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Proposed tax-relief legislation for teleworkers gathers steam

By , Network World
May 23, 2006 10:34 AM ET

Network World - Backers of a proposed bill to protect teleworkers from onerous state tax rules hope this could be the year the legislation sticks.

If passed, the Telecommuter Tax Fairness Act would prevent states from taxing income that nonresidents who telecommute to an in-state employer earn while working from home.

The legislation is aimed in particular at New York, which is legendary for its stance on nonresident teleworkers. It requires those who sometimes work in the office of their New York employers to pay state taxes -- not only on the income they earn while physically in New York, but also on the income they earn while at home. This often results in a double tax when the telecommuter's home state expects tax on the income the telecommuter earns at home.

The issue effects not only employees but also employers. Businesses can wind up having to deal with some sticky withholding requirements if employees are subject to double state taxation. Plus the risk of double taxes for employees may limit employers' ability to recruit nonresident talent, says Nicole Belson Goluboff, a lawyer from Scarsdale, N.Y., who specializes in telework-related issues.

New York isn't the only state with a so-called convenience rule, but it's the most aggressive enforcer. "Convenience" refers to a nonresident employee choosing to work from home because it's convenient for the employee rather than a necessity. Unless a telecommuter can convince tax authorities that his or her work cannot be done in a New York office, the state isn't going to forfeit taxes.

New York recently revised its convenience rule, but nonresident employees still are required to prove necessity to avoid taxation on income earned working from home, Goluboff says. "Telework involves work that at its core is portable -- you used to do it in the office, but now you don't have to. Very few telecommuters are going to be able to satisfy that standard."

A computer programmer living in Nashville, Tenn., challenged New York's tax policy last year in a case that turned a spotlight on the double tax issue. Thomas Huckaby spent 75% of his time working from home for a New York employer and 25% of his time at the employer's offices. Huckaby paid taxes to each state proportionate to the amount of income earned in those locals. But New York demanded taxes on 100% of Huckaby's income.

Huckaby fought the issue in a case that ascended to the highest court. But in a setback for telework advocates, the Supreme Court in late October declined to hear the case.

The Supreme Court's decision not to address the issue "effectively authorized New York to continue to subject nonresident telecommuters to a double tax penalty," Goluboff says. It also opened the door to other states that don't have -- or aren't enforcing -- a convenience rule to likewise start pursuing their own nonresident income tax.

"It's rather attractive to be able to collect tax revenue from non-voting nonresidents," Goluboff says. "The Supreme Court's silence really dealt a very serious blow to the movement to expand the use of telework."

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