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A Tale of Two Bills: Preventing the Double Taxation of Remote Workers

Posted on Sep. 14, 2020
Edward A. Zelinsky
Edward A. Zelinsky

Edward A. Zelinsky is the Annie and Morris Trachman Professor of Law at Yeshiva University’s Benjamin N. Cardozo School of Law in New York City.

In this article, the author argues that to prevent the double taxation of remote workers, Congress should adopt the recently introduced Multi-State Worker Tax Fairness Act of 2020 and its requirement that a state only tax income physically earned within its borders.

Even before the COVID-19 crisis, much controversy surrounded the state income taxation of interstate remote workers. An interstate remote worker, often also called an interstate telecommuter, is an individual who lives in one state and works at her residence for an employer located in another state and uses modern technology to work and communicate across state lines. The public health crisis has heightened the tax controversy surrounding interstate remote work as individuals and employers have urgently embraced working at home to combat the spread of the coronavirus.1 Many remote workers find themselves subjected to double state income taxation — by the state in which they live and work and by the state where their employer is located.

Two bills recently introduced in Congress address in different ways the state income taxation of interstate remote workers. The Multi-State Worker Tax Fairness Act of 20202 uses the physical presence test and achieves the solution which is correct as a matter of constitutional law and tax policy: Remote workers should only be taxed by their states of residence on the income they earn while working at home. In contrast, the approach embodied in the Remote and Mobile Worker Relief Act3 is temporary and ultimately unsound. Under that legislation, many, perhaps most, interstate remote workers would be subject to double state income taxation both by the states in which they live and work and by the states where their employers are located — even if such workers do not set foot in the employer’s state.

After the COVID-19 crisis has abated, remote work will remain an expanded feature of the American economy. It would be best for the income earned by interstate remote workers on the days they work at their homes to only be taxed by the state where they live, work, and receive public services, not by the state where their employer is located. Congress should permanently confirm this simple and sensible rule by adopting the Multi-State Worker Tax Fairness Act of 2020 and its requirement that states only tax nonresidents’ incomes physically earned in the taxing state. Congress would thus eliminate the double state income taxation of income earned at home by remote workers across state lines.

If Congress does not act in this sensible fashion to protect interstate commerce, the states that now aggressively tax the incomes of out-of-state telecommuters should stop doing so to keep themselves competitive in a world of expanded remote work. The overly aggressive taxation of telecommuters’ income, particularly by New York, signals a hostile tax environment to persons and firms who have the option of locating elsewhere. For their own long-term self-interest, the states that today tax remote workers on the income they earn at their out-of-state residences should instead align their respective tax policies with the realities of the modern economy. For their own competitiveness, these states should stop taxing income earned by nonresident telecommuters at their out-of-state homes.

Background: Nonresidents and Remote Work

Constitutional law and considerations of tax policy have long distinguished between residents and nonresidents.4 States have the plenary authority to tax all the income of their respective residents.5 In contrast, a state can tax a nonresident only on income earned in that state.6 Thus, no issue is posed by a resident of Manhattan who, during the COVID-19 crisis, works for her Manhattan-based employer from a house on Long Island or in upstate New York. In that instance, the Empire State is both the employee’s state of residence and the state of source — where the employee earns her income. However, if an individual works in one state and lives in another, both states can potentially assert tax over the same income, the former on the basis of source, the latter on the basis of residence.

Even before the COVID-19 crisis, remote work or telecommuting was growing along with the attendant tax controversy. Consider, for example, a computer programmer who works at his home in Tennessee for an employer based in New York.7 Or a law professor who commutes to Manhattan three days each week during the semester to teach his classes while spending the rest of his work time at home in Connecticut doing legal writing and research.8

New York has taxed aggressively in these contexts, pushing its source-based authority to tax nonresidents beyond the constitutional and tax policy breaking point. Under its “convenience of the employer” doctrine, the Empire State asserts that these individuals owe New York tax on the income they earn on their days working at home in Tennessee and Connecticut even though, on these work-at-home days, these individuals do not enter New York and instead receive their respective public services from the states in which they work at home. The upshot can be double taxation or overtaxation as the remote worker is taxed on the same income by both his state of residence (where he actually lives, works, and receives public services) and the state in which the remote worker’s employer is located, which (unconvincingly) claims to be the source state for such income.

Some states emulate New York’s convenience of the employer doctrine to tax out-of-state employees’ incomes even though such individuals live and work in another state.9 Other states have reached the same result without invoking a notion of employer convenience. The Arkansas tax department, for example, has declared that a computer programmer working in Washington state is, for state income tax purposes, conducting business in Arkansas and is thereby subject to Arkansas tax even though this programmer spends no time in the state. 10 In a similar vein, the Massachusetts tax collector has declared that, for the duration of the COVID-19 crisis, some individuals working at their out-of-state homes owe income taxes to the Bay State, even though they are not physically working there. 11

Some states have agreements that their respective residents need not pay income taxes to or file nonresident returns in the other states that are parties to the agreement. 12 However, absent such an agreement, a remote employee who works at his out-of-state home, using the internet to stay in touch with his employer in another state, can often be double taxed, thereby penalizing interstate activity.

While there are serious constitutional arguments against this state tax overreach, 13 New York’s courts in particular have been unresponsive to these concerns. 14

Some argue that this is not a problem because an interstate remote worker will receive from her home state an income tax credit for her taxes paid to her employer’s state. For five reasons, this is an inadequate answer. First, the telecommuter may reside in a state without a personal income tax such as Tennessee or New Hampshire. If so, no home state credit offsets the tax assessed by the employer’s state on the remote worker’s income because there is no home state income tax against which to grant a credit. When Massachusetts asserts tax on income earned at a telecommuter’s home in New Hampshire, there is no offsetting credit for the New Hampshire resident because the Granite State does not levy a personal income tax.

Second, even if a remote worker’s state of residence imposes a state income tax, it may not grant a credit for taxes assessed by the employer’s state on the grounds that the income is earned in the state of residence, not in the state in which the employer is located. While the U.S. Supreme Court has indicated that, under some circumstances, states must provide their residents with income tax credits to offset out-of-state income taxes, 15 it is unclear whether this rule mandating credits applies in the context of telecommuters’ wages that are earned by the taxpayer in his state of residence. 16

Third, when a remote worker’s state of residence grants a credit against its state income tax for the tax assessed by the employer’s state, the credit is typically limited to the home state’s tax rate. 17 Since New York income tax rates are typically higher than other states’ income tax rates, the credit granted by the remote worker’s home state will often offset only part of the higher New York tax.

Fourth, compounding the remote worker’s tax burden are the associated compliance costs, that is, the expense of filing a nonresident state income tax return. Even if little or no tax is due to the employer’s state, the interstate remote worker may be legally obligated to file a nonresident income tax return for that state. 18 The cost of filing that return is a de facto tax, burdening this individual for working at home for an employer located in another state.

Finally, as a matter of public finance, a credit for taxes assessed against interstate telecommuters by the state in which the employer is located unfairly penalizes the treasury of the telecommuters’ state of residence. The state of residence (not the employer’s state) provides public services to a remote worker and his income-producing activity on the days when the telecommuter works at home. By granting a credit against its tax, the state of residence forgoes its legitimate claim to revenue to finance these services and instead defers to the employer’s state, which provides no services to the employee when she works at her out-of-state home.

If, for example, a telecommuter working for a Boston-based employer from his residence in Rhode Island needs an EMT, it is Rhode Island and its municipalities that provide that public service, not Massachusetts, where the employer is located. Massachusetts provides services to the employer located within its boundaries and may properly tax the employer for those services. But it does not provide services to the employee personally on the days she works at home in Rhode Island. Thus, a credit by the telecommuter’s home state deprives it of revenue to finance the services it provides to the telecommuter working at home while such credit effectively grants a windfall to the employer’s state, which furnishes no services to the telecommuter working at his out-of-state home.

A Tale of Two Bills

Against this background, the Multi-State Worker Tax Fairness Act of 2020, 19 through its physical presence requirement, would permit only the state of residence to tax a remote worker on the days he works at home. This outcome is sensible as a matter of tax policy because the state of residence provides public services to an individual on the day he works at home. This outcome is also sensible in constitutional terms because it apportions the income earned on a work-at-home day to the state where such income is earned — that is, the telecommuter’s state of residence.

The core provision of the Multi-State Worker Tax Fairness Act of 2020 is a straightforward declaration that a state can tax a nonresident individual on her compensation income only if such income is earned by the nonresident’s physical presence in the taxing state:

In applying its income tax laws to the compensation of a nonresident individual, a State may deem such nonresident individual to be present in or working in such State for any period of time only if such nonresident individual is physically present in such State for such period and such State may not impose nonresident income taxes on such compensation with respect to any period of time when such nonresident individual is physically present in another State. 20

To implement this rule, the act would bar any state’s attempt to circumvent the physical presence requirement through “any convenience of the employer test or any similar test.” 21 Thus, the act would permanently prevent the double state income taxation of the earnings of interstate remote workers by restricting nonresident state taxation to income physically earned in the taxing state. A state could no longer project its tax authority beyond its borders, taxing out-of-state remote workers for the income they earn in another state through the convenience of the employer rule or any other legal doctrine designed to tax the income an individual earns outside the borders of the taxing state.

In contrast to this simple and permanent solution to the problem of double taxed remote work income, the provisions of the Remote and Mobile Worker Relief Act 22 pertaining to remote work would apply only for 2020. 23 This is inadequate. The problem of double state income taxation of remote work predated the COVID-19 crisis and will persist after this public health crisis abates. Congress should adopt a permanent solution to prevent the double taxation of telecommuters’ incomes, not the kind of temporary fix embodied in the Remote and Mobile Worker Relief Act.

Even as a temporary fix for the COVID-19 crisis, the December 31, 2020, deadline makes no sense. Major employers, including Google, have announced their support for COVID-related remote work into 2021. 24 While the drafters of the Remote and Mobile Worker Relief Act evidently plan for the public health crisis to end by December 31, 2020, there is no indication that the virus will cooperate. Moreover, for the temporary period to which it would apply, the Remote and Mobile Worker Relief Act would not adequately address the problem of the double taxed telecommuter. Consider first the ambiguities of this act in contrast with the direct terminology of the Multi-State Worker Tax Fairness Act of 2020.

Critical to the Remote and Mobile Worker Relief Act is its definition of an employee’s primary work location as “the address of the employer where the employee is regularly assigned to work when such employee is not working remotely.” 25 This bill then defines working remotely 26 as “the performance of duties by an employee at a location other than the primary work location of such employee.” 27 To see the ambiguous nature of these definitions, consider first the possibility that an employer might “regularly assign[]” an employee to work at his home. Would the employee’s residence thereby become the employee’s “primary work location” for purposes of this act?

Perhaps. But perhaps not. An employee’s primary work location must be an “address of the employer.” 28 One reading of that phrase is that the employee’s home can become an address of the employer and thus the employee’s primary work location if the employer says so. An alternative reading is that the employer’s address must be a conventional brick-and-mortar location such as an office or a factory, rented or owned by the employer. But what if the employee is not required to work at this location regularly, whatever that might mean? Does the employee then not have a primary work location for purposes of this act? If not, how would this act apply to her?

Consider as well that the Remote Mobile and Worker Relief Act limits its putative tax relief to remote work undertaken “at the direction of the[] employer.” 29 What if the employer permits (or perhaps encourages) employees to work at home but does not strictly mandate such telecommuting? Is this remote worker directed by the employer?

Moving beyond these ambiguities, the Remote and Mobile Worker Relief Act’s general rule is that the state of the “primary work location” can tax the income of a telecommuter earned on the days when she works at her out-of-state home. 30 Since this act, if it became law, would not “modify[], impair[], [or] supersed[e]” the authority of the telecommuter’s state of residence to tax her income on the basis of residence, 31 the upshot would be the double state income taxation of the income earned by interstate remote work — once by the telecommuter’s state of residence and once by the state of the primary work location, whatever that might prove to mean.

The employer can (but need not) elect an alternative rule under which the employer “tracks where such employee performs duties on a daily basis.” 32 In that case, only the state of residence would tax the telecommuter’s income from working at home. But there is no requirement that the employer make this election nor does this bill establish standards for the employer’s tracking system.

For all these reasons — its temporary nature, its ambiguities, its continued acceptance of the double state taxation of income earned by remote employees — the Remote and Mobile Worker Relief Act is not an acceptable legislative response to the problem of double taxed interstate remote work. Congress should instead enact the Multi-State Worker Tax Fairness Act of 2020 and its straightforward requirement that states only tax income earned physically within their borders.

The States Can Correct the Problem

Suppose — as seems more than possible — that Congress does not address the problem of the double taxed remote worker. The overly aggressive taxation of remote workers, particularly but not exclusively by New York, signals a hostile tax environment to persons and firms that have the option of locating elsewhere. Among its other long-term effects, the COVID-19 crisis has made clear that many persons and businesses have choices about their location. To keep themselves competitive in a world of expanded remote work, the states that now double tax telecommuters should instead bring their tax practices within constitutional and tax policy norms by taxing nonresidents only when they are physically present in the taxing state.

Whatever revenue is thereby sacrificed in the short run will be more than made up by a more competitive environment in the long run. For their own long-term self-interest, the states that today tax remote workers on the income they earn at their out-of-state residences should instead align their respective tax policies with the realities of the modern economy, an economy in which many firms and individuals will have choices about location. For their own competitiveness, these states should stop taxing income earned by nonresident telecommuters at their out-of-state homes.

Conclusion

Congress should preclude the double state income taxation of interstate remote workers by confirming the simple and sensible rule that states may only tax nonresidents on the income that is physically earned within the taxing state. Accordingly, Congress should adopt the Multi-State Worker Tax Fairness Act of 2020 and its physical presence test and thereby eliminate the double state income taxation of income earned at home by remote workers across state lines.

FOOTNOTES

1 See, e.g., Katherine Bindley, “The Silicon Valley Exodus,” The Wall Street Journal, Aug. 15, 2020; Laura Saunders, “The Lurking Tax Threat for Remote Workers — You May Be on the Hook for Taxes in the State Where Your Job Is Based, Even if You Never Go There,” The Wall Street Journal, June 13, 2020; and Aaron Davis, “Fight Over Income Tax Nexus Brewing in the States,” Tax Notes State, Aug. 17, 2020, p. 761.

2 H.R. 7968, 116th Cong., 2nd Sess. (2020) introduced by Rep. James A. Himes, D-Conn., and cosponsored by Reps. Jahana Hayes, D-Conn., and Chris Pappas, D-N.H.

3 S. 3995, 116th Congress, 2nd Sess. (2020) introduced by Sens. John Thune, R-S.D., and Sherrod Brown, D-Ohio. This act also addresses the state taxation of mobile workers, individuals who physically perform their jobs in a variety of states. See id. at section 2.

4 Edward A. Zelinsky, “New York’s Ill-Advised Taxation of Nonresidents During COVID-19,” Tax Notes State, May 25, 2020, p. 1001; and Walter Hellerstein et al., State and Local Taxation: Cases and Materials 379-391 (2020).

5 Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450, 462-463 (1995) (“A jurisdiction, such as Oklahoma, may tax all the income of its residents, even income earned outside the taxing jurisdiction.”) (emphasis in original).

6 Id. at n. 11 (“For nonresidents, in contrast, jurisdictions generally may tax only income earned within the jurisdiction.”).

7 Huckaby v. New York State Division of Tax Appeals, 4 N.Y.3d 427 (2005).

8 Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85 (2003). The taxpayer in this case was me.

9 See, e.g., 61 Pa. Adm. Code section 109.8 (“However, any allowance claimed for days worked outside of this Commonwealth shall be based upon the performance of services which, of necessity, obligate the employee or casual employee to perform out-of-State duties in the service of his employer or casual employer.”); and Nebr. Admin. Code title 316, reg. 22-003.01(C)(1) (“If the nonresident’s service is performed without Nebraska for his or her convenience, but the service is directly related to a business, trade, or profession carried on within Nebraska and except for the nonresident’s convenience, the service could have been performed within Nebraska, the compensation for such services shall be Nebraska source income.”).

10 See State of Arkansas, Dept. of Finance and Administration, Legal Opinion No. 20200203 (Feb. 20, 2020) (computer programmer working in Washington state owes Arkansas income tax).

11 830 CMR 62.5A.3(3): Massachusetts Source Income of Non-Residents Telecommuting Due to the COVID-19 Pandemic (Emergency Regulation) (“All compensation received for services performed by a non-resident who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing such services in Massachusetts, and who is performing services from a location outside Massachusetts due to the Pandemic-Related Circumstance will continue to be treated as Massachusetts source income.”).

12 See, e.g., Iowa Admin. Code Rule 701-38.13 (discussing “reciprocal tax agreement” between Iowa and Illinois).

13  Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, State Taxation, para. 20.05[4][e][i] at 25-33 (2015); Hellerstein et al., supra, note 4 at 391-402; Morgan L. Holcomb, “Tax My Ride: Taxing Commuters in Our National Economy,” 8 Fla. Tax. Rev. 885 (2008); and William V. Vetter, “New York’s Convenience of the Employer Rule Conveniently Collects Cash From Nonresidents, Part 2,” State Tax Notes, Oct. 23, 2006, p. 229.

14 Huckaby, 4 N.Y.3d 427; and Zelinsky, 1 N.Y.3d 85.

15 Comptroller of the Treasury v. Wynne, 575 U.S. 542 (2015).

16 Zelinsky, “The Enigma of Wynne,” 7 Wm. & and Mary Bus. L. Rev. 797, 814-817 (2016).

17 See, e.g., N.J. Stat. Ann. section 54A:4-1(b) (limiting credit based on the resident’s New Jersey tax liability); and Conn. Gen. Stat. Ann. section 12-704(a)(2) (limiting credit based on the resident’s Connecticut tax liability). See also Zelinsky, “Apportioning State Personal Income Taxes to Eliminate the Double Taxation of Dual Residents: Thoughts Provoked by the Proposed Minnesota Snowbird Tax,” 15 Fla. Tax Rev. 533, 546-550 (2014) (describing state tax credits for residents’ payments of out-of-state taxes); and Hellerstein et al., supra note 4 at 433-434 (discussing how such credits are typically limited to “the tax imposed on such income by the state granting the credit”).

18 On the filing obligations on New York nonresidents, see N.Y. CLS Tax sections 612(a) and 651(a)(3) and N.Y. Department of Taxation and Finance, 2019 Standard Deductions.

19 H.R. 7968. The bill’s language reflects earlier legislative efforts to prevent the double taxation of telecommuters. See, e.g., the Multi-State Worker Tax Fairness Act of 2016, S. 2813, 114th Congress, 2nd Sess. I participated in drafting these prior efforts.

20 Multi-State Worker Tax Fairness Act of 2020 at section 2(a).

21 Id.

23 Id. at section 3(c)(1) (defining covered period as extending no later than December 31, 2020). For the duration of this covered period, the presence of a remote employee at home would not create nexus for tax purposes between the employee’s home state and the employee’s employer. Id. at section 3(b).

24 Rob Copeland and Peter Grant, “Google Tells Staffers to Work Remotely Until Next Summer,” The Wall Street Journal, July 28, 2020.

25 The Remote and Mobile Worker Relief Act at section 3(c)(5).

26 Id. at section 3(c)(8).

27 Id.

28 Id. at section 3(c)(5).

29 Id. at section 3(c)(8).

30 Id. at section 3(a)(1).

31 Id. at section 3(d).

32 Id. at section 3(a)(2).

END FOOTNOTES

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