Telecommuting Tax

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In what appears to be a significant change in the taxing landscape for long-distance telecommuters—those who work for a company legally based in a state other then the one they live in (and it seems to me I know a few of those types)—the state of New York says it can tax all the income earned by anyone from companies based there, no matter where they live. This is the result of a 4-3 decision by NY's Court of Appeals. Although the state of Tennessee, where the gentleman at issue in the case resides, does not tax wages, I imagine this will create some interesting possible conflicts for those who live in states that do tax wages and work for NY-based companies.

One of the dissenting judges, according to the Associated Press' report,

argued that the basis of the majority's decision that all income is taxable is "that the commissioner says it is … The majority cites no authority at all, and offers no persuasive reason, in support of this new interpretation."

NOTE: This entry edited since first posting in recognition of Tennessee's lack of an income tax on wages. [See comment thread.]

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  1. Just to clue everyone in, New York’s highest court is the Court of Appeals. New York’s intermediate appeals court is referred to as Appellate Divisions or Terms of the Supreme Court. So this decision, if it is appealed, would likely go to the SCOTUS (I can’t think of a reason why it would go to a Federal District Court).

  2. I don’t understand. If I live in NJ and work in Manhattan, I do not pay NYC city or NY state income tax, so why would this guy.

  3. Tennessee won’t care- they have no income tax

  4. I say, let the states compete for the tax dollars of telecommuters, commuters, etc. If you live in Jersey, but work in Manhattan, or telecommute for a company in Manhattan, then, you get to choose who you pay taxes to. They compete for your bucks with lower rates, easier filing, etc. Bam, an incentive for lower taxes!

  5. I seem to have messed up the Findlaw link. It’s findlaw.com

  6. swami — I live in PA and work in Manhattan. I’m subject to the taxes of both NY and PA, and I assume you should be paying NY tax as well.

    While the New York state legislature specifically exempted commuters from paying NYC tax a few years back, we’re still on the state’s hook.

    PA does credit me for the tax I pay to NY, and since NY’s rate is something like double PA’s, I effectively pay no PA taxes on my salary. I think, though, that that arrangement is due to some sort of tax reciprocity treaty between NY and PA. States that previously didn’t concern themselves with such issues (like, say, Hawaii) might suddenly become very interested.

  7. ..tho NH does tax dividend and interest income, so it’s not a pure income tax free state, though it is IT-free for wages.

  8. There is definately a commerce clause issue to be dealt with.

  9. According to :

    http://www.taxadmin.org/fta/rate/ind_inc.html

    “TENNESSEE State Income Tax is Limited to Dividends and Interest Income Only.”

    So unless it changed in 2004 it’s like NH.

    “Tax Rate Tables Will Be Updated on March 31, 2005”

    FL also has a Corporate income tax. I believe NV is alone in having none.

  10. umbriel,

    I didn’t realize that. I thought only NY residents paid income tax to NY, like the NYC income tax. I live in NYC so I pay both anyway.

  11. Right- I wasn’t counting that tax, because it’s always been referred to as an investment tax or other terms. Regular working joes pay no income tax, just those rich investors, so nobody cares enough to consider that it is an income tax.

  12. Thanks for edjacamating me on Tenn income tax—entry amended to reflect that which I did not know an hour ago.

  13. New York State cases are very influential when it comes to issues of taxation, finance, banking, insurance, etc. Expect other states to cite this decision favorably and adopt this oppressive policy. This case could become the Poletown of the 21st Century.

  14. Swami, I guess that’s clarified, but just in case: anyone who works in NYC is taxed by NYC, NY, & the IRS regardless of residence.

    Californicate has this law as well and it is well established with a long track record.

    The trade off is that if you live in a state that imposes an income tax you will get a credit for taxes paid to NY or Ca (or any other state) that prevents all but the worst double taxation. But if you live in Nv or NH that has no income tax you pay the full tax imposed by Ca or NY.

    The key is where the work is performed. The way around it is to talk your employer into issuing two W-2’s. Not an easy task I might add and the bigger the employer the less likely you will be to get the employer to cooperate.

    For example: someone who lives in Az and works at home sometimes and in Ca sometimes. Have a W-2 issued for the pro-rated Arizona part of the wages and one for the Ca part of the wages. That isn’t according to Hoyle but it seems to get past the drones at the EDD.

    Californicate is so bad that they require tax withholding on distributions to non-resident members of Ca LLC’s and Partnerships as well as certain other withholdings like the proceeds from the sale of your house if you are leaving the state.

  15. Does this apply to ANY company based (incorporated) in New York, or ony if you work specifically for a company (or branch) of a company that is physically located in NYS?

  16. Oh, and I might add, most states that impose an income tax have similar laws.

    For years Ca taxed the retirement benefits of former residents who moved to other states arguing that the right to the pension was earned while a Ca resident and that the pension originated in Ca. That was fine for guys for some people who could ignore it. But if you worked for Boeing, GM, or any of the other big guys they’d withhold Ca tax before sending you your pension checks thus forcing you to file a tax return and pay the tax. The US Congress finally enacted a law that put a stop to that.

  17. For that matter, what is the definition of “telecommuting?” In my industry there is a large number of people who perform field service for their employers, but live in a different state than their employment location.

    Would serving as an independent contractor or consultant negate the NYS law?

  18. db,

    In general you have to be employed within the jusrisdiction. The key is where the work is performed.

    You can work for a NY company in another state and not be subject to NY taxes so long as all the work is performed in your home state.

    Not sure if you’re asking this or not but if a company is based elsewhere and has a physical presence in NY (or any other state) it is required to qualify to do business there and is subject to taxes based on where the income originates. Some states tax worldwide income some don’t.

  19. db, being independent could mitigate the problem to an extent because you have more leeway to prevent NY from finding out what is going on. That is entirely different from the letter of the law, which still subjects you to tax based on where the work is performed.

    It’s all connected to physical presence. It’s the same rules that say Amazon doesn’t have to charge you sales tax because they have no physical presence within your state.

  20. And here is another example. I prepare tax returns for people who live in any number of different states. I am not subject to income taxes in any of those states because my clients mail, email, or ship their stuff to me. I then do the magic and send it back. All work is done here, at Casa de Rocas Grande, and is subject only to Californicate income taxes.

  21. So if a person were a field service engineer, and spent upwards of 300 days on the road (as some in my industry, but not me, do), then where is the work being done? At the business location? At the clients’ locations? That could get really messy, if a person wanted to be technically compliant with the letter of the laws is each state in which he/she performed significant work.

    I actually imagine that there are well-defined answers to these questions; they can’t have just come up now. However, the New York decision may open some states’ eyes to new revenue possibilities and encourage them to pay closer attention to who’s working within their borders.

    As Gary says earlier, that would probably be a serious Commerce Clause question.

  22. And one more clarification before I have to get back to work.

    The largest determining factor in all of this (for employees) is how the employer treats it. If the employer prepares a W-2 that shows your wages as, for example, Tennesse wages, NY is never going to take issue with that because NY has no reason to even look at it.

    I’m guessing that in the court case Brian cited the company reported the employee’s wages as NY wages 100% and the employee tried to take some form of credit or deduction for the wages he claimed were Tn wages. That probably got him audited and he took it to court.

  23. I was told once (but have never independently confirmed this) that professional athletes have to file taxes in each state that they play in.

    My own experience with this issue was that once I telecommuted for a NYC firm from NH. I then moved to AL without telling my HR dept. They went apeshit when they found out, because technically my living in AL meant that the firm had a presence there. Since they were a retail firm, they would now be obligated to collect sales taxes for shipments to AL, just because of ‘lil ole me. We ended up arranging it so my payroll came from a firm that had a presence in AL.

  24. We probably need a court case about this. Related is the issue of deferred compensation. If you contribute to a non ERISA qualified deferred compensation arrangement while employed in NYC, for example, when you take the money out it is income. Problem is, these are generally retirement arrangements. What happens when you retire to Florida, THEN take the money out of the plan? What happens right now is that NY will argue that you earned the wages there and are subject to taxation, and FL will argue that you received wages there and are subject to taxation.

  25. One answer is for more workers to negotiate a contractual relationship with their employers instead of becoming actual employees …

    This is especially relevant for telecommuting programmers. Job security for us sucks anyway.

    nmg

  26. “One answer is for more workers to negotiate a contractual relationship with their employers instead of becoming actual employees …”

    But then you get no benefits or health insurance and pay both the employee and employer payroll taxes.

  27. Jason — Practically speaking, I would think most people could ignore the deferred compensation issue, since your withdrawals from the retirement account would be a matter between you and the account manager. I don’t think as of now that NY would have any direct way of knowing what you, a former resident, are doing with your retirement funds. Its claim on your withdrawn funds would be as unenforcable as its claim for sales/use tax on what a NY resident buys on a visit to DE. If they find this too troubling, NY may simply decide to tax such contributions as ordinary income in the first place, as PA (and likely other states) do now.

  28. “But then you get no benefits or health insurance and pay both the employee and employer payroll taxes.”

    You already pay the employer payroll tax. It’s reflected in your reduced wages.

    The added compensation that employers give in the form of benefits and health insurance would of course factor into the rate you negotiate as a contractor. That’s the major reason why contract rates are higher than employee rates.

    The employee isn’t getting paid less, the contractor isn’t getting paid more… (well he’s getting paid slightly more to compensate him for a reduced job security… and his inability to frivolously sue for wrongful termination)

    nmg

  29. Umbriel:

    Most people could – unless a state gets tight on money and decides, as NY did a few years ago, to audit payrolls. Deferred compensation shows up on year by year W2s issued by the employer. They are not taxed through the administrator of the plan on 1099Rs, like a 401(k) distribution would be.

  30. California taxes all income earned in the state, even if you aren’t employed in, or a resident of that state. If you are on duty while attending a meeting, for example, you owe CA income tax for those days. When my wife did work for a CA company, she had to pay tax on the number of days she spent in CA.

    For most people, these amounts are too low for enforcement, but not for professional athletes, who have their own “jock taxes” enacted by many states.

    Baseball players have to file income tax forms in every state they play over the course of a season.

    http://www.taxfoundation.org/press-baseball.html

    ‘William Ahern, of the Tax Foundation, said a DC United soccer player received tax forms from 10 different states. The player was no Alex Rodriguez. “The guy makes $26,000 a year,” says Ahearn. “The jock taxes he owed varied from $200 to $2.” ‘

  31. Isn’t the problem here that NY is taxing ALL the income, not just the income earned in the state?

  32. Isn’t the problem here that NY is taxing ALL the income, not just the income earned in the state?

    The problem is the taxing power itself. As they say, now you’re just negotiating about price.

    – Josh

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