Telecommuter Tax Fairness Act of 2005: Restoring Balance to State
January 26, 2006
Telecommuter Tax Fairness Act of 2005: Restoring Balance to State
Taxation of Telecommuters
by Chris Atkins
I. Introduction
In 1994, Thomas Huckaby began telecommuting to his office in New York City from his
home in Tennessee. Though he would make trips to his employer’s office in New York,
the vast majority of his work time was spent in Tennessee. Thus, when he filed
nonresident tax returns in New York for tax years 1994 and 1995, he apportioned 25
percent of his income to New York.1
When his return was audited, New York tax officials claimed that he had to apportion
100 percent of his income to New York, based on their “convenience of the employer”
rule on telecommuting.2 The New York Court of Appeals (the highest court in New
York) eventually upheld the state’s determination, and the U.S. Supreme Court declined
to hear the case.
Mr. Huckaby’s dilemma is another example of the friction between the 21st century
economy and state tax systems which are largely based on a 20th century economy.3
While there are legitimate reasons for anti-abuse rules in the case of telecommuting, New
York’s rule violates many tenets of sound tax policy, including the principle that taxes
should be levied in exchange for services received from the government, and will lead to
widespread double taxation of telecommuters. The Telecommuter Tax Fairness Act of
2005, a bill originally introduced by Senators Dodd (D-CT) and Lieberman (D-CT) in the
Senate (S. 1097) and Representative Christopher Shays (R-CT) in the House (H.R. 2558),
seeks to restore the correct balance to state taxation of telecommuters.
II. New York’s “Convenience of Employer” Rule
New York law allows taxpayers to apportion their income between New York and other
states if they perform services in other states.4 To secure such treatment, however, New
York requires that services performed outside the state be done out of necessity as
opposed to convenience.5 Thus, since telecommuters usually work out of their homes for
convenience, New York consistently requires telecommuters located in other states (like
Mr. Huckaby) to pay tax on 100 percent of their income in New York.6
New York is one of only four states with a “convenience of the employer” rule for
telecommuters. The others are Delaware, Nebraska, and Pennsylvania, though it is
reported that these states do not enforce their rules as aggressively as New York.7 With
the Supreme Court declining to hear the Huckaby case, and no action thus far taken in
Congress, states have little to lose politically and much to gain fiscally by moving toward
more aggressive enforcement actions against telecommuters.
Of course, states do need to be careful about the tax treatment of telecommuting. Loose
rules on telecommuting would invite abuse, as taxpayers who make the normal commute
during the week could claim they were telecommuting on the weekend (when if fact they
were doing no work) and siphon income away from the state in which they work. There
is a way, however, to craft a rule that prevents abuse and state overreaching. New York’s
"convenience of the employer rule" acts as a hacksaw when a scalpel is all that is needed.
III. Analysis
The Telecommuter Tax Fairness Act of 2005 would require a nonresident taxpayer to be
physically present for work in a state before he is required to pay tax on his income.
Thus, a telecommuter could not be forced to pay tax on 100 percent of his income in a
state where he physically worked less than 100 percent of his work days.
Due to the importance of state tax sovereignty—which is guaranteed by the 10th
Amendment to the Constitution— Congress must be careful anytime that it seeks to
preempt state and local tax authority, as the Telecommuter Tax Fairness Act would do.
For the reasons outlined below, however, Congress would be well advised to preempt
state tax authority in the case of telecommuter tax issues.
The most important reason for Congress to act is to prevent state taxpayers from facing
double taxation. Absent federal action, many telecommuters will continue to pay taxes on
over 100 percent of their income. Because states do not consistently credit taxes paid to
other states, telecommuters in some states will be disadvantaged in the absence of a rule
like that contained in the Telecommuter Tax Fairness Act (see example in Table 1). This
double taxation introduces economic distortion into the decision whether to telecommute
or normally commute.
Table 1: The Telecommuter Tax Fairness Act Reduces Double Taxation for
Telecommuters
Source: Tax Foundation
The next most important reason for Congress to act is the benefit principle of taxation,
which says that a state should get the right to tax a person’s income when that person is
benefiting from services provided by the state.8 A physical-presence rule better matches
taxes paid and benefits received, since only employees who are physically present are
significantly benefiting from public services.9
When Mr. Huckaby telecommutes, he is virtually present in New York, but physically
present in Tennessee. Thus, when telecommuting he is primarily benefiting from roads,
schools and prisons in Tennessee, and Tennessee should be able to tax his income based
on the benefit principle.
When he goes to New York, however, he primarily benefits from roads, schools and
prisons in New York. Thus, when he works in New York, that state should be able to tax
his income based on the benefit principle. Since New York claims the right to tax 100
percent of Huckaby’s income, however, and shows no sign of changing its policy, only
Congress can craft a uniform rule that accurately matches taxes paid with benefits
received.
Congress must also act to reduce tax complexity. While telecommuters will usually not
have a difficult time allocating their income between the state where they live and the
state where their employer is located, telecommuting could become a compliance
nightmare for employers.
Businesses with telecommuters in other states would have to withhold income tax for
their employees in those states. Since different states have different rules on
telecommuting, this would quickly become a compliance burden for businesses. A rule
like that embodied in the Telecommuter Tax Fairness Act would create one clear, simple
rule to guide businesses who have to withhold for telecommuters in other states.
Another issue involved in the telecommuter tax issue—though not addressed by the
Telecommuter Tax Fairness Act—is nexus. According to BNA’s 2004 Survey of State
Tax Departments, over 40 states assert the right to tax an employer’s income based on the
in-state presence of a telecommuting employee (see Table 2). In the 2001 survey, only 32
states asserted the same right. In Thomas Huckaby’s case, this means that not only would
Mr. Huckaby have to pay tax on 100 percent of his income in New York, but his
employer would have to pay tax on some portion of its income in Tennessee. If Congress
takes no action on the “convenience of the employer” rule, look for states like Tennessee
to get more aggressive with out-of-state employers who employ telecommuters like Mr.
Huckaby.
Table 2: Most States Assert Tax Nexus on Employers Based on Presence of
Telecommuting Employees
Source: BNA's 2004 Survey of State Tax Departments, Vol. 11 No. 4, S-26-27.
IV. Conclusion
A major tenet of sound tax policy is neutrality: the government should not encourage or
discourage certain behaviors through the tax code. In the case of telecommuting, the
“convenience of the employer” rule is acting as a direct financial disincentive for
employers and employees to use telecommuting, since telecommuters can face double
taxation on their income. Congress would be well advised to end this economic distortion
by considering the Telecommuter Tax Fairness Act of 2005, which would allow states
like New York to tax only their fair share of a telecommuter’s income, protect
telecommuters from double taxation, and simplify the tax system for their employers.
Footnotes
1. See In the matter of Thomas L. Huckaby, 2005 NY Int. 51 (March 29, 2005).
2. See 20 NYCRR ? 132.18(a).
3. See generally Chris Atkins, Tax Foundation Background Paper No. 49, “A Twentieth
Century Tax in the Twenty-First Century: Understanding State Corporate Tax Systems”
4. See 20 NYCRR ? 132.18(a).
5. See Id. (“…any allowance claimed for days worked outside 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.”).
6. See also Matter of Zelinsky v. Tax Appeals Trib., 1 NY 3d 85 (2003).
7. See Paul Korzeniowski, “Telecommuting Climate Getting Chilly,” E-commerce Times
8. See Complete Auto Transit v. Brady, 430 U.S. 274, 287 (1977) (to pass Commerce
Clause scrutiny a tax must be “fairly related to benefits provided the taxpayer.”).
9. See also Chris Atkins, “Paying for "Civilized Society" in the Global Marketplace: H.R.
1956's Physical Presence Rule Accurately Matches Taxes Paid and Benefits Received,”
Tax Foundation Fiscal Fact (September 26, 2005), located at
2006 Tax Foundation
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