Telecommuters, Beware of New York

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="064285a1erlcgo.png"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>The Telework Coalition</B></FONT><B>   </B></div> <div> <B>Enabling Virtual, Mobile, and Distributed Work through Education, Technology, and Legislation</B></div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="063d2c00dkelyh.png"> <div> <A HREF="index.htm" TARGET="_top" TITLE="The Telework Coalition"><U>Home</U></A></div> <div> <A HREF="id296.htm" TARGET="_top" TITLE="Membership Sponsorship Opportunities"><U>Membership & Sponsorship Opportunities</U></A></div> <div> <A HREF="id208.htm" TARGET="_top" TITLE="Our Sponsors"><U>Our Sponsors</U></A></div> <div> <A HREF="id270.htm" TARGET="_top" TITLE="TelCoa in the News"><U>"TelCoa in the News"</U></A></div> <div> <A HREF="id17.htm" TARGET="_top" TITLE="Calendar"><U>Calendar</U></A></div> <div> <A HREF="id282.htm" TARGET="_top" TITLE="TelCoa / ACP Event"><U>TelCoa / ACP Event</U></A></div> <div> <A HREF="id19.htm" TARGET="_top" TITLE="Contact Us"><U>Contact Us</U></A></div> <div> <A HREF="id259.htm" TARGET="_top" TITLE="Strategic Alliances"><U>Strategic Alliances</U></A></div> <div> <A HREF="id278.htm" TARGET="_top" TITLE="Business Continuity Planning (COOP)"><U>Business Continuity Planning (COOP)</U></A></div> <div> <A HREF="id294.htm" TARGET="_top" TITLE="Avian Flu and Pandemic Information and A"><U>Avian Flu and Pandemic Information and Articles</U></A></div> <div> <A HREF="id156.htm" TARGET="_top" TITLE="Virtual Call Center Sponsors"><U>Virtual Call Center Sponsors</U></A></div> <div> <A HREF="id157.htm" TARGET="_top" TITLE="Virtual Call Centers "><U>Virtual Call Centers </U></A></div> <div> <A HREF="id20.htm" TARGET="_top" TITLE="Board of Directors and Advisory Board"><U>Board of Directors and Advisory Board</U></A></div> <div> <A HREF="id158.htm" TARGET="_top" TITLE="The Telecommuter Tax Fairness Act "><U>The Telecommuter Tax Fairness Act </U></A></div> <div> <A HREF="id223.htm" TARGET="_top" TITLE="TelCoa Awards"><U>TelCoa Awards</U></A></div> <div> <A HREF="id18.htm" TARGET="_top" TITLE="Our Vision and Mission"><U>Our Vision and Mission</U></A></div> <div> <A HREF="id40.htm" TARGET="_top" TITLE="Telework in the News"><U>Telework in the News</U></A></div> <div> <A HREF="id35.htm" TARGET="_top" TITLE="Federal, State, Regional News, Legislat"><U>Federal, State, & Regional News, Legislation, and Programs</U></A></div> <div> <A HREF="id263.htm" TARGET="_top" TITLE="Telework Tools "><U>Telework Tools </U></A></div> <div> <A HREF="id33.htm" TARGET="_top" TITLE="Telework Facts "><U>Telework Facts </U></A></div> <div> <A HREF="id42.htm" TARGET="_top" TITLE="You Should Know"><U>You Should Know</U></A></div> <div> <A HREF="id43.htm" TARGET="_top" TITLE="Broadband"><U>Broadband</U></A></div> <div> <A HREF="id27.htm" TARGET="_top" TITLE="Environmental Information and Fact Sheet"><U>Environmental Information and Fact Sheet</U></A></div> <div> <A HREF="id90.htm" TARGET="_top" TITLE="Health, Safety Telework"><U>Health, Safety & Telework</U></A></div> <div> <A HREF="id105.htm" TARGET="_top" TITLE="Telework Jobs and Opportunities"><U>Telework Jobs and Opportunities</U></A></div> <div> <A HREF="id337.htm" TARGET="_top" TITLE="Other Jobs"><U>Other Jobs</U></A></div> <div> <A HREF="id34.htm" TARGET="_top" TITLE="Contributing Partners"><U>Contributing Partners</U></A></div> <div> <A HREF="id41.htm" TARGET="_top" TITLE="Related Links "><U>Related Links </U></A></div> <div> <A HREF="id25.htm" TARGET="_top" TITLE="Reference"><U>Reference</U></A></div> <bR> <div>  </div> <bR> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> Telecommuters, Beware of New York</div> <bR> <div> <B>David Hardesty, September 2, 2001</B></div> <div> When it comes to taxing telecommuters, New York is aggressive. New York employers can find their employees subject to income tax in New York on 100% of their wages, even when these employees telecommute from such states as Connecticut or California.  The New York rules can cause these employees to be taxed twice on their income, once by New York, and once by their home states.  Companies that plan to use telecommuters must consider carefully whether headquartering in New York is the best thing to do.</div> <div> To illustrate the problem, consider the following:</div> <div> Hypothetical: Assume Jones works for MyWebCo.com, a company with its offices in New York. Jones is a website programmer, who lives in California, and works in his home. During the year 2000 he spends one day in the company's New York office, attending meetings. This is the only time spent in New York. Jones worked 300 days in 2000, including 1 in New York and 299 in California. His salary in 2000 was $100,000. Assuming he must pay some amount of personal income tax in New York, how much of his income is taxable in New York?</div> <div> a.     None</div> <div> b.     1/300, or $333.33</div> <div> c.     $100,000</div> <bR> <div> Believe it or not, “c” is the likely answer. In addition, because Jones is a California resident, he will be subject to tax in California on his entire salary, and it is unlikely California will grant Jones a credit against its tax for taxes paid to New York. Thus, there is a good chance Jones will be subject to a double tax.  This hypothetical will be explained further later on. First, let's go from hypothetical to real, with two recently decided cases.</div> <div> In Huckaby,[1]the taxpayer was a resident of Tennessee, who worked for a Tennessee company. One of the Tennessee company's customers was a New York company, NOITU. The taxpayer, who developed and serviced computer programs, provided services to NOITU. After a time the Tennessee company terminated the taxpayer's employment, and NOITU agreed to hire the taxpayer.</div> <div> As an employee of NOITU, the taxpayer spent about 60 days per year in New York. The remainder of his time was spent working in his home office, in Tennessee. Under New York law, the taxpayer was not a resident of New York. The taxpayer filed New York nonresident tax returns for 1994 and 1995. In each case, he calculated salary that was subject to tax in New York, by taking the ratio of the days worked in New York to his total days worked.  During 1994, he worked 187 days in Tennessee and 59 in New York. In 1995, he worked 180 days in Tennessee and 62 in New York.</div> <div> In Huckaby, the Division of Tax Appeals held that all of the taxpayer's NOITU salary was taxable in New York, not just the salary attributable to his days worked in New York. The basis of this finding is New York Tax Law Sections 631(a) and (b), which define a nonresident's New York source income, upon which he must pay tax. These statutes are interpreted by Regulation 132.18(a), which provides, in part  “If a nonresident employee .  . . performs services for his employer both within and without New York State, his income derived from New York State sources includes that proportion of his total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number working days employed both within and without New York State. . . .  However, any allowance claimed for days worked outside of New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.”</div> <bR> <div> Under this regulation, nonresidents are allowed to apportion income to New York, based only on the days working in New York, which is what the taxpayer in Huckaby did; however, only if the work performed outside of New York could not have been performed in New York. For example, if a nonresident employee is required to perform services at a customer site, where that customer is not located in New York, those services “of necessity” obligate the employee to work outside of New York. In this case, the days outside New York are excluded in apportioning income to New York.  However, where it is more convenient, but not necessary, to work outside of New York, the days worked outside of New York are not excluded.</div> <div> The rule is stated another way in instructions to the New York nonresident income tax return Work days are days on which you were required to perform the usual duties of your job.  Any allowance for days worked outside New York State must be based upon the performance of services which, because of necessity (not convenience) of the employer, obligate the employee to out-of-state duties in the service of his employer. Such duties are those which, by their very nature, cannot be performed at the employer's place of business.[2]</div> <bR> <div> The taxpayer, in Huckaby, unsuccessfully attempted to persuade the Division of Tax Appeals that the rules did not make sense, characterizing the rules as providing that if petitioner had not spent any time working in New York, it would not have the power to tax any of his income. However, if petitioner worked just one day in New York and 300 days in Nashville, all of his income would be subject to New York State personal income tax.</div> <bR> <div> Nevertheless, the rules were upheld, despite the fact that the taxpayer lived 900 miles from New York, and was required to stay in hotels during those weeks he worked in that state.  These are long-standing rules that have survived many court challenges.[3] The fact that the taxpayer could have performed all of his services in New York was enough to make all of his income taxable in that state.</div> <bR> <div> Another recent case is Zelinsky,[4] involving a Connecticut resident who was a professor at the Cardozo Law School in New York. The Zelinksy case is similar to Huckaby, except that the taxpayer was in easy commuting distance of New York.  However, Zelinsky introduced a new problem, that of double taxation. By requiring the taxpayer to pay New York tax on all of his salary, despite the fact that he performed a substantial amount of his work in Connecticut, the Division of Tax Appeals doomed the taxpayer to pay both New York and Connecticut tax on the same income.</div> <bR> <div> As in other states, a Connecticut resident pays that state's income tax on all of his income. Where that income is also taxed in another state, double tax is usually avoided by the state allowing the taxpayer to offset his Connecticut tax with a credit for the tax paid in the other state.  However, where the tax is on income from personal services, the credit is available only where the services taxed by the other state are actually performed in the other state. This can be referred to as a physical presence rule. To the extent the taxpayer in Zelinsky was taxed by New York on services not physically performed in New York, Connecticut would not allow the credit.</div> <bR> <div> The taxpayer, in Zelinsky, asserted that New York's law was unconstitutional; in part, because it resulted in double taxation. One of the taxpayer's arguments was stated as follows:</div> <bR> <div> Specifically, petitioner maintains that Connecticut uses a physical presence approach to sourcing income and does not recognize the convenience of the employer test as a means of sourcing income.  Accordingly, Connecticut treats the days he worked at home in Connecticut as resulting in Connecticut source income subject to tax by Connecticut, and allows no credit to offset the tax New York imposes on such income. Thus, petitioner points out that he is in fact subject to multiple taxation on the same income in violation of the constitutional requirement that income must be fairly apportioned in order to comport with Commerce Clause standards against unduly burdening interstate commerce.</div> <div>  </div> <div> Despite what appears to be a good argument, the state held against the taxpayer.</div> <bR> <div> Turning to our hypothetical, if Jones works no days in New York, his salary is not taxable in that state.  This is confirmed in Zelinsky. However, as is apparent from Huckaby, by working only one day in New York all of Jones' income is subject to New York tax. In addition, California follows a physical presence rule similar to that of Connecticut.[5] Therefore, it is unlikely California will allow Jones to claim a credit for taxes paid in New York. According to the instructions to California's Schedule S, Residents of California may claim a credit for net income taxes imposed by and paid to another state only on income, which has a source within the other state. For this purpose, California's sourcing principles apply even though the results may be contrary to the other states' principles. The following describes the sources of various types of income:</div> <div> Compensation for services rendered by employees or independent contractors has a source where the services are performed.</div> <div>  </div> <div> It appears in our hypothetical that Jones will be taxed in both New York and California, on the same salary.</div> <div> There is no indication that New York will change its rules. Not only do the current rules generate substantial tax dollars; the people directly impacted (i.e., the commuters and telecommuters) do not vote in New York. However, as telecommuting becomes more common, New York companies may begin to put pressure on the state. These companies suffer from these rules; where the onerous tax rules make it difficult to hire employees, and where employers bear some of the cost of double taxation.</div> <bR> <div> Certainly, companies whose business model includes telecommuters have to consider the additional tax cost when deciding to locate in New York. And, smart employees need to take the New York rules into account in evaluating potential employers.</div> <bR> <div> Congress has started to look at the issues surrounding telecommuting. In response to a request by Rep. Dick Armey (R-Texas), the General Accounting Office prepared a report describing some of the potential barriers facing employers thinking about instituting telecommuting.[6] The report summarized the state tax issues presented by telecommuting as follows Uncertainties exist about the application of state tax laws and what constitutes interstate business. Telecommuting may establish a physical business presence in a state where none previously existed and expose employers to additional corporate taxes, expose employees to additional income taxes, require employers to collect sales taxes in states where telecommuters reside, and result in litigation for employers over tax issues. </div> <bR> <div> The GAO describes the current impact of these issues as limited; but describes this as “a key emerging issue according to experts and literature.”</div> <bR> <div> <B>Conclusions</B></div> <bR> <div> New York's treatment of telecommuters, especially those residing in states where a credit for New York tax is not available, is not fair; it is also counterintuitive. Who would think, for instance, that working a single day in New York can expose all of a nonresident's income to tax? Still the New York law has been upheld many times in court. Whether it will continue to be upheld is not known. </div> <bR> <div> Congress may step in if it determines state tax rules present a barrier to the growth of telecommuting. However, Congress is only beginning to look at the issue, and is unlikely to do anything in the near future. In any case, Congress will be reluctant to preempt New York's tax laws. </div> <bR> <div> Given that the rules are unlikely to change in the foreseeable future, employers that want to use telecommuters must consider carefully whether locating offices in New York is a good idea. If a New York office is a must, employers can minimize the threat of double taxation by insuring that telecommuting employees perform no work in New York.</div> <bR> <div> <A HREF="id158.htm" TARGET="_top" TITLE="The Telecommuter Tax Fairness Act "><U><IMG SRC="21c4b260.gif" border=0 width="75" height="38" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></U></A></div> <bR> <bR> <bR> </td> </tr></table></body>