For many workers, their offices are now anywhere with an internet connection, even if that means they are in a different state. However, this accessibility may come with a price for some at tax time.
Traditionally, individuals are charged income taxes in the state they live in, and people generally lived in states where they worked or nearby. Commuters coming from neighboring countries were usually covered by agreements that avoided double taxation. But with people moving far and wide in the midst of the pandemic – not just neighboring states – and teleworking instead, some face the prospect of additional taxes.
Six states have convenience rules that allow companies in their territories to levy income tax on their employees, even if they do not live in the state.
The problem is that while some neighboring states have agreements that provide tax breaks, teleworkers who have moved elsewhere due to the pandemic may receive additional income taxes from the state their business is based in.
Rhonda Collins, director of tax content and government relations for the National Association of Tax Professionals, told ABC News that these complex tax rules will conflict with the rise in teleworking caused by COVID-19.
"[Employees] may be working in a state they have not previously worked and / or a state where they are not permanently resident," she told ABC News in a statement. "Here the employee can possibly be subject to the convenience rules and thus lead to double taxation of the income."
Jared Walczak, the vice president of government projects at Tax Foundation, an independent charitable tax policy, told ABC News that convenience rules have been scrutinized in the past, but with little debate or fanfare as many state governments offer taxpayers relief Loans and loans offer agreements with their neighboring leaders.
However, as teleworking becomes more prevalent in a post-pandemic world, that is changing – not just from individuals concerned about double taxation, but also from states that want to make sure they are reducing their earnings fairly.
A possible double taxation hit
Many states have rules in place to prevent their taxpayers from experiencing double taxation when commuting to work.
17 have so-called "reciprocal" tax treaties with their neighbors, under which residents are not taxed when they physically commute to work. For example, Pennsylvania residents commuting to New Jersey and vice versa are not required to file in two states due to a reciprocity agreement.
Some states that do not have reciprocity agreements have passed other laws to prevent double taxation, according to Collins.
"When a person lives in one state but works in another, they usually receive a tax credit on their income tax return that reduces or eliminates double taxation on their W-2 income," she said in a statement.
For example, states such as Vermont, Connecticut, and Virginia give residents who work in adjacent states tax credits up to a certain limit under tax laws.
Walczak said the situation is deteriorating in six states – Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania – that have so-called "convenience" regulations for income taxes. Under those rules, companies can treat employees as if they work in the state their offices are in, regardless of where they live, Walczak said, which could lead to potential double taxation damage.
Another problem is that many of these states, according to the Tax Foundation, leave the details to the employers. For example, a technician working in Vermont on a product for a New York company would not normally be considered a New York employee, Walczak said.
On the flip side, a Vermont resident who physically or virtually commutes to a New York office could be considered a New York employee, he said. In both cases, the status of the employee lies with the company.
"There is a double taxation situation here," said Walczak.
When teleworking increased in the late 1990s and early 2000s, these laws were tested because employees working for companies in states with convenience regulations could now live elsewhere.
New York's convenience provision was challenged in court by a Tennessee teleworker. In 2005, the state's designation was upheld by the New York Court of Appeals.
Walczak said there had been no major pressure from other states or the federal government to correct the tax situation that affects certain teleworkers.
COVID-19, he said, has changed that.
States that burden commuters do not change the rules
With coronavirus restrictions and employees working from home to avoid the virus spreading, millions of Americans have now had the option of choosing their own home office location.
For some workers, this meant moving to another part of the country and not missing a work hour as long as they had an internet connection.
This exodus of workers, even if it is temporary, has ramifications for employers and especially for state tax collectors, said Walczak.
With the economy still volatile, states have been looking for solutions to generate as much revenue as possible, including provisions for tax workers moving out of the state, Walczak said.
"In the long run, states will not allow a situation in which they are denied their revenue," he said. "States will increasingly tax this income."
The six states that already have provisions on convenience have not changed their rules, even when teleworking, despite circumstances preventing employees from commuting to their offices.
Walczak said neighbors who have the convenience provisions have taken steps to prevent double taxation of their residents, but at a cost.
New Jersey, for example, will lose $ 1.2 billion in revenue due to tax credits offered to commuters working in hands-on states, Governor Phil Murphy said.
The pandemic forced some state lawmakers to change their policies to allow more people to work from home, with varying levels of tax protections for their residents.
Rhode Island legislature issued an emergency tax ordinance that removes residents who normally worked in offices in neighboring states from being subject to state income tax even if they work from home.
The battle over the controversial Massachusetts Rule is getting hot
In March Massachusetts, for which there was no convenience provision, issued a temporary rule that effectively created one. Under that provision, anyone who worked in the state prior to the pandemic would continue to pay Massachusetts income taxes, which is around 5% regardless of where they worked the rest of the year.
"The Commonwealth has put in place temporary regulations similar to those in other New England states," Treasury spokeswoman Naysa Woomer said in a statement to ABC News. The department said employees can get credit based on what state they live in and the tax rate would only reflect the days the employee worked in Massachusetts.
Neighboring New Hampshire doesn't have a tax credit program or state reciprocity, and now residents must be taxed for the months they haven't entered an office in Massachusetts, according to Walczak.
New Hampshire Governor Chris Sununu filed a lawsuit against Massachusetts in October in the latter state's Supreme Court ruling that the summer's extended temporary tax rule was unconstitutional. He has asked the US Supreme Court, which is automatically responsible for such a tax law, to take up the case.
Since then, 14 states, including Ohio, Connecticut and New Jersey, have filed amicus briefs in support of New Hampshire's lawsuit and called on the Supreme Court to hear the case. The states that joined the lawsuit said they invested in solving the problem, especially since their residents are likely to be home-based for the foreseeable future.
"We are confident that the Supreme Court will rule that states do not have the constitutional power to tax people who do not live or work there," Murphy said in a statement.
Massachusetts Treasury Department spokeswoman Naysa Woomer declined to comment on pending litigation. As of January 20, no other state has filed any filing in support of Massachusetts in the lawsuit.
Experts say teleworkers concerned about taxes should contact their HR departments and / or a tax professional.
I'm looking forward to
Large corporations, particularly in the financial sector, have taken steps to regulate the convenience of state taxes through satellite offices or to relocate their headquarters to states where those regulations do not apply, Walczak said.
He predicted that more companies recovering from the economic downturn could open new offices in states that lack convenience regulations.
As the opportunities for teleworking increase after the pandemic ends, state governments and Congress and Congress need to update their rules to bring them in line with the new normal.
Members of Congress from both parties have in the past introduced laws to combat double taxation.
The Multi-State Worker Tax Fairness Act, first introduced in 2016 by Connecticut Democratic Sens. Richard Blumenthal and Chris Murphy, was reintroduced last year by Rep. James Hines, D-Conn..
The bill "limits a state's power to levy income tax on compensation to a non-resident to the period during which the non-resident is physically present in the state." It would prohibit a state from making a provision similar to Massachusetts.
Senate Republicans also had a provision in their Health, Economic Aid, Liability, and Schools Act, introduced last year, that stipulates that remote workers are only subject to income tax in their state of residence and in all states where they physically work longer would be considered 90 days in 2020.
For the calendar years 2021 to 2024, workers would have to spend more than 30 days for their non-state income to be taxed by law.
Walczak said there wasn't enough "political will" to move these bills forward; However, elected officials must resolve the situation soon.
"All of this is in the foreground now because we are seeing a revolution in the way people work," he said. "The forced expansion of remote working is working, and tax legislation that stands in the way is something that needs to be addressed."