Warning: States Looking to Tax Remote Work

By at 23 October, 2020, 11:25 am

by Raymond J. Keating-

If there’s one area where government is creative, it’s when it comes to finding ways to reach into people’s pockets. Today, in this pandemic economy, more people are working from home, that is, working remotely. Politicians and their appointees obviously haven’t missed this development, and many are wondering how they can extend the reach of the Tax Man.

Unfortunately, some have acted, providing examples for others from which to work.

Stateline recently offered an update on the issue, initially highlighting the fact that Massachusetts lawmakers voted to extend the reach of their state’s income tax to people who had worked in Massachusetts but due to the pandemic were now working remotely at home in New Hampshire, that is, in a state that imposes no general personal income tax.

The Massachusetts tax supposedly is temporary, only lasting until the end of 2020. It will be interesting to see what happens then, if remote work is still a necessity for some given the pandemic. Throughout history, of course, many so-called temporary taxes wound up becoming permanent.

And as reported, “six other states — Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania — have permanent rules that predate the pandemic.”

How could taxing people in one state when they are doing their work, and living, in another state pass constitutional muster? After all, it certainly doesn’t pass common sense and sound economics tests.

Stateline noted:

“New York, which has had its regulation as part of income tax law from the early part of the 20th century, has a reputation of strict enforcement on out-of-staters working for a New York-based company. It’s called the “convenience tax” because, before the pandemic, it was believed that some people worked remotely out of convenience, not necessity. The pandemic scrambled those semantics, but the tax remains.

“The New York application of the tax was tested in a 2003 case by Edward Zelinsky, who lives in Connecticut but works as a law professor at Yeshiva University’s Cardozo School of Law in New York. Zelinsky argued he should pay New York income tax on only half of his earnings, because he spends half his teaching and research time in New York and half at home in Connecticut. 

“But the New York Court of Appeals, the state’s highest court, ruled Zelinsky owed New York income tax on his entire salary. The U.S. Supreme Court declined to hear the case.”

While it’s not surprising that a New York court came up with this finding, it remains perplexing how the Supreme Court chose not to take up the case.

But there are places where sanity reigns. For example, “A few areas — the District of Columbia, Maryland and Virginia, notably — have reciprocity agreements that simplify things for taxpayers. Those deals mean taxpayers owe only the income tax of the state in which they live, not the state where they work.” In general, people living in one state and physically working in another usually pay taxes where they work, and get a credit for their home-state taxes.

Makes sense, right? Sure it does. But common sense often can be in short supply in politics, especially when it comes to taxes, and during a time when governments are facing revenue shortfalls.

For example, if you think New York is outrageous, consider what’s going on in Arkansas: “In February, the Arkansas revenue department roiled the legal tax world by issuing an opinion stating that if a person who had been working in Arkansas, but then moved to another state but continued to do the same work — say, a computer programmer — that worker would still be subject to Arkansas income tax.”

If the Supreme Court isn’t going to deal with this, how about Congress? U.S. Sens. John Thune (R-S.D.) and Sherrod Brown (D-Ohio) have offered legislation. The “Mobile Workforce State Income Tax Simplification Act of 2019” would prohibit “the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than (1) the state of the employee’s residence, and (2) the state within which the employee is present and performing employment duties for more than 30 days during the calendar year.”

In a statement, Senator Thune said: “If enacted, it would simplify state income tax filings by creating a common-sense, across-the-board standard for mobile employees who spend a short period of time during the year working across state lines. Imagine how complicated and unfair it is for an individual who lives in a state like South Dakota, with no state income tax, to have to file income taxes in multiple states for simply temporarily working in those states – in some cases, for as little as 24 hours – and not be able to recover any income tax payments he or she has to make. The current framework is overly burdensome, and this legislation would provide much-needed relief.”

Senator Brown added, “We should be making it easier, not harder, for workers to support themselves and their families. We live in a highly mobile society. People travel across state lines for work. We should be cutting red tape and simplifying the state income tax filing process to help these workers get ahead.”

Here’s an issue that voters need to know where candidates in the presidential, senatorial and House races stand.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


News and Media Releases