Fighting for fair telework tax

New York state's practice spurs draft federal legislation.

What began as a tax squabble between New York and neighboring states today threatens to deter telework across the country and compromise key aspects of the Bush administration's national agenda. At issue are conflicting states rules governing how teleworkers pay personal income tax.

In most cases, when teleworkers reside in a different state from their employer, they split the taxes paid on their personal income between their employer's state and their home state, given that they work part time at the employer's office and part time at home. If they work 60% of the time at company headquarters and 40% in a home office, they are expected to pay tax on 60% of their income to the employer's state, and 40% to the home state.

However, New York state tax law also requires employees of New York state-based companies to pay tax on 100% of income earned to New York, regardless of where they perform the work. New York will give non-resident teleworkers a tax credit for the time they spend working in their home state, but only - and this is the issue - when the teleworking is done for the "convenience of the employer." This means New York gives a credit only when the employee worked out of state because of the employer's necessity.

But what constitutes necessity?

"Very, very little," says Nicole Belson Goluboff, an attorney specializing in telework and author of The Law of Telecommuting.

New York state says that unless the nature of your work is such that it couldn't be done in a New York office, then you must pay tax on 100% of your income to New York state. But you must also pay tax on the portion of the income you earned teleworking to your home state. Even if the New York employer eliminates your office space, even if you're a salesperson always on the road, if the work possibly could be done in New York, the state makes you pay tax to New York.

Another problem is that New York state defines part-time teleworker broadly. In many instances, employees who relocate to far-off states and visit the company office only once or twice a year will receive a bill from New York state for the full year's income tax.

"You must allocate days everyone agrees you worked outside New York as days you worked inside New York. It's a fiction that's designed to enrich the coffers of New York," Goluboff says. "The rule also imposes onerous payroll obligations on employers. There are withholding requirements in multiple states when you're multiple-taxed."

Several cases challenging New York's regulation are working their way through the courts. Most notable is that of Cardozo Law School Professor Edward Zelinsky, who typically teaches in New York three days a week and works from his Connecticut home for two. Zelinsky argued the regulation is unconstitutional because it allowed a condition whereby he could be double taxed on his income. However, the U.S. Supreme Court recently refused to hear the case, putting an end to Zelinsky's legal fight.

"New York's been applying this rule aggressively for some time. It's been widely condemned by scholars and practitioners. The Supreme Court's refusal to take the Zelinsky case sanctions other states that aren't currently applying this rule to start doing so," Goluboff says.

In rejecting Zelinsky's challenge, the New York State Court of Appeals argued that New York provides "a host of tangible and intangible protections, benefits and values to the taxpayer and his employer including police, fire, and emergency health services, and public utilities." Other benefits include employment and cultural opportunities. The court said just because an employee chooses to telework, that "does not diminish what New York provides in order to enable him to earn that income." 

Telework tax timeline

New York state’s history of double taxing non-resident teleworkers could soon end with federal legislation.
2001

September, 2001

The North Eastern State Tax Officials Association’s Income Tax Working Group recommends member states adopt a physical presence method for allocating income of non-resident employees based on where the work was performed. New York, New Jersey and Pennsylvania refuse, choosing to follow the “convenience of employer” rule instead.
2003

Nov. 24, 2003

The N.Y. Court of Appeals rejects Edward Zelinksky’s constitutional challenges to the “convenience of employer” rule. The Cardozo Law School professor teaches in New York and telecommutes from his Connecticut home three days a week.
2004
April 26

The U.S. Supreme Court denies a review of the N.Y. Court of Appeals' decision in the Zelinsky case, sanctioning other states to apply the “convenience of employer” rule.

April 27

Federal legislation is drafted prohibiting a state from taxing employees on in-come earned while working in another state. Sources say it’s close to gaining a sponsor and should be introduced in the coming months.

April 29

The New York Appellate Division (a lower appellate court than the Court of Appeals) upholds the “convenience of employer” rule in the case of Huckaby v. N.Y. State Division of Tax Appeals. Huckaby lives in Tennessee and spends only 25% of his time working in New York.

June 1

To gain awareness and support for federal legislation prohibiting double taxation, The Telework Coalition, www.telcoa.org, posts a letter for visitors to download and send to their congressmen.

The court also argued that because many states impose no income tax on residents or tax at a lower rate, telework is a way for non-residents to avoid paying New York state income taxes; the rule prevents "subterfuge" by non-residents. If your company didn't hire you to work out of your Connecticut home, then you shouldn't be paid to work there, or be given a unilateral choice to say where your income comes from, the court said.

"But the underlying assumption is that telecommuters who say they're working at home aren't really doing so," Goluboff says. "That seems to be more of a traditional management objection than it should be of a New York state taxing authority."

However, the case of Thomas Huckaby presents a stronger challenge to New York State's "convenience of employer" rule. Because he lives in Nashville and works in New York only 25% of the time, Huckaby rarely receives the New York State benefits enjoyed by neighbor-state commuters like Zelinksy.

Going underground?

The problem of double taxation first came to the attention of then-Connecticut Tax Commissioner Gene Gavin in the mid-1990s. As president of the North Eastern State Tax Officials Association, Gavin and his group recommended that member states adopt a physical presence test for allocating the income of non-resident employees based on where the employees worked. New York, Pennsylvania and New Jersey refused, although New Jersey gives taxpayers a credit for taxes paid to New York. The only other state to cite "convenience of employer" rule is Nebraska.

"If New York gave up its position, it would lose millions in revenue each year," Gavin says. Some say about $100 million. "New York's stand isn't based on progress, it's based on saving money. It's a dinosaur hungry for revenue, not for progress."

IBM and Citicorp are among two of the largest New York employers with Connecticut telecommuters. An IBM marketing manager who lives in Connecticut and teleworks says he knows of at least three other employees who are also double taxed by New York. The employee, who asked not to be named, assumes there are hundreds more but says the nature of telework makes it difficult to find them.

"We've talked to IBM corporate. They're aware of the problem and sympathetic, but they say not much can be done. This is a nasty but effective way to dun a small fry like me for a couple thousand dollars. I can't afford an attorney to fight it."

IBM corporate did not comment for this story.

Even so, the employee concedes double taxation isn't enough of a disincentive to stop teleworking. "It's important for IBM to have us all mobile. Even if it comes at the cost of a couple grand a year, the needs of the business and the needs of my personal convenience outweigh [the tax]."

Telework consultant Gil Gordon agrees that double taxation is an annoyance, but it doesn't deter telework.

"The bigger issue involves corporate taxation," he says. "Does the fact that a corporation based in State A that has teleworkers in State B mean that the corporation now has a business presence in State B and thus faces a corporate tax liability, even though those teleworkers are the only tangible evidence of the employer's presence? This issue needs to be clarified, too."

On the other hand, the IBM employee wonders about the long-term implications of double taxation. "In time, people might reason that if New York is going to be a bigger bully than their home state, then they'll just pay tax to New York. This could drive legitimate above-ground people into non-compliance," he says.

Possible resolutions

Currently, there are two avenues to prohibit New York from double taxing teleworkers. One, the Supreme Court agrees to hear the Huckaby case, the Nashville resident who spends 25% of his work time in New York, and deems New York's "convenience of employer" rule unconstitutional. The other is for Congress to pass legislation prohibiting the practice.

Last month, just after the Supreme Court refused to hear the Zelinsky case, federal draft legislation was introduced. The proposed legislation would prevent a state from deeming a nonresident to be present in or working in the taxing state when the nonresident is not physically present in that state. The law would prevent a state from imposing nonresident income taxes for any time the nonresident is present elsewhere.

Although it has no sponsor, Zelinsky supports the bill and says he believes "support is imminent."

The bill is expected to garner strong support because telework is a component in four of President Bush's public policy initiatives. These include assuring continuity of government in the event of a disaster (H.R. 2844, the Continuity in Representation Act of 2004 and the Continuity of Operations Program); compliance with the federal employee telework mandate (Public Law 106-346); the New Freedom Initiative, which helps disabled workers; and Public Law 107-171, which helps rural communities expand their economies.

"The states are trying to reduce traffic congestion, improve the environment, and provide opportunities for older and disabled workers, while imposing taxes that contradict these efforts," says Chuck Wilsker, president of the Telework Coalition. "We believe the federal government must step in to correct this situation."

Learn more about this topic

Stop Double Taxation

A letter urging Congress to support a bill that prohibits New York State from taxing non-resident teleworkers on income they earn while teleworking in their home state.

The Telework Coalition

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