New York Court Says Telecommuters Must Pay NY Tax

hal9000(jr) writes "The Boston Globe is running this story on an out-of-state programmer working for a New York company who had to pay state taxes. '"New York has the right to tax 100% of a nonresident employee's income derived from New York sources," according to the 4-3 decision by Court of Appeals. The court relied on a fairness rule called the "convenience of the employer" under law that says a worker's income is taxable if he chooses to live outside the state, as opposed to if he or she was transferred there.' The dissenting opinion: 'Judge Robert Smith argued that the basis of the majority's decision that all income is taxable is "that the commissioner says it is ... The majority cites no authority at all, and offers no persuasive reason, in support of this new interpretation."'"

Comments

Re:I, for one, welcome our NY tax refugees!

[DAldredge]

Don't forget Texas is trying to pass a "It isn't an income taxes because we are calling it something else" income/payroll tax.

Things in texas are rather screwed up at the moment.

Re:So does this mean ..

[pete6677]

No. The state in which he is a resident will allow him to deduct the amount of taxes paid to other states. I have worked in one state and lived in another before, and that was how it was done. I don't think too many people would work in a different state than their home was in if it meant double taxation.

hmmm

[khallow]

While I find New York's argument dubious, it does appear that this is a fairly common problem and that some states would rule in the same way that New York did. From the link above (for Pennsylvannia):

I can provide you with the position that the Commonwealth would take, had taxpayer been a nonresident of Pennsylvania during 1999 and 2000, in respect to the situation described in your letter. This may prove helpful in understanding New York's activities.

Under the personal income tax, a nonresident individual who earns compensation for services performed in Pennsylvania is subject to the income tax because it is Pennsylvania source income. 72 P.S. 7301(k). The employer would be responsible for withholding and remitting state income tax for all payroll periods in the tax year when such person performs services in the Commonwealth.[2]

With the advent of individuals being permitted to work at locations other than the employer's place of business, states began examining whether their income tax laws were being complied with. If an employee is permitted to perform services/duties from his home or a place other than the within the state where he would normally report for work, and when such person's employer has no business reason[3] to have the employee work outside of the office/facility, such state could attempt to subject the income to tax. The rationale for this rule, at times referred to as "the convenience of the employer test" is that if the employee is permitted to work at home for his/her own convenience/ preference, the state where he/she would normally report for work should be entitled to the income tax for compensation or wages earned during those time periods.

While not published in a regulation, Pennsylvania follows this theory for resident and nonresident individuals who would report to a Pennsylvania location for work, but actually work elsewhere for their own convenience.

In other words, this seems common practice and I really don't see that this hinders telecommuting unless the state of residence also attempts to tax those same wages.

Here's an interesting bill called the Telecommuter Tax Fairness Act. From it:

Convenience of The Employer Rule

The Telecommuter Tax Fairness Act (the Act), first introduced last September by Sen. Christopher Dodd (D-CT) and Rep. Christopher Shays (R-CT), would eliminate a state tax rule known as the "convenience of the employer" rule. New York is among the states to apply the convenience rule. Pennsylvania and Nebraska have maintained similar rules.

Under the rule in New York, a nonresident who elects to telecommute part-time to a New York employer may owe taxes to New York on 100% of his or her income, including the income earned at home. Because the telecommuter's home state may also tax the income earned at home, the telecommuter risks taxation by both states on the same income.

Consider, for example, a Connecticut resident who works for a firm in Manhattan and telecommutes 2 days a week. In addition to taxing the income the employee earns while physically in New York, New York may tax the telecommuter on the income he or she earned at home in Connecticut: New York may consider the income the telecommuter earned in Connecticut as New York source income.

Connecticut, however, may take a different view. It may regard the income earned in Connecticut as Connecticut source income. Thus, Connecticut may tax its resident on the income earned there and may not grant a credit for taxes paid to New York on that income. As a result, the nonresident employee may be taxed twice on the income earned at home. By making telework costly for nonresidents, the convenience rule discourages this kind of interstate employment.

New York's Harsh Ap

Re:So does this mean ..

[4alexnyc]

Not exactly - you can deduct the tax paid to the state with the higher tax rate as a credit against tax paid in the state the lower one. Since NY has one of the highest state tax brackets (in fact, I think it might be the highest) it's usually the only state tax paid. Of course, we didn't discuss the NY City tax... (ugggh)

Re:I, for one, welcome our NY tax refugees!

[PipianJ]

Actually, New York and Texas have almost identical laws when it comes to the law that (in Texas) has been interpreted to mean that someone with 6 dildoes is committing a misdemeanor.

Texas (Texas Penal Code, Title 9)

43.21. DEFINITIONS

(7) "Obscene device" means a device including a dildo
or artificial vagina, designed or marketed as useful primarily for
the stimulation of human genital organs.

43.23. OBSCENITY

(c) A person commits an offense if, knowing its content and
character, he:
(1) promotes or possesses with intent to promote any
obscene material or obscene device; or
(2) produces, presents, or directs an obscene
performance or participates in a portion thereof that is obscene or
that contributes to its obscenity.
(d) Except as provided by Subsection (h), an offense under
Subsection (c) is a Class A misdemeanor. ...
(f) A person who possesses six or more obscene devices or
identical or similar obscene articles is presumed to possess them
with intent to promote the same.

New York (New York Consolidated Laws, Title MA235)

235.00. Obscenity; definitions of terms.

1. "Obscene." Any material or performance is "obscene" if (a) the
average person, applying contemporary community standards, would find
that considered as a whole, its predominant appeal is to the prurient
interest in sex, and (b) it depicts or describes in a patently offensive
manner, actual or simulated: sexual intercourse, criminal sexual act,
sexual bestiality, masturbation, sadism, masochism, excretion or lewd
exhibition of the genitals, and (c) considered as a whole, it lacks
serious literary, artistic, political, and scientific value. Predominant
appeal shall be judged with reference to ordinary adults unless it
appears from the character of the material or the circumstances of its
dissemination to be designed for children or other specially susceptible
audience.
2. "Material" means anything tangible which is capable of being used
or adapted to arouse interest, whether through the medium of reading,
observation, sound or in any other manner.

235.05 Obscenity in the third degree.

A person is guilty of obscenity in the third degree when, knowing its
content and character, he:
1. Promotes, or possesses with intent to promote, any obscene
material; or
2. Produces, presents or directs an obscene performance or
participates in a portion thereof which is obscene or which contributes
to its obscenity.
Obscenity in the third degree is a class A misdemeanor.

235.10 Obscenity; presumptions.

2. A person who possesses six or more identical or similar obscene
articles is presumed to possess them with intent to promote the same.

Re:Flawed logic

[metamatic]

People who apparently don't like the United States and its Bill of Rights, did vote--that's the problem...

Not so fast, buckaroo

[PigBoyOhBoy]

The state in which he is a resident will allow him to deduct the amount of taxes paid to other states.

I live in New Hampshire and worked for a Massachusetts company for a few years. Massachusetts siphoned off its full income tax during those years with absolutely no recourse to me because New Hampshire has no income tax. Now that doesn't for a moment mean that I don't pay tax in New Hampshire. We make up for that tax free status by having outrageous real estate taxes instead.

But do you suppose Massachusetts cares how much I pay in real estate taxes? Boohoo.

The real killer last tax year (2004) was that at least half of my income came from Florida. And because my deductions on the Massachusetts form are factored by the percentage of income from Massachusetts, they wanted even more of my money than usual. The more I earn outside of Massachusetts, the more I pay to Massachusetts in taxes. Go figure!

Re:Taxes have gotten out of hand.

[CodeBuster]

You cannot be taxed twice on the same income.

The problem is that common double tax situations have become entrenched in federal and state budgets. They either have to leave the double taxes as they are, on stock dividends for example, or else cut spending. Which one do you think appeals more to politicians?

All services, goods, and fees which are mandated by any government entity are counted as taxes

In a sense they already are. The government is charging money, or taxing if you will, to cover the cost of basic public services as you use them. These services generally include civil court, motor vehicle licensing, and in some states toll highways. They are just counted separately from income taxes, meaning that you pay them with after income tax money, and imposed as the circumstances dictate.

total taxes paid, including all income taxes, fees, sales taxes, etc., cannot exceed a certain percentage of your income. Anything in excess of, say 40% (though I think 20% would be more reasonable) of gross income gets refunded.

It would not be possible to implement this without maintaining massive centralized databases containing all transactions engaged in by all citizens during the course of a typical year. This would be a massive increase in government power and a serious threat to any semblance of privacy that we still have left. The IRS is bad enough and you want to increase the scope of their auditors?

a flat tax rate instead of the ridiculous graduated tax rates. (Where I can actually make more money and end up with less because my tax percentage jumps.)

This is a misconception. Even if you are just barely in the next highest tax bracket you will never lose 100% of the money that is in that highest bracket so it is impossible to end up with less than you would have had if you were still entirely in the lower bracket. At least this is how it is in the United States, however at one time in the United Kingdom this WAS true and the highest bracket was actually paying 105% of income in that bracket, but even the most hardened socialist cannot claim that was fair so they fixed it back to 90%. With regard to graduated rates a more elegant smooth curve, possibly involving the natural logarithm, would have been more elegant than the crude bracket system, but then again most citizens, including politicians, never took calculus and so if they cannot understand the system then it must be unfair...sheesh

taxes are subject to jurisdictional delineations; if you are not using the services provided by a jurisdiction, you cannot be taxed by that jurisdiction (including the Federal government if you live outside the U.S.

Taxes are paid were the income is earned irrespective of whether you live there or not and this is how it should be. That is why New York is not wrong to tax this man for income that is earned inside the state of New York. However, it would be wrong for that income to be taxed by his home state too. Generally though this isn't a problem because income taxes go into the general fund rather than into more specific funds meant to maintain roads, buildings, and other infrastructure. Those funds are usually covered by other taxes such as gas taxes, property taxes, and the like.

The inheritance tax should be abolished altogether. It is simply unconscionable.

Inheritance is income just like any other source of income. It should be taxed as income. Taxes above and beyond income, just because it is inheritance, for example are unfair and should not be levied.