State Taxation and the Modern Workforce
Efforts to simplify and clarify the tax law for the growing phenomenon of the mobile, telecommuting and virtual workforce face challenges.
September 24, 2009
For a variety of reasons, many employees do not work at an office or single employer location, but may instead regularly or occasionally work from their home, a customer office or a different office of their employer. When all of these locations are in the same state, no state tax issues typically arise. Today's information technology though, enables many types of workers to work remotely with little or no reason to be in the same state as the employer. When multiple states are involved in an employee's work arrangements, state tax issues, such as double taxation, can ensue.
This article describes the cause of some of these tax issues and the types of legislative proposals offered in the past several years to address them and the obstacles they face.
Telecommuting and Mobile Employees
Various terms are used to describe the employees who face state income tax issues due to their work arrangements. Such terms are also often used interchangeably. A "telecommuting" employee is typically one who has an employer-provided office, but may be allowed to work one or more days per week from home. Telecommuting may be offered or mandated for many reasons such as making employment more enticing, employee convenience, enabling an employer to make more efficient use of office space, reducing traffic congestion and air pollution, addressing climate change and allowing work to continue despite health or weather problems.
While often it is the employee's desire to telecommute, many employers require or encourage it as well. For example, telecommuting might be part of a company's efforts to reduce its carbon footprint. Some governments also encourage telecommuting. For example, the U.S. Department of Health and Human Services has suggested telecommuting plans as a technique to prepare for a possible flu pandemic. Governor Tim Kaine of Virginia issued Executive Order 82 in 2009 on the "greening of state government." This Order notes that state law calls for at least 20 percent of the workers in state agencies to be telecommuting by 2010. To further encourage telecommuting, the governor declared August 3, 2009 to be "Statewide Telework Day" with the request that state agencies and private employers "allow as many citizens as possible to telecommute on that day."
A "mobile" employee on the other hand is someone who works at multiple locations and can be assigned to work in multiple offices operated by their employer. It might also describe someone allowed to work at home but with occasional commitments to attend meetings or perform other duties at the employer's office.
Depending on the location of an employer's office, an employee's home and the particular work assignment, telecommuting and mobile employees may have connections in more than one state. Separate bills of the 111th Congress address tax issues of telecommuting workers (such as H.R. 2600) and mobile employees (such as (H.R. 2110). Despite differing language to describe the workers, the bills attempt to clarify and simplify state income tax consequences such employees may face, although the approaches of each bill differ.
Two court decisions in New York garnered attention to the state tax issues faced by employees and employees with work arrangements that touch multiple states. Both cases dealt with that state's "convenience of the employer" test. As described in Huckaby v. NY State Division of Tax Appeals, 796 NYS2d 312 (2005), cert. denied, Dkt. No. 04-1734 (2005), this test "provides that when a nonresident is employed by a New York employer, income derived from work in another state is taxable by New York unless performed out of state for the necessity of the employer." In Huckaby, an employee worked for a New York employer from his home in Tennessee with occasional trips to the employer's office in New York. Huckaby split his income between these states based on the number of days worked in each. The court ruled for the state in finding that because working in Tennessee was for the employee's convenience rather than for the employer's necessity, all the income was taxable in New York. A similar result was reached in Zelinsky v. NY State Tax Appeals Tribunal, 769 NYS2d 464 (2003), cert. denied, 541 U.S. 1009 (2004).
For further information, see Lafond and Schrader, "State Taxation of Telecommuters," Journal of Accountancy. For an overview of varying state tax rules, see Council on State Taxation (COST) testimony (PDF) by Douglas L. Lindholm, before a House Judiciary subcommittee on November 1, 2007.
The "convenience of the employer" approach used by New York and a few other states can lead to double taxation of income. That is not the only tax concern though. Both employees and employers face administrative and compliance challenges of withholding and filing in multiple states and dealing with the recordkeeping tasks associated with the need to track daily activity of employees. Errors and confusion are likely to result from these work arrangements.
Since 2004, various legislative proposals have been introduced. As noted earlier, two different sets of bills have been offered with some modification over the years. This legislation is briefly described next.
The Mobile Workforce State Income Tax Fairness and Simplification Act (H.R. 2110, 111th Cong.) provides that wages can only be subject to income tax in:
H.R. 2110 provides rules for determining the work location and defines "day." This proposal excludes professional athletes and entertainers, as well as "certain public figures." This bill is intended to prevent double taxation of employee income and to simplify recordkeeping and compliance obligations for employers and mobile employees.
Similar legislation introduced in the 110th Congress (H.R. 3359; hearing held November 1, 2007) and the 109th Congress (H.R. 6167), used a 60-day period rather than a 30-day one. These earlier bills also defined "state" to include its political subdivisions (for example, cities), while H.R. 2110 does not use that broad of a definition. The definition of "day" was also modified from looking at over 50 percent of the employment duties in a day to instead looking at the "preponderance of the employee's employment duties."
Another set of bills introduced starting in 2004 focus on "telecommuters and others who work at home." The current version of this legislation, H.R. 2600 (111th Cong.) prohibits states from taxing income of a nonresident worker if they are not physically present in the state. Basically, "no State may deem a nonresident individual to be present in or working in such State on the grounds that:
Because the congressional proposals dictate when states may subject a worker to income tax, they are challenged by states on federalism concerns. The Multistate Tax Commission (MTC) opposes both (H.R. 2110, 111th Cong.) and H.R. 2600 (111th Cong.) (MTC memorandum of July 30, 2009 (PDF)). In addition to the concern about pre-emption of states' rights, the MTC also finds that these bills "undermine the principles of economic presence." The MTC has initiated a project to draft a model act on state tax withholding for multistate employees (July 17, 2009 memo (PDF)).
The Federation of Tax Administrators (FTA) opposed H.R. 3359, but per bill sponsor Congressman Johnson, H.R. 2110, the revised and current bill, resulted from a compromise between FTA and COST (Rep. Johnson statement, April 27, 2009). FTA Resolution 2009-6 (PDF) explains its position with reference to H.R. 3359. It also notes that FTA does not consider a physical presence standard as appropriate in other contexts for establishing authority to tax, particularly with respect to business activity taxes.
Another possible obstacle to enactment of uniform rules is crafting definitions. While H.R. 2110 defines most terms, it does not define "employment duties." This term is important in preventing potential abuse in which an employee, for example, might argue that he performed work at his home or another location that is in a state with a lower tax rate than where the employer is located.
With healthcare, climate change and extenders on the congressional schedule, the additional challenge of enacting uniform rules for state taxation of the income of mobile employees may continue to be put on hold. However, the issues seem more resolvable than other uniformity proposals, such as for business activity tax nexus (H.R. 1083 (111th Cong.)). In addition, although congressional efforts have been underway for over five years, the uniform solution is more likely to come from Congress than from uniform action of all state legislatures.
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Annette Nellen, CPA/Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.