enough, a real-world one. Consumer Reports is based in Yonkers, NY, but its well-known automobile test facility is in Connecticut. Consumer Reports employees who need access to the test track to do their jobs, therefore, would have a necessary reason to be working from home in Connecticut as far as New York tax law is concerned. For workers who don’t meet this primary factor, such as that hypothetical scientist whose microscope is set up at home, your home office has to meet a litany of secondary and tertiary factors in order to be considered a necessary out-of-state work site under state law.
States around the country are dealing with large revenue shortfalls in 2020 and 2021 due to a decline in economic activity during the pandemic. A lack of commuters means fewer fill-ups and less gas tax; a lack of open restaurants means less meal tax; closed stores means less sales tax; fewer travelers means no hospitality tax, and so on. States are therefore doing whatever they can to grab whatever money they can, and employer convenience rules make income taxes fair game.
If you think this sounds like a disaster in the making for millions, well, you’ve got plenty of company. And states being what they are, there are only two real avenues available for changing the situation: Congress or the courts.
Professor Edward Zelinsky described himself to Ars as both the “grey-haired poster boy” for and the grandfather of the movement to deal with these state tax issues. It’s an apt description.
Zelinsky is one of the millions of workers whose office is in one of the five boroughs of New York City—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 around the country, Zelinsky sometimes works from home when he doesn’t have a pressing need to go in to the office or the classroom. Like many of the other 20 million people in the greater New York City metro area, his home is not in New York but instead in a neighboring state—Connecticut.
He’s well ahead of the pandemic curve with this arrangement. Since the 1990s, he has worked part time from his home in the Nutmeg State and commuted part time to his office in New York. For some years in the ’90s, he split up his tax returns, arguing that his Connecticut work should have had Connecticut tax withheld and his New York work should have had New York taxes withheld, rather than being doubly taxed by both states for time he worked at home. New York, however, disagreed.
Zelinsky pursued his appeal up the legal ladder, and his case ended up in the New York Court of Appeals where, in 2003, he ultimately lost. He petitioned the Supreme Court to take the case, but it declined. (“I was not surprised,” he told Ars.) Recent events, however, have finally forced the Supreme Court to take a look at employer convenience rules.
In October, New Hampshire filed a lawsuit against neighboring Massachusetts in the US Supreme Court (the court of original jurisdiction for cases of states vs. states). In its complaint (PDF), New Hampshire—which does not have an income tax—alleges that the Massachusetts income tax on remote workers in New Hampshire constitutes “a direct attack on a defining feature of the State of New Hampshire’s sovereignty.”
By imposing the remote worker income tax, the suit explains, “Massachusetts has unilaterally imposed an income tax within New Hampshire that New Hampshire, in its sovereign discretion, has deliberately chosen not to impose.” The Bay State’s actions to tax New Hampshire residents working in New Hampshire is a violation of both the Commerce Clause and Due Process Clause, the suit argues, and it “effectively negates the express financial incentive (tax savings) that fuels New Hampshire’s successful competition for capital and labor resources.”