Telecommuters: Beware the tax man

Telecommuters employed by a company outside their home state may be at risk of having to pay extra taxes unless Congress adopts a bill protecting them.

Telecommuters employed by a company outside their home state may be at risk of having to pay extra taxes unless Congress adopts a bill protecting them, experts said Tuesday.

The U.S. Supreme Court on Monday refused to hear the appeal of a Tennessee computer programmer who claimed that New York was violating his constitutional rights by forcing him to pay taxes on income he earned in his home state while telecommuting.

The New York tax provision, called "Convenience of the Employer," allows the state to tax nonresidents who choose to telecommute for their New York-based employers for their convenience, but not if it is at the convenience of the employer. The Supreme Court let stand the New York appeals court ruling in favor of the state.

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What's new:
The U.S. Supreme Court refused to hear the appeal of a Tennessee computer programmer who claimed that New York was violating his constitutional rights by forcing him to pay taxes on income he earned in his home state while telecommuting.

Bottom line:
Telecommuters employed by a company outside their home state may be at risk of having to pay extra taxes unless Congress adopts a bill protecting them.

More stories on telecommuting

"That means that at the end of the day telecommuters will be subject to more taxes rather than less taxes," said Scott Clark, who runs the state tax practice for Thelen Reid & Priest in New York.

The technology industry, more than most others, relies heavily on telecommuters who can just as easily fire off e-mails and work on documents or program code in their slippers at home as they can sitting in their cubicle at the office.

Telecommuter advocates were quick to blast the decision.

"It's particularly egregious in light of the fact that telecommuters greatly benefit society in many ways, not the least of which is by consuming fewer of our scarce resources--like petroleum, roadways, and bus or train seats," the American Telecommuting Association said in a statement. "Even with this ruling, however, the ranks of telecommuters will continue to grow because the benefits so far outweigh the costs."

About 45 million people work from home, and the number of employee telecommuters rose 30 percent during the past year, according to ITAC, the Telework Advisory Group for WorldatWork, in research commissioned from The Dieringer Research Group.

"Statutes like that in New York make it very burdensome for individuals who are in a technology-related or e-commerce field to do business," Clark said.

In the Supreme Court case, Tennessee resident Thomas Huckaby told the court he was not opposed to paying tax on the 25 percent of his income that he earned while working in the New York office. However, he objected to being ordered to pay tax on the 75 percent of his income he earned working at his Nashville home. Tennessee does not have income tax.

The ruling "makes it a lot harder for a New York employer to hire an out-of-state telecommuter because they are submitting themselves to New York tax, which is a very high tax," said Peter Faber, Huckaby's attorney. "My concern is that other states may be emboldened by this to adopt a similar approach."

Faber said the New York state tax department's advisory committee, on which he sits, is studying the taxation of telecommuters. "Even though they won in court, they may well relax their position on telecommuters," he said.

An "antiquated" provision?
"The provision is rather antiquated," dating to the 1960s, Clark said. "Quite frankly, it is about time states brought these provisions into the current-day world and recognized the fact that telecommuting is essential to our economy and that it is an everyday fact."

Pennsylvania, Nebraska and New Jersey have similar laws, Faber said. However, New York is more aggressive at enforcement than other states, said Nicole Belson Goluboff, who serves on the advisory board of the Telework Coalition, a telecommuter advocacy group. "Any state may decide that it wants to adopt a similar rule," she said.

"If all of the states go to a convenience-of-the-employer methodology, this is going to cause confusion for people who are telecommuting in one state and maybe never step foot in their employer's home state," said Stephanie Lipinski Galland, who works on the American Bar Association tax section's committee on state and local taxes.

The court's action runs counter to federal efforts to encourage people to drive less and telecommute more, Goluboff said.

The decision "comes at a particularly important time because interest in telecommuting is significantly heightened because of high gas prices, the threat of short fuel supplies and also the potential threat of an avian flu pandemic," she said.

The Telecommuter Tax Fairness Act, reintroduced in the Senate in May, would protect telecommuters from double taxation. The bill is in committee and not yet scheduled for a vote, said a spokeswoman for Sen. Christopher Dodd, a Democrat from Connecticut.

"Congress can resolve this tomorrow. Congress has the power; there's no question," said Walter Hellerstein, a law professor at University of Georgia and author of books on state taxation.

Hellerstein said he could understand why the Supreme Court didn't want to consider the matter. "Where does a telecommuter earn his income? That's a pretty hard question" to answer, he said.

 

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