Darien Shanske*
The challenge of how to tax employees who commute or work between states did not arise with the current pandemic. A leading state and local tax professor challenged New York’s approach to the issue in 2003, pursuing his claim to the New York Court of Appeals.[1] Congress has been considering bills on the issue for at least ten years.[2] The Multistate Tax Commission, an intergovernmental agency that promotes uniform state tax law (among other things), approved model legislation for a mobile workforce statute in 2011.[3]
Yet, without a doubt, the current crisis has made these issues more pressing, as many more employees are working at home in one state where once they commuted into a neighboring state for work.[4] Some states that stand to lose taxes paid by those employees who are no longer commuting have taken the position that the tax employees would have paid is still due.[5]
One current version of a federal proposal to resolve the problem is contained in one of the latest rounds of pandemic relief offered by Senate Republicans: the Remote and Mobile Worker Relief Act.[6] Oversimplifying a bit, the Act sets a bright-line threshold at 30 days of physical presence of the employee in a state to trigger a payment of tax to that state and, for 2020, pushes that threshold out to 90 days.
When it comes to evaluating various rules for taxation of a remote workforce, there are at least two types of questions one might usefully consider. First, are we considering the issue with respect to the current crisis or are we considering a longer-term solution? Second, are we looking for the best answers as a matter of policy or doctrine? Ideally, doctrine would allow for the best policy choices, but that is not assured. This is especially the case if states are left to resolve the issues on their own.
Combining these two questions creates a two by two matrix.
Doctrine Policy
Long-term "Convenience of the employer" type rules 90-day rule?
Short-term Apportionment 30-day rule?
In order to promote comments from the distinguished respondents, I will address each quadrant of the matrix, hoping to provide at least something provocative to respond to.
First, as for the short-term doctrinal issues, I believe the main question is: how far can states go in enforcing “convenience of the employer” type rules?[7] If an employee is working at home during a shelter-in-place order, then that does not seem to be for the employer’s convenience.[8] But that is a question of interpreting a particular state’s statute. What of the Constitution? Could a state source to itself income earned by an employee with substantial virtual contacts with a business in that state? Why, post-Wayfair, does presence need to be physical?[9]
Second, as for the short-term policy issues, there are two sub-issues. First, there is the question of what to do about emergency workers who voluntarily went to states such as New York to help during the worst of the crisis. I can’t see an argument for why New York should not willingly forego any taxes it might ordinarily have been able to claim from these workers, but am open to the panel convincing me I am being a sap. If I am right, though, then the feds should help New York do the right thing.
But this argument is not so simple as to ordinary employees. The federal bill, though admirably trying to resolve the problem, does not strike me as very appealing. Given that so many employees were sent home in mid-March, the 90-day rule would mean that states and localities like New York and New York City would lose significant revenue. This does not seem to be the right answer given the services provided until the crisis hit, nor the services provided to maintain a civilized society to be available when the pandemic recedes. Perhaps this might not matter as much if the federal government were providing sufficient aid to make state and local governments whole, but, as of this writing, that has not happened . . . .
I’d now like to skip to the long-term policy box. Is the 30-day rule the right rule in general? I am dubious, though I cannot say that a 20-day rule (as proposed by the Multistate Tax Commission) or a 14-day rule (under New York law) would be better—or worse.[10] It seems to me that imposing a bright-line rule based on physical presence is problematic, not because it is too generous (or stingy) or game-able (though it is), but because it does not measure the right thing.[11] Put another way, physical presence is an increasingly weak proxy for when a jurisdiction is providing sufficient services to justify the imposition of a tax.
To illustrate this point: a federal securities lawyer, say a partner at a big firm, works in New York City, but lives in New Jersey. New York can, should, and does (at the city level) tax the firm as a firm because the state and the city are providing services to the firm. And yet state and local governments are also providing services to the partner—services that might not be well captured at the entity level, especially if, as is reasonable, the state (and/or city) wants to impose a progressive tax. So New York is in effect taking the position that the partner making two million dollars should pay more than the paralegal making fifty thousand dollars. Do we think that this is reasonable? And—if we do—is it because of the partner’s greater consumption of services relating to her physical presence in New York? I don’t think so; it has to do with the network of connections that the law firm can access because of the agglomeration of expertise and capital available in New York. It should not matter that the partner is careful only to attend 29 in-person meetings per year in New York as compared to the fact that a federal securities lawyer needs[12] to be part of a firm with a significant New York presence in order to earn two million dollars.
In many ways my example here is typical of a classic local government finance issue as to cities and suburbs. If a big portion of a city’s tax base moves to the lower tax suburbs around the city, then the city is going to have a harder time providing the amenities that made it a city worth living near to begin with.
Of course, none of this answers the question of what a model law would look like at the federal level. It seems to me, as so often is the case with the federal-state relationship, that the feds are looking to cut several corners by imposing a bright-line rule and walking away. First, I don’t think just having some hearings represents an appropriate level of consideration. State and local issues should be considered systematically and, if a law is to be crafted, it should be done not only on the basis of impartially collected evidence, but should also be subject to refinement through the regulatory process. This is not to be naive about the regulatory process, but it is striking that private interests get greater opportunities to offer systematic input regarding other aspects of federal tax law than states would be afforded under the current proposal for remote workforce taxation. Second, I think that the use of federal money should be considered, possibly to administer a central clearinghouse and also possibly to help those states that stand to lose from a reduction in revenue. The national interest is advanced by encouraging both mobility and unique agglomerations of talent—perhaps the federal government should advance one goal (agglomeration) through a subsidy of some kind and advance the other (mobility) through a limitation on remote taxation.
But assuming there is not going to be a statute, what is the best way forward for the states given current doctrine (the long-term doctrine box)? If we are really moving to a more mobile/remote workforce, then I think states should consider taxing workers whose presence is virtual using some kind of apportionment approach. This is, after all, how we tax the income of interstate businesses and so it is not clear why we should not do this for workers as well,[13] though perhaps with different kinds of formulas. Professor Zelinsky has proposed this approach as to taxpayers who physically move between the states;[14] I am proposing to do this for taxpayers that move “virtually” between the states. One might worry that such a regime would be burdensome, but one can imagine that the burden of apportioning employee income could be placed on the employer.[15] One might also worry that this might encourage a shift to the use of independent contractors, but a recent (controversial) case in California illustrates that such independent contractors could be considered part of a unitary business with their (primary) client, thus returning us to the world of apportionment.[16]
As I said at the outset, everything proposed here is tentative, or less, and is offered to spur responses from thinkers I greatly respect.
* Professor of Law, UC Davis School of Law
[1] Zelinsky v. Tax Appeals Tribunal, 801 N.E.2d 840 (N.Y. 2003), cert. denied, 541 U.S. 1009 (2004).
[2] See, e.g., Mobile Workforce State Income Tax Simplification Act of 2012, H.R. 1864, 112th Cong. (2012).
[3] Shirley Sicilian, Model Mobile Workforce Statute – Additional Uniformity Committee Recommendations, Multistate Tax Comm’n (Feb. 28, 2011), http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Committees/Executive_Committee/Scheduled_Events/MWF%20Ex%20Com%20Memo%202-28-11.pdf [https://perma.cc/K3L4-FP5P].
[4] Jenny Gross, Here’s How Moving to Work Remotely Could Affect Your Taxes, N.Y. Times (Aug. 25, 2020), https://www.nytimes.com/2020/08/25/business/coronavirus-nonresident-state-taxes.html [https://perma.cc/T7K5-62M9]; Liz Weston, Working Remotely in the Pandemic May Generate a Tax Surprise, NerdWallet (Sept. 3, 2020), https://www.nerdwallet.com/article/finance/working-remotely-in-the-pandemic-may-generate-a-tax-surprise [https://perma.cc/379D-5KTF].
[5] See, e.g., Aaron Davis, New Hampshire Calls on Massachusetts to Rescind Remote Worker Tax, Tax Notes (Aug. 24, 2020), https://www.taxnotes.com/featured-news/new-hampshire-calls-massachusetts-rescind-remote-worker-tax/2020/08/24/2cw9f [https://perma.cc/79WS-UX9V].
[6] American Workers, Families, and Employers Assistance Act, S. 4318, 116th Cong. (2020) (broader relief bill); Remote and Mobile Worker Relief Act of 2020, S. 3995, 116th Cong. (2020) (remote worker bill).
[7] Currently, five and a half states have the convenience rule: Arkansas, New York, Delaware, Nebraska, Pennsylvania, and sometimes Connecticut. Timothy P. Noonan & Doran J. Gittelman, Taxing Times to Be a Telecommuter: Convenience Rules During COVID-19, Tax Notes (Sept. 17, 2020) (citing state statutory sources), https://www.taxnotes.com/featured-analysis/taxing-times-be-telecommuter-convenience-rules-during-covid-19/2020/09/17/2cyh2 [https://perma.cc/Q3MJ-HTCH].
[8] Walter Hellerstein, Nonresident NY Employees Are Not Currently Working at Home for Their ‘Convenience’, Tax Notes (Apr. 6, 2020), https://www.taxnotes.com/featured-analysis/nonresident-ny-employees-are-not-currently-working-home-their-convenience/2020/04/02/2cbx8 [https://perma.cc/3ZYE-AEJS].
[9] South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
[10] Withholding on Wages Paid to Certain Nonresidents Who Work 14 Days or Fewer in New York State, TSB-M-12(5)I, New York State Department of Taxation and Finance (2012); Sicilian, supra note 3, at 2.
[11] And so an alternative proposed bill, the Multi-State Worker Tax Fairness Act of 2020, H.R. 7968, 116th Cong. (2020), which takes into account physical presence in a state, is also problematic on this ground, though less so because it does not contain a minimum day threshold.
[12] This is stipulated for the sake of my hypothesis. I am sure it is not actually a necessary condition, but it is likely very helpful.
[13] And we do use apportionment for individuals in special situations, such as professional athletes. See Noonan & Gittelman, supra note 7.
[14] Edward A. 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 (2014).
[15] Rick Handel proposes something along these lines: Rick Handel, Income Taxation of Mobile Employees, Tax Notes (Feb. 12, 2020), https://www.taxnotes.com/tax-notes-today-state/employment-taxes/income-taxation-mobile-employees/2020/02/12/2bqt2 [https://perma.cc/34MU-MKDN].
[16] In the Matter of the Appeal of: Blair S. Bindley, OTA Case No. 18032402, 2019 WL 3804280 (Cal. Off. Tax. App. May 30, 2019).
The Proper State Income Taxation of Remote and Mobile WorkersEdward A. Zelinsky*
Professor Shanske’s provocative statement prompts me to make three observations.
First, it is important to distinguish the tax issues presented by interstate “mobile workers” from the tax concerns pertaining to interstate “remote workers.” As to mobile workers, the critical consideration is that multiple states can tax part of the mobile worker’s income on the basis of his physical presence in each of those states. Such multiple taxation (including multiple tax return filing obligations) can penalize and impede the interstate movement of such mobile workers.
As to remote workers, the key issue is the potential claim of the employer’s state that it can tax the remote worker’s income even though he has no physical presence in that state. The net result can be double taxation, as the same income is taxed both by the state in which the remote worker lives and works and by the employer’s state.
A classic case of a mobile worker is a salesperson who, throughout the year, travels to customers located in various states. As a matter of constitutional law, each of these states can tax the properly apportioned income earned by the salesperson in that state.[1] The interstate mobile worker may thus find herself subject to state income taxation in each state to which she travels for work, along with the attendant costs of filing state income tax returns in each state in which she has physical presence during the year. The resulting costs may hamper this salesperson’s movement across state lines.
In contrast, an interstate remote worker (often also referred to as a “telecommuter”) is typically an individual who works at home for an employer located in another state, maintaining contact with her out-of-state employer by means of electronic communication such as email, social media, and telephone. For example, a computer programmer may work at home in one state for an employer located in another state.[2] In these cases, the issue is not that there are multiple states with which the individual has physical contact. Rather, the problem is the overlapping tax claims of the remote worker’s home state (where she lives and actually works) with the tax claims of the state in which the worker’s employer is located but which has no physical connection to the remote worker.
In particular situations, these categories are not airtight. An individual may work remotely from his home on some days and then physically commute on other days into the state in which his employer is located.[3] In that case, the employer’s state has a physical connection to the individual’s income earned on the days he spends within that state, but must assert taxation over the balance of the individual’s income through the “convenience of the employer”[4] rule or a similar doctrine designed to reach the income earned by this telecommuter on his work-at-home days even though on those days he is outside the boundaries of the state seeking to tax him.
Second, the best short-term responses to these situations are the same as the best long-term responses. In the context of a mobile worker who physically works during the year in different states, the proper outcome is a de minimis rule requiring that her presence in any state must in any year reach some minimum threshold before the state can impose tax and filing requirements on this individual. The most recent version of the legislation proposed by Senators Thune and Brown would impose a 30 day minimum requirement before a state could impose tax and filing obligations on an employee.[5] There is no magic to this or any other particular number but the principle is compelling: To facilitate the interstate movement of individuals in the economy, a state should only impose tax or compliance costs on an individual once that individual’s in-state presence is sufficiently significant to justify such liabilities. This was true before the Covid-19 crisis. It is true during this crisis and it will be true thereafter.
The state income taxation of interstate remote workers is a different quandary requiring a different approach, namely, a prohibition on states taxing income generated by individuals when they physically work in another state. Consider, for example, the current controversy over New Hampshire residents who previously commuted to work in Boston but who, during the Covid-19 crisis, are working exclusively at home in New Hampshire. Massachusetts claims to tax the income of these New Hampshire residents even though they no longer set foot in the Bay State.[6]
The correct approach to this and similar contexts involving interstate remote work is embodied in the Multi-State Worker Tax Fairness Act of 2020,[7] introduced in the House by Representatives Himes, Pappas and Hayes: No taxation of this New Hampshire resident by Massachusetts as long as this resident exclusively lives, works, and receives public services in New Hampshire. If this resident resumes commuting to Massachusetts in the future, he would then pay Massachusetts nonresident tax on the income he earns in Massachusetts but not on the income he earns working at home in the Granite State.
Professor Shanske suggests that there is merit to my proposal to apportion the investment and pension incomes of individuals who are residents for tax purposes in two or more states. In particular, I would apportion such pension and investment incomes between the states of residence in proportion to the dual resident’s days spent in each state.[8] The same rule (as embodied in the Himes-Pappas-Hayes legislation) is compelling in the context of remote work. When an individual is a resident of one state but telecommutes for an employer in another state, that other state should only tax this nonresident’s income earned on the days when she physically commutes into the employer’s state.
The other state, where the out-of-state telecommuter’s employer is located, can tax the in-state employer for the services provided to it. But the remote worker is a separate person from the employer and, as a separate taxpayer, should only be taxed on her income by the second state when the worker actually spends time there, not when she telecommutes from her out-of-state home.
Buttressing this conclusion as a matter of tax policy is the constitutional case law implementing the dormant Commerce Clause requirement of apportionment. The seminal decision is Central Greyhound Lines, Inc. v. Mealey.[9] In that case, New York State taxed 100% of the gross receipts earned by a bus company even though 43% of the buses’ mileage physically occurred in Pennsylvania and New Jersey.[10] The Court held that the dormant Commerce Clause required New York to “fairly apportion[]” its gross receipts tax based on the buses’ relative “mileage within” New York and the other two states.[11] When New York, Massachusetts, and any other states tax income earned by a remote worker in another state, they flout this constitutional test of physical apportionment.
Third, state decision-making in this area confronts the classic trade-off between immediate political expediency and long-term interest. We see this in Governor Cuomo’s now notorious insistence that out-of-state health care professionals who came to New York as volunteers during the height of the Covid-19 crisis should pay New York State income tax if their home state employers continued their salaries during the period of that volunteer service in the Empire State.[12]
With becoming modesty, Professor Shanske says he may be a “sap” for concluding that these volunteers should not pay New York income tax. If so, I am a sap too. But I also suggest that, beyond our visceral response, there are two compelling reasons why New York should not impose income taxation on these out-of-state volunteers. First, as a statutory matter, it is not clear that these nonresident health care providers were conducting their “business, trade, profession or occupation” in New York.[13] They were humanitarian volunteers of the highest order. There is a strong argument that, on the unique circumstances of the current public health crisis, this public service is not a “business, trade, profession or occupation” for New York income tax purposes.[14]
Second, even though there is a plausible counterargument that these volunteers owe New York income tax, it is churlish and self-destructive for New York to assert tax liabilities against these volunteers. Even before the Covid-19 crisis, we lived in a quasi-Tieboutian[15] world where many individuals and firms can relocate to find the package of taxes and public services they prefer. As a result of the Covid-19 emergency, more individuals and firms have learned that, with the benefits of modern technology, they can relocate.
New York and other states obtain short-run tax revenues from their overly-aggressive taxation of telecommuters, of mobile workers, and of health care volunteers. Having been a municipal official for eighteen years, I understand such short-term budgetary pressures, pressures which have been exacerbated by the Covid-19 crisis. Having stood in their shoes, I empathize with state and local officials confronting these budgetary problems.
But, in the long-run, states exist in an increasingly competitive world. When states tax nonresident telecommuters on the days they work at their out-of-state homes, or when states tax or require tax filings of mobile workers who spend relatively few days in the state, or when states tax health care professionals who come as volunteers, they send a message for the long run: This is a hostile tax environment. Stay away if you can.
In a post-Covid-19 world, this unfortunate message will carry great weight with firms and individuals assessing their locational choices.
* Annie and Morris Trachman Professor of Law at Yeshiva University’s Benjamin N. Cardozo School of Law
[1] Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450, 462-63 n. 11 (1995) (“For nonresidents, in contrast, jurisdictions generally may tax only income earned within the jurisdiction.”).
[2] Huckaby v. Tax Appeals Tribunal, 829 N.E.2d 276 (N.Y. 2005), cert. denied, 546 U.S. 976 (2005); see Ark. Dept. of Fin. & Admin., Legal Opinion No. 20200203 (Feb. 20, 2020), https://www.ark.org/dfa-act896/index.php/api/document/download/20200203.pdf [https://perma.cc/YU24-6YFL] (opining that a computer programmer working in Washington State owes Arkansas income tax).
[3] Zelinsky v. Tax Appeals Tribunal, 801 N.E.2d 840 (N.Y. 2003), cert. denied, 541 U.S. 1009 (2004).
[4] Id. (discussing New York’s “convenience of the employer” doctrine); see also 61 Pa. Code § 109.8 (2020) (“However, any allowance claimed for days worked outside of this Commonwealth shall be based upon the performance of services which, of necessity, obligate the employe[e] or casual employe[e] to perform out-of-State duties in the service of his employer or casual employer.”); 316 Neb. Admin. Code § 22-003.01(C)(1) (2020) (“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.”).
[5] Remote and Mobile Worker Relief Act, S. 3995, 116th Cong. § 2 (2020). For more on this legislation, see Edward A. Zelinsky, A Tale of Two Bills: Preventing the Double Taxation of Remote Workers, Tax Notes (Sept. 10, 2020), https://www.taxnotes.com/featured-analysis/tale-two-bills-preventing-double-taxation-remote-workers/2020/09/10/2cxn7 [https://perma.cc/YNW4-45PR].
[6] 830 Mass. Code Regs. 62.5A.3(3) (2020) (“[A]ll 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 a Pandemic-Related Circumstance will continue to be treated as Massachusetts source income . . . .”).
[7] Multi-State Worker Tax Fairness Act of 2020, H.R. 7968, 116th Cong. (2020). For more on this legislation, see Zelinsky, supra, note 5.
[8] Edward A. Zelinsky, Double Taxing Dual Residents: A Response to Knoll and Mason, Tax Notes (Nov. 13, 2017), https://www.taxnotes.com/tax-notes-state/credits/double-taxing-dual-residents-response-knoll-and-mason/2017/11/13/1x6rr [https://perma.cc/2N92-QFPP]; Edward A. 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 (2014).
[9] 334 U.S. 653 (1948).
[10] Id. at 660.
[11] Id. at 663 (internal quotations omitted).
[12] Corey Crockett & James Ford, Health Workers That Volunteered to Come to NY During Pandemic Have to Pay State Income Tax: Cuomo, PIX11 News (May 6, 2020), https://www.pix11.com/news/coronavirus/health-workers-
that-volunteered-to-come-to-ny-during-pandemic-have-to-pay-state-income-tax-cuomo; Michael Ruiz, Samaritan’s Purse, Other Workers Who Came to NY for Coronavirus Fight Must Pay State Income Tax, Cuomo says, Fox News (May 6, 2020), https://www.foxnews.com/us/samaritans-purse-workers-ny-coronavirus-state-income-tax-cuomo [https://perma.cc/7X3W-SNBN]; Steve Malanga, Cuomo to Coronavirus Volunteers: Pay Up, Wall St. J. (May 8, 2020), https://www.wsj.com/articles/cuomo-to-covid-volunteers-pay-up-11588892159 [https://perma.cc/9YAJ-BJMJ].
[13] N.Y. Tax Law § 631(b)(1)(B) (McKinney 2020).
[14] Id.
[15] Legal scholarship has been heavily influenced by Charles Tiebout’s seminal model of taxpayers moving among competing jurisdictions to find their optimal packages of taxes and services. See, e.g., Edward A. Zelinsky, The Once and Future Property Tax: A Dialogue with My Younger Self, 23 Cardozo L. Rev. 2199, 2205 (2002).
In Defense of the “Convenience of the Employer” TestEllen S. Brody* and Cory M. Paul**
This comment is written in response to a prompt prepared by Professor Darien Shanske on the challenge of taxing employees who work remotely in one state for an employer located in a different state. While this challenge did not arise out of the Covid-19 pandemic, it was certainly exacerbated by it as it no longer simply impacts those employees who used to commute daily between neighboring states, but also now impacts employees who fled their apartments in big cities to homes in more isolated communities around the country. Looking to the long-term impact of the current Covid-19 crisis and reviewing the various legislative proposals aimed at creating a national standard for states’ taxation of remote workers, this comment is a defense of the “convenience of the employer” test and the benefits of its wide-scale adoption.
The Convenience Test and Its Alternatives
New York and five other states (Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania) have adopted a “convenience of the employer” test to determine when to tax nonresident employees’ income.[1] Using the New York test as a model, an employee working for a New York employer may allocate her income between various states when she performs services both within and without New York, allocating to New York an income amount in proportion to the number of days she worked in New York state compared to the total number of days that she worked during that year. Additionally, she must treat any day she performed services outside of New York for her own convenience as a New York work day.[2] In other words, if your employer is in New York, income you receive for your work will be sourced to New York unless your employer requires you to be working elsewhere. Whether an employee is working in another state for the convenience of the employer is strictly scrutinized.[3] Generally, days spent telecommuting when the employee could have been working in New York are (setting the pandemic aside) sourced to New York.[4]
The origins of New York’s “convenience of the employer” test are unclear. Even the New York Court of Appeals found itself unable to give a full history of the doctrine in a case that challenged the constitutionality of the test, stating that “[w]hen the convenience test first came into use is obscure; however, it was embodied in regulation by 1960.”[5] Reviewing the history of its own cases, the court further noted that “[t]he policy, if not the regulation, appears to have been in place since at least 1951.”[6]
It is inconceivable that the initial author of the convenience test in 1951 could have considered the applicability of this rule to a world in which a person sitting in her home office in one state could attend a live, in-person meeting across the country. Computers in 1951 read punch cards, so it’s equally safe to bet that the test’s author failed to anticipate that the same employee sitting at home in New Jersey, entering inputs on her keyboard, could have her work reflected immediately on a computer in her New York City office.
Whether the anonymous author of the convenience of the employer test was prescient or just lucky, the basic rule itself does seem more up to the challenges of the modern day workplace than its competitors. The other approaches rely too heavily on increasingly outmoded ways of thinking about the location of employment: sourcing employees’ income based on their physical location on any given workday. Under that system, the telecommuter working in New Jersey for a New York firm would have her income sourced to New Jersey except for days when she traveled physically to work in New York.
There are currently at least two bills in Congress that would, at least partially, enact this physical presence standard on a nation-wide basis. The first was introduced in the House of Representatives by Representatives James Himes and Jahana Hayes of Connecticut and Representative Chris Pappas of New Hampshire.[7] It would prohibit on a national level any state from adopting convenience of the employer rules and instead require states to tax nonresidents only on income earned while physically present in a state.[8] It’s worth noting that this bill was introduced as a response to these Representatives’ neighboring state of Massachusetts’ issuance of an emergency regulation enacting a convenience of the employer rule in the wake of Covid-19 lockdowns and increased telework, based on its fear that it would otherwise lose the income tax from those employees who were forced to work at home for an extended period in 2020 (if not permanently).[9]
A Senate bill proposed by Iowa Senator Chuck Grassley takes a slightly different approach.[10] It would prevent any state from taxing “wages or other remuneration earned by an employee” other than the employee’s state of residence or “any taxing jurisdiction within which the employee is present and performing employment duties for more than 30 days during the calendar year.”[11] For 2020, the 30 day floor before a state can tax a nonresident is raised to 90 days in response to the pandemic.[12]
Under these approaches, it is possible that the thousands of people who fled the big cities for states with no personal income taxes may never come back.
Choosing the Preferable Standard
At a quick glance, there is great appeal in a rule allocating income to the jurisdiction in which the employee is physically present. Such a rule seems, at least facially, easy to apply. A person can be physically present in only so many states in a given day, and is only physically present in one state at a time.[13] Additionally, many states provide tax credits to residents for income sourced to their work performed in other states. This credit system works well under a physical presence test. Finally, workers take advantage of the services, protections, and general benefits of their state of residence, so when telecommuting from home, they receive the benefits of their tax dollars.
Conversely, the New York Court of Appeals has highlighted the many advantages of the convenience of the employer rule.[14] First, the Court explained that the convenience rule is also easy to administer and is internally consistent, such that if every state followed the same rule, there would be no multiple taxation.[15] Double taxation arises when one state uses a convenience of the employer test and the other looks at the physical location of where the employee is performing the work. If a nation-wide standard was adopted, this double taxation would be eliminated and tax credits would work as intended.
The Zelinsky case is similarly elegant in responding to criticisms that telecommuters do not benefit from the taxes they pay to their employer’s state.[16] In Zelinsky, the taxpayer was a professor at Cardozo Law School, and the Court identifies services upon which the taxpayer daily relied, up to and including such intangible benefits as the prestige his position at Cardozo gave to his personal writings.[17] Cardozo itself, of course, relies on New York for all of the traditional government services, and, through a transitive property, Zelinsky receives the same.[18] Application of the convenience rule ensures that he chips in.[19] A similar logic plainly extends to, for instance, any New York law firm, whose existence in New York provides access to services and clientele regardless of the residence of a telecommuting employee or partner.
Finally, the more philosophical questions highlighted by the Covid-19 pandemic, are (1) the extent of telecommuting that is going to exist going forward and (2) whether physical presence really is a meaningful concept at this juncture. Is a therapist in Wyoming engaged in a session with a client in New York via video conference truly not present in New York in any meaningful sense?[20] Under the Grassley or Himes bills, a therapist with even exclusively New York clientele and a New York employer would not pay any New York tax. Given that, in the coming years, individuals’ telepresence in non-resident states is likely only going to expand, does such a result make sense?
Our courts are not blind to the declining meaningfulness of physical presence as it relates to economic activity. The Wayfair decision is premised in part on the idea that “the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the ‘far-reaching systemic and structural changes in the economy’ and ‘many other societal dimensions’ caused by the Cyber Age.”[21]
The move towards increasing telework is no less of a systemic and structural change to income taxing schemes as the internet economy has been for sales taxes. The convenience of the employer rule does not rely on physical presence and avoids the pitfall of that measure’s increasing irrelevance. In fact, universal state adoption, or federal adoption, of the convenience of the employer rule would eliminate its greatest failings while providing immediate relief from the uncertainty of the tax consequences of telecommuting, both in the time of Covid-19 and after things have “returned to normal.”
Having recommended that, this is not to say that other problems should not be anticipated. Take the employee working from her home in New Jersey. What if she moved to a new firm with offices in New York, Washington D.C., Miami, Houston, and Los Angeles, and never goes into any one office but rather telecommutes permanently. Where is her employer? Would her income be apportioned among all of these offices, some of which are located in high tax states while others are located in states that impose no personal income tax? Does it matter if she has an assigned office space that she never uses? Let’s also not forget that during the Covid-19 pandemic many employees were forbidden to go to their offices. Finally, for the convenience of the employer rule to fully divorce from a physical presence standard, it would need to apply to taxpayers who did not spend a single day physically in the taxing state, which would invite jurisdictional challenges akin to those at issue in Wayfair.[22]
The only clear answer that all parties should be able to agree on is that a nation-wide approach should be adopted to prevent possible double taxation. If you choose to live in a state that decides not to impose a personal income tax, you may still have to pay tax, but only if you choose to work for an employer located in a state that does impose such a tax. And if you choose to live in a state that does impose a personal income tax, you should not be subject to double taxation on that income under competing sourcing rules. A national approach would promote mobility of employees without depleting the tax base of the large cities that must rely on the personal income tax to fund the numerous services they provide.
* Partner, Roberts & Holland LLP
** Associate, Roberts & Holland LLP
[1] Jared Walczak, Teleworking Employees Face Double Taxation Due to Aggressive “Convenience Rule” Policies in Seven States, Tax Found. (Aug. 13, 2020), https://taxfoundation.org/remote-work-from-home-teleworking [https://perma.cc/NVU8-XASG].
[2] N.Y. Comp. Codes R. & Regs. tit. 20, § 132.18(a) (2020).
[3] See, e.g., New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others, TSB-M-06(5)I, N.Y. State Dep’t of Tax’n & Fin. 3 (2006) (suggesting, in one example, that an employee who needs a test track for prototype vehicles might be out of state for the convenience of their employer when their home is near to an out-of-state track).
[4] See Huckaby v. Tax Appeals Tribunal, 829 N.E.2d 276, 280-81 (N.Y. 2005), cert. denied, 546 U.S. 976 (2005) (finding that a Tennessee domiciliary working as a computer programmer for a New York employer was required to source income to New York despite working in the state only a few days per year).
[5] Id. at 280.
[6] Id. at 280 n.2.
[7] Multi-State Worker Tax Fairness Act of 2020, H.R.7968, 116th Cong. (2020).
[8] Id.
[9] Press Release, Congressman Chris Pappas, Pappas Co-Leads Legislation to Protect New Hampshire Workers from Unfair Tax Implications of Telework (August 7, 2020), https://pappas.house.gov/media/press-releases/pappas-co-leads-legislation-protect-new-hampshire-workers-unfair-tax-0 [https://perma.cc/Q9UM-NY2F].
[10] American Workers, Families, and Employers Assistance Act, S.4318, 116th Cong. (2020).
[11] Id. § 403(a)(1).
[12] Id. § 403(a)(6). This extended period would allow nurses and doctors, who came to New York from around the country to help treat patients during the pandemic, earn money for their efforts in New York without fear of being subject to New York income tax.
[13] While Senator Grassley's bill sets rules parsing which state is credited with an employee’s workday, it demonstrates the difficulty of drafting an ironclad statute. According to the proposed statute, if the employee works in her resident state and one other state in a given day, the nonresident state is credited. If the employee works in two nonresident states (or three or more states), the day goes to the jurisdiction in which the employee “performs more of the employee's employment duties . . . during a day.” It’s unclear whether this is measured by time or by productivity. Id. § 403(a)(4)(A)(i).
[14] Zelinsky v. Tax Appeals Tribunal, 801 N.E.2d 840, 845 (N.Y. 2003), cert. denied, 541 U.S. 1009 (2004).
[15] Id.
[16] See id. at 848.
[17] Id. at 848.
[18] Id.
[19] Id.
[20] Andrea Petersen, Your Video Therapist Will See you Now, Wall St. J. (Apr. 26, 2020), https://www.wsj.com/articles/your-video-therapist-will-see-you-now-11587906000 [https://perma.cc/M5VM-8HS5].
[21] South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2097 (2018) (citation omitted).
[22] See generally id. In contrast with such an approach, New York’s rule applies to taxpayers who spend any time physically working in New York during the tax year, not to a pure teleworker. That the allocation of an entire year of income can hinge on being called to New York for a single day of meetings is a legitimate criticism of the current convenience rule.
Remote Workforce Doctrine and Policy: Looking to the New York ApproachTimothy P. Noonan*
Every day we are reminded by our televisions and our Twitter feeds that “we are living in uncertain times.” And while such a description is apt to our economy, our kids’ education, and even our day-to-day lives, it is also directly applicable to state taxation. Professor Shanske’s prompt identifies one of the most significant state tax issues arising as a result of the pandemic: how states are supposed to deal with taxation of employees’ remote-work arrangements. In my practice, I have tackled this issue in audits and tax appeals on dozens of occasions, so I offer my perspective from the front lines, in a state where this problem has existed for decades.
Background
To be sure, this is not a new problem. The taxation of remote work arrangements has been controversial, at least in states like New York, for many years.[1] For nonresident employees, basically all states use a “workday” approach, meaning that the employee pays tax in the state based on the number of days worked in the state over the course of the year. This workday methodology applies more famously to professional athletes and entertainers who receive significant compensation for performing services as little as one or two days a year in a taxing state. But in reality, it applies across the board, to all employees receiving compensation for services performed in different states.
And while the vast majority of states use a sourcing rule that points to the taxpayer’s physical location on their working days, historically a few states have an exception to physical presence for telecommuters, sometimes called the “convenience of the employer rule.” Under this doctrine, the source of the employment compensation generated while working remotely depends on the reason for working remotely—specifically whether the employee was working remotely for convenience or by necessity in the service of her employer. If the latter, the income will be determined by the employee’s physical location; in other words, the days worked at home will “count” as out-of-state days. If the former, the income source defaults to the employer’s location.
Presently, or at least pre-COVID, only five states employed some form of a convenience rule: Arkansas, New York, Delaware, Nebraska, and Pennsylvania.[2] Connecticut joined the fray as well, at least partially, in 2019, agreeing to adopt the convenience rule on a reciprocal basis for those taxpayers working in states that also applied the rule.[3]
But states without a convenience rule have jumped on the bandwagon, attempting to address the issue of remote work during the current pandemic. For example, New Jersey released withholding guidance stating that no changes should be made to wage withholding or personal income tax payments required as a result of the pandemic.[4] Massachusetts issued a similar provision, requiring that at least through the end of 2020, it would continue to require employees to pay Massachusetts taxes on their wage income even if they were working outside the state.[5] On the other hand, states such as Maryland released guidance declaring that income earned from working remotely within Maryland is Maryland sourced income.[6]
Interplay with Resident Tax Credits
So what we have now is a hodgepodge of methodologies within and among the states. And when this happens in the state personal income tax realm, disaster (and double taxation) often follows.
It is true that all states have resident credit provisions that offer its residents a credit for taxes paid to other jurisdictions. However, many depend on the application of uniform state-sourcing rules. For instance, New York offers resident taxpayers a credit for taxes paid to other jurisdictions, but only on income derived from other jurisdictions, which is construed according to New York’s rules.[7] In other words, the credit is calculated by looking at New York sourcing rules to determine whether the income was derived from sources within the other jurisdictions.[8] New Jersey, on the other hand, provides a credit for taxes paid to other states on income that is also taxed by New Jersey, so the availability of a credit is not as limited as it is in states like New York.[9] Unlike New York, it does not matter whether the income getting taxed in the other state was earned in or sourced to the other states imposing the tax; rather, the credit will be available provided the source is not New Jersey, itself.[10] Double taxation in this area most infamously occurs with respect to intangible or investment income taxed in multiple states. Under New York’s rule, no credit is allowed to its residents for taxes paid to other states on investment or intangible income, again because of New York’s rule requiring that the income have a source in the other state in order to be creditable.[11] Such a mismatch does not occur for New Jersey residents.
On a multistate basis, the states are otherwise all over the map on this issue. Some are like New York, offering up a limited credit mechanism that will only allow a credit for taxes paid to the other state if the income was sourced to that state using the home state’s sourcing rules. Colorado and Maine have rules like this.[12] Others—like Oregon, Michigan, and Montana—have broader provisions like New Jersey’s, allowing in most instances a credit for taxes paid to the other states so long as the income was also taxed in the home state.[13]
All in all, these resident credit provisions are critical to an understanding of the remote work problem because, absent an offsetting resident tax credit, income earned by employees working in multiple states can be subject to double taxation.
One Long-term Solution?
Obviously, uniformity is the best solution here. But of course, uniformity and state taxation go together about as well as Democrats and Republicans. Still, if Congress or some consortium of states were to consider a solution, perhaps a view into what New York has done is worthwhile. As noted above, New York has historically applied the convenience rule.[14] But in 2006, the New York tax department issued a publication outlining what essentially works as a safe harbor to avoid some of the harsher consequences arising from a strict application of the convenience rule.[15]
Distilled to its essence, the concept here is that while the employer’s home state should receive tax on compensation earned in the typical remote-work arrangement, the remote work would be respected in the employee’s home state if their home office qualified as a “bona fide employer office.”[16] In other words, if a taxpayer’s home office has enough of the bells and whistles to essentially create what looks like an actual office or nexus in the employee’s home state, rather than an employee simply working in their pajamas on their couch, then New York would respect their remote work arrangement.[17]
Specifically, to show that an office is a bona fide office of the employer, the New York publication specifies that it must meet four of six “secondary factors” and three of ten “other factors.”[18] The “secondary factors” are as follows: the home office is a requirement of employment; a business purpose; the home office is used for meetings; the employee performs core duties there; the employee does not have an office in New York; and the employee is reimbursed for substantially all of the expenses of the home office.[19] The list of “other factors” is longer and includes factors such as: the home office has a separate phone number and listing; a specific area of the home is used exclusively as a home office; and that business records of the employer are kept at the employee’s home office. [20]
Some work around the edges would be needed here, if New York’s model were to be used as some kind of widely-applied safe-harbor. Several of the categories are ambiguous, making them difficult to understand and difficult to apply in practice. Still, if there is going to be some sort of multistate solution for the remote work problem, there is some merit to the New York solution. And for what it’s worth, the New York Tax Department just recently updated an “FAQ” on its website to clarify that it would continue to apply its convenience rule during the pandemic, but that taxpayers could still take advantage of the bonafide employer office safe harbor rules to avoid New York taxation.[21]
This approach would have some winners and losers, of course, like any broadly-applied solution. But one of the benefits of this approach—and one that more generalized solutions may lack—is that the winners and losers will not always be the same. Many employers will not be willing to set up remote-work arrangements capable of meeting the various factors, so the employer’s states, in those situations, will retain the tax revenue. But some employees may be willing and able to set up a situation that creates a “bona fide employer office” in the employee’s home, and in those cases the employee’s home state would be the winner. In both situations, however, this has the benefit of giving taxpayers—employers and employees alike—some flexibility in choosing their arrangements, and may more evenly spread out the costs and losses attributable to remote work.
Overall, this concept has the benefit of imposing tax in arguably the right places. The concept, again, is that if the employee’s home office is more like a real office than it is a couch, then the employee’s home state has more of a justification to tax the work. So, from a tax policy perspective, if the employer has really set up a “bona fide employer office” in the employee’s home state, then why shouldn’t the employee’s home state get to tax the days worked there?
* Partner, Hodgson Russ LLP
[1] See, e.g., Paul R. Comeau, Timothy P. Noonan, & Joseph N. Endres, New York’s Revised Convenience Rule Provides Some Clarity and Continued Controversy, 16 J. Multistate Tax’n & Incentives 18 (2006).
[2] N.Y. Comp. Codes R. & Regs. tit. 20, § 132.18(a) (2020); New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others, TSB-M-06(5)I, N.Y. State Dep’t of Tax’n & Fin. (2006), http://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf [https://perma.cc/3NYF-UDBY]; Del. Code Ann. tit. 30, § 1124(b) (2020); Del. Div. of Revenue, Schedule W, Apportionment Worksheet (2019), https://revenuefiles.delaware.gov/2019/TY19_ScheduleW-e.pdf [https://perma.cc/S2TX-84MA]; 316 Neb. Admin. Code § 22-003.01C(1) (2020); 61 Pa. Code § 109.8 (2020); Ark. Code Ann. § 26-51-202(b) (2020); Ark. Dep’t of Fin. & Admin., Legal Opinion No. 20200203 (Feb. 20, 2020), https://www.ark.org/dfa-act896/index.php/api/document/download/20200203.pdf [https://perma.cc/YU24-6YFL].
[3] Conn. Gen. Stat. § 12-711(b)(2)(C) (2020).
[4] Telecommuter COVID-19 Employer and Employee FAQ, N.J. Div. of Tax’n (May 27, 2020), https://www.state.nj.us/treasury/taxation/covid19-payroll.shtml [https://perma.cc/4EYM-PECY].
[5] 830 Mass. Code Regs. 62.5A.3 (2020); see also Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic, TIR 20-10, Mass. Dep’t of Revenue (July 21, 2020), https://www.mass.gov/technical-information-release/tir-20-10-revised-guidance-on-the-massachusetts-tax-implications-of [https://perma.cc/A726-L3AQ].
[6] Tax Alert: Employers Withholding Requirements for Teleworking Employees during the Covid-19 Emergency, Comptroller of Maryland (May 4, 2020), http://www.comp.state.md.us/covid/documents/TaxAlert050420-EmployerWithholdingonTeleworkers.pdf [https://perma.cc/VQ67-4YQ2]. For a current list of state updates regarding COVID-19, check out our tracker online.
[7] N.Y. Tax Law § 620(a) (McKinney 2020); N.Y. Comp. Codes R. & Regs. tit. 20 §§ 120.1, 120.4(d) (2020).
[8] See id.
[9] N.J. Stat. Ann. § 54A:4-1(a) (West 2020); N.J. Admin. Code § 18:35-4.1(a)(1)(i) (2020); Instructions to New Jersey Resident Return NJ-1040, N.J. Div. of Tax’n 30 (2019), https://www.state.nj.us/treasury/taxation/pdf/current/1040i.pdf [https://perma.cc/3AWG-SCYV]; New Jersey Form GIT-3B, Credit for Income Tax Paid to Other Jurisdictions, N.J. Div. of Tax’n (2019), https://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git3b.pdf [https://perma.cc/RVY7-HATP]. In accordance with these rules, however, New Jersey would nonetheless not give a credit for taxes paid to other states on income that was actually derived from sources within New Jersey. Doherty v. Dir., Div. of Tax’n, 30 N.J. Tax 570, 583 (2018) (quoting Jenkins v. Dir., Div. of Tax'n, 184 N.J. Super. 402, 40 (1982)).
[10] See Doherty, 30 N.J. Tax at 583.
[11] Chamberlain v. N.Y. State Dep’t of Tax’n & Fin., 88 N.Y.S. 3d 257(N.Y. App. Div. 3d Dep’t 2018),
appeal dismissed, lv denied, 122 N.E. 3d 557 (N.Y. 2019), cert. denied, 140 S. Ct. 133 (2019); Edelman v. N.Y. State Dep’t of Tax’n & Fin., 80 N.Y.S.3d 241 (N.Y. App. Div. 1st Dep’t 2018), appeal dismissed, lv denied, 122 N.E. 3d 557 (N.Y. 2019), cert. denied, 140 S. Ct. 134 (2019).
[12] Colo. Code Regs. § 39-22-108(2) (2020); Me. Stat. tit. 36. § 5217-A (2020).
[13] Or. Rev. Stat. § 316.292 (2020); Mich. Comp. Laws § 206.255 (2020); Mont. Code Ann. § 15-30-2302 (2019).
[14] N.Y. Comp. Codes R. & Regs. tit. 20, § 132.18(a).
[15] N.Y. State Dep’t of Tax’n & Fin., supra note 2.
[16] Id. at 2-5.
[17] See id.
[18] Id. at 2-4. New York’s publication also has a de facto “bona fide office” definition called the primary factor, but that requires that the home office contain or be close to specialized facilities, which is rarely applicable or relevant in any of the real life situations we have seen in our practice. Id. at 3.
[19] Id. at 3-4.
[20] Id. at 4-5.
[21] Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax, updated Oct. 19, 2020, https://www.tax.ny.gov/pit/file/nonresident-faqs.htm#telecommuting [https://perma.cc/NSX2-GHT5].