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Fighting for fair telework tax

New York state's practice spurs draft federal legislation.

By , Network World
June 07, 2004 12:03 AM ET

Network World - 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.

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