Working from home, they could avoid the expense and hassle of commuting to work. But now they may have to pay state income tax on all of their income with respect to a state where they do not live and where they do not work.
The New York appellate decision
In a case called Matter of Huckaby, a New York state appellate court ruled in a 4-3 vote opinion earlier this year that a telecommuter who works for a New York company but who lives and performs most of his work in Tennessee still must pay New York state taxes on 100 percent of his income. The court so ruled even though this particular employee spends no more than a quarter of his working time in New York for his employer.
Under New York's "convenience of the employer" test, if a given employee works outside New York for a New York employer, New York asserts its ability to tax all of the employee's earnings for the New York employer, regardless of how much time, if any, the employee spends working inside of New York.
The appellate court ultimately cast aside constitutional challenges to this convenience of the employer test and ruled that this test does not cause commerce or due process violations of the United States Constitution.
Not surprisingly, this result has come under harsh criticism. There is the concern about potential double taxation of employees in their home states and where their employers are located. In addition, this type of result is seen as a threat to the very notion of telecommuting, which otherwise has many favorable attributes. Indeed, millions of people now work from home, according to U.S. Census Bureau statistics.
Given the adverse result and the importance of the issue, Huckaby filed a further appeal to the Supreme Court, hoping the high court would overturn the decision by the New York state appellate court.
However, on Halloween--a fitting date in this instance--the Supreme Court delivered a trick and not a treat by deciding not to accept and consider Huckaby's appeal. It thus let the decision of the New York state appellate court stand. The Supreme Court ducked the opportunity to clarify whether states can seek income taxes based on the location of employers and employees.
The only partially good news here is that most states, unlike New York, apportion income for taxation purposes. A person working for a company based outside New York who also works in a different state than the one where the company is based likely would pay income taxes in both states. But the payment would be apportioned in terms of how much time the person spent working for the company in his or her home state and where the company is based.