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Editor’s note: This is a guest post from Nicole Goluboff. Goluboff, a lawyer and Advisory Board Member of the Telework Coalition, is the author of “The Law of Telecommuting,” “Telecommuting for Lawyers” and numerous articles on telework.
The reasons for employers to decentralize workers are becoming harder and harder for businesses, employees and governments to ignore. Telework can help employers reduce costs, avoid job cuts and start hiring. It can help them minimize turnover, assure business continuity during emergencies and boost productivity. It can help employees save on commuting and achieve a better work/life balance. It can decrease traffic congestion, the cost of repairing and maintaining transportation systems, carbon emissions and the nation’s dependence on foreign oil.
However, despite these and other well-publicized benefits of telework, some states maintain a tax rule that frustrates employers and employees trying to use it. The rule — known as the “convenience of the employer” rule — imposes a heavy penalty on nonresidents who telecommute to in-state employers.
To assure that state tax authorities do not impede the growth of interstate telework arrangements, Congress must abolish the convenience rule.
How the “Convenience of the Employer” Rule Works
New York State is notorious for its exceptional drive to enforce the convenience rule. Under the rule there, if a nonresident of the state works for a New York firm and opts to telecommute sometimes — even for most of the year — New York will tax him on 100 percent of his salary: the wages he earns in New York plus the wages he earns in his home state. Because the employee’s home state can also tax the compensation he earns at home, he risks double state taxation for working off-site.
To protect their residents from double taxation, some states grant a credit for personal income taxes telecommuters pay the employer’s state on the salary earned at home. However, even telecommuters offered a credit risk being penalized. When a telecommuter’s state has a lower tax rate than the employer’s state, the telecommuter has to pay the steeper rate on the income he earns at home.
Similarly, telecommuters living in states with no income tax suffer because of the rule. Say a Florida resident telecommutes to his New York employer, traveling to New York on business only a few weeks a year. Although the employee chooses to live and do most of his work in a state with no personal income tax, he may nonetheless be forced to pay state income tax — to New York — on all of his Florida wages.
The additional state tax burden the convenience rule imposes can make telework too expensive for employees. The rule also creates tremendous confusion for them: Determining where they owe income tax if they telecommute — their own state, the company’s state, or both — can be a considerable challenge.
How Businesses Suffer
When employees cannot afford to telecommute, employers cannot tap the business benefits telework offers. In addition, just as employees can be confused about where they owe income taxes, businesses can be confused about where they have to withhold taxes. Compliance with the convenience rule can become so onerous for payroll departments that firms in convenience rule states may be forced to move out. For example, in 2008, a company reported to The New York Times that it was planning to leave New York because it was “blindsided” by the state’s enforcement of the rule (“Telecommuters Cry ‘Ouch’ to the Tax Gods“).
How States Suffer
The convenience rule threatens states where telecommuters live (or where would-be telecommuters live) with an unfair drain on their revenue. For example, if a telecommuter’s state does give him a credit for taxes he paid New York on wages he earned at home, the telecommuter’s state effectively shunts its own revenue to the Empire State. That revenue finances public services in New York (like police, fire and other emergency services), even though the telecommuter often works at home and depends on the services provided by the home state. States struggling with perilous budget deficits -– and with the decisions they have to make about which of their own programs to eliminate -– cannot afford to subsidize the programs in New York.
In addition, workers’ states can lose revenue because:
- Confused telecommuters may mistakenly conclude they owe taxes only in their employer’s state, not the home state;
- Confused employers may mistakenly conclude they must withhold only for their own state, not the states where their telecommuters live;
- Unemployed residents may remain jobless — and without taxable income — longer than necessary, because the convenience rule makes looking for work with remote employers unaffordable;
- Businesses in the home state may earn less taxable income when telecommuting residents are forced to cut their home state spending because the extra state tax bill for telecommuting shrinks the residents’ budgets;
- Businesses in the home state may earn less taxable income when residents who cannot afford the telecommuter tax must commute to their out-of-state jobs everyday and purchase more of the goods and services they need in the employer’s state than in the home state.
Even states that maintain a convenience rule suffer because of it. For example, by threatening the profitability of in-state companies and driving them away, the rule jeopardizes the states’ business income tax base.
The rule also threatens the states’ personal income tax base. In New York, because the rule applies only to employees who spend some days working inside New York, telecommuters can duck the tax penalty by staying out of New York entirely. They may decide, with their cost-wary employers, that they will telecommute full-time. Or, they may look for work in their home states. Either way, once a telecommuter leaves New York for good, New York can no longer tax any of his income. Further, New York’s stores, restaurants and other businesses lose his patronage.
The Federal Solution: The Telecommuter Tax Fairness Act
The Telecommuter Tax Fairness Act (H.R. 2600) is proposed federal legislation that would prohibit states from taxing nonresidents on the wages they earn when physically present in another state, removing the threat of double or excessive taxation for telecommuting across state lines.
The bill was introduced by Representatives Jim Himes (D-CT) and Frank Wolf (R-VA). It has support from a bi-partisan group of lawmakers representing states all around the country, including Connecticut, New Jersey, Maryland, Virginia, Georgia, Massachusetts, Kansas, Illinois, Arizona, Washington State and even New York.
The bill also has endorsements from organizations advocating for telework, transportation, homeowners, taxpayers and small businesses. The telecommuter tax is a needless barrier to telework’s expansion. As Washington weighs how to create jobs, improve the country’s preparedness for pandemics and other emergencies, meet national transportation needs, slow climate change, strengthen America’s energy independence and help secure a prosperous future for both large and small businesses, it should demolish this barrier. The Telecommuter Tax Fairness Act would do just that -– without costing the federal government anything. It’s time to make this bill law.
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