A recent ruling by the New York Court of Appeals highlights a tax issue telecommuters might not be aware of: Which state gets the tax money on your
income? If you’re working for a company in New York or a small number of
other states, they do.
Thomas Huckaby worked as a computer programmer working out of his home
office in Tennessee for a Jamaica, N.Y., organization called the National
Organization of Industrial Trade Unions.
The bulk of his work, roughly 75 percent according to court documents, was
done at home, but Huckaby was required to visit the home office to train users on the software he created and to gather guidelines for program
revisions.
Between 1994 and 1995, Huckaby filed nonresident returns with the State of
New York for the time he spent in the state. New York’s Department of
Taxation and Finance officials had a problem with that and told Huckaby he
needed to pay state taxes on all his income. It’s a decision that was
subsequently backed up by an administrative law judge, the tax appeals
tribunal and ultimately the appellate division.
The crux of the issue is that Huckaby works out of his Tennessee office as a
matter of convenience — not necessity.
“Any allowance claimed for days worked outside of New York must be based on
the performance of services which, because of the necessity of the employer,
obligate the employee to out-of-state duties in the service of his
employer,” the taxation department explained in court documents.
“Such duties are those which, by their very nature, cannot be performed at the employer’s place of business.”
It’s hard to judge how much of an effect the ruling has had on customers at
H&R Block for this year’s tax season, said Jackie Perlman, a senior tax research coordinator for the Kansas City, Mo.-based
tax preparer, because they aren’t required to note whether they’re telecommuters.
She said in Huckaby’s case, he’ll likely get credit applied to his Tennessee
income taxes for the income tax he paid into New York. New York tax rates
are higher than Tennessee, she said, so he’s hurt by paying 100 percent of
his income tax through the Empire State.
In and of itself, New York’s “convenience of the employer” test isn’t
onerous — until the state where the telecommuter is working from starts asking
for its own share of the employee’s income.
What this amounts to is a double tax on telecommuters, said Chuck Wilsker,
president and CEO of the Telework Coalition. If a teleworker spends 60
percent of his time in New York and 40 percent in Connecticut, pays 100
percent of his income to New York, but still needs to pay Connecticut its
40 percent, it’s going to have a negative effect on the practice, he said.
“It’s hard enough to get people to [telecommute] in the first place,” Wilsker said. “Well guess what, while you’re thinking about it,
think about paying an extra 20, 40 or 60 percent [in taxes], ” he said.
Congress has already put its two cents into the debate. In August
2004, Sen. Chris Dodd (D-Conn.) introduced the Telecommuter Tax Fairness Act of 2004 to prevent New York from levying taxes on Connecticut telecommuters.
“Connecticut workers help drive our economic growth,” he said in a statement
at the time. “They shouldn’t have to pay an unfair ‘toll’ tax simply because
they work from home.”
The bill was never passed, and officials from Dodd’s offices were unavailable
at press time to say whether the bill would be introduced again this year.
