1/22/2021
By Ivan Pereira
One of the major upheavals brought on by the novel coronavirus is the way millions of Americans work.
For many workers, their offices are now located anywhere with an internet connection, even if that means being in a different state. That accessibility, however, may come with a price for some at tax time.
Traditionally, individuals are assessed income taxes in the state where they live and people generally lived in states where they worked or nearby. Commuters who came from neighboring states were usually covered by agreements that avoided double taxation. But with people moving far and wide amid the pandemic — not just neighboring states — and telecommuting instead, some face the prospect of extra taxes.
Six states have what is known as convenience rules, which allow companies located in their jurisdictions to issue an income tax on their employees even if they don’t reside in the state.
The problem is that while some neighboring states have agreements that provide tax relief, telecommuters who went elsewhere because of the pandemic may be hit with extra income taxes from the state where their company is based.
Rhonda Collins, the director of tax content and government relations for the National Association of Tax Professionals, told ABC News these complex tax rules will conflict with the rise in telecommuting brought on by COVID-19.
“[Employees] may be working from a state in which they previously did not work and/or a state in which they are not a permanent resident,” she told ABC News in a statement. “This is potentially where the worker may be subject to the convenience rules and thus resulting in double taxation of income.”
Jared Walczak, the vice president of state projects for Tax Foundation, an independent tax policy nonprofit, told ABC News the convenience rules have come under scrutiny in the past, but with little debate or fanfare since many state governments offer relief for taxpayers through credits and agreements with their neighboring leaders.
However, with telecommuting becoming more prevalent in a post-pandemic world, that is changing — not only from individuals concerned about double taxation, but states that want to make sure they’re getting their fair cut of revenue.
A potential double tax hit
Many states have rules in place to prevent their taxpayers from being hit with double taxation if they commute out of state for work.
Seventeen have so-called “reciprocity” tax agreements with their neighboring states where residents aren’t taxed if they physically commute to work elsewhere. For example, Pennsylvania residents who commute to New Jersey, and vice versa, will not have to file in two states because of a reciprocity agreement.
Some states that don’t have reciprocity agreements have other laws in place to prevent double taxation, according to Collins.
“When an individual lives in one state but works in another, typically they receive a tax credit on their resident income tax return which reduces or eliminates double taxation of their W-2 income,” she said in a statement.
For example, states like Vermont, Connecticut and Virginia provide tax credits up to a certain limit to their residents who work in bordering states, according to tax laws.
Walczak said the situation gets murkier when it comes to six states — Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania — which have so-called “convenience” provisions for income taxes. Under these rules, companies can treat employees as if they work in the state where their offices are located, regardless of where they live, Walczak said, resulting in a potential double tax hit.
Further muddying the waters is that many of these states leave the details up to employers, according to the Tax Foundation. For example, a technician working in Vermont on a product for a New York company would not typically be considered a New York employee, Walczak said.
On the other hand, a Vermont resident who commutes, either physical or virtual, to a New York office could be considered a New York employee, he said. In both cases, the employee’s status is up to the company.
“This is where you get a situation with double taxation,” Walczak said.
As telecommuting expanded in the late 90s and early 2000s, those laws were tested as employees working for companies in states with convenience provisions could now live elsewhere.
New York’s convenience provision was challenged in the courts by a Tennessee telecommuter. In 2005 the state’s provision was upheld by the New York Court of Appeals.
Walczak said there hasn’t been a major push from other states or the federal government to rectify the taxation situation affecting certain telecommuters.
COVID-19, he said, changed that.
States charging commuters don’t change the rules
With coronavirus restrictions and employees working from home to avoid spreading the virus, millions of Americans now had the option of choosing their own location for a home office.
For some workers, this meant they could relocate to another part of the country and not miss an hour of work as long as they had an internet connection.
That exodus of employees, even if temporary, has consequences for employers and importantly, state tax collectors, Walczak said.
With the economy still reeling, states have been looking for solutions to generate as much revenue as they can, including provisions to tax workers who move out of state, according to Walczak.
“States, in the long run, will not allow a situation where they are denied their revenue,” he said. “States will increasingly tax those incomes.”
The six states that already have convenience provisions haven’t changed their rules despite circumstances that prevent employees from commuting into their offices, even if they telecommute.
Walczak said states that neighbor those with the convenience provisions have taken action to prevent their residents from double taxation, but at a cost.
New Jersey, for instance, stands to lose $1.2 billion in revenue because of the tax credits it offers commuters who work in states with convenience provisions, said Gov. Phil Murphy.
The pandemic forced some state lawmakers to alter their policies in response to more people working from home, with varying degrees of tax protection for their residents.
Rhode Island lawmakers issued an emergency tax order where residents who usually worked in offices in neighboring states would not be subject to state income tax as well when they worked from home.
Battle heats up over controversial Massachusetts rule
In March, Massachusetts, which did not have a convenience provision, issued a temporary rule effectively creating one. Under that provision, anyone who worked in the state before the pandemic would still pay Massachusetts income taxes, which is about 5%, regardless of where they worked for the rest of the year.
“The Commonwealth has implemented temporary regulations that are similar to those adopted by other New England states,” revenue department spokeswoman Naysa Woomer said in a statement to ABC News. The department said employees can receive credit depending on what state they live in and the tax rate would only reflect the days that the employee worked in Massachusetts.
Neighboring New Hampshire doesn’t have a tax credit program or reciprocity agreement with any state and now residents are faced with getting taxed for the months where they didn’t physically set foot in a Massachusetts office, according to Walczak.
New Hampshire Gov. Chris Sununu filed a lawsuit in October against Massachusetts in the latter state’s supreme court calling the temporary taxation rule, which was extended in the summer, unconstitutional. He has asked the U.S. Supreme Court, which has automatic jurisdiction over such a tax-related law, to take up the case.
Since then, 14 states, including Ohio, Connecticut and New Jersey have filed amicus briefs supporting New Hampshire’s suit and called on the Supreme Court to hear the case. The states that joined the suit said they are invested in resolving the issue, especially since their residents will likely be working from home for the foreseeable future.
“We are hopeful that the Supreme Court will hold that states do not have the constitutional authority to tax individuals who neither live nor work there,” Murphy said in a statement.
Massachusetts Department of Revenue spokeswoman Naysa Woomer declined to comment on pending litigation. As of Jan. 20, no other state has filed paperwork backing Massachusetts in the suit.
Experts say that telecommuters concerned about taxes should contact their HR departments and or a tax professional.
Looking forward
Major companies, particularly those in finance, have made moves to address state tax convenience provisions, through satellite offices or moving their headquarters to states that don’t have those provisions, Walczak said.
He predicted that more companies that are rebounding from the economic downturn could end up opening new offices in states that don’t have the convenience provisions.
But as telecommuting options grow following the end of the pandemic, Walczak said state governments and Congress will need to update their rules to fit the new normal.
Members of Congress from both parties have introduced legislation in the past to address double taxation.
The “Multi-State Worker Tax Fairness Act,” first introduced in 2016 by Connecticut Democratic Sens. Richard Blumenthal and Chris Murphy, was re-introduced by Rep. James Hines, D-Conn., last year.
The bill “limits the authority of a state to levy income tax on the compensation of a nonresident individual to the period in which the nonresident individual is physically present in the state.” It would prohibit a state from enacting a provision similar to Massachusetts.
Senate Republicans also had a provision in their Health, Economic Assistance, Liability Protection and Schools Act, which was introduced last year, where remote employees would only be subject to income tax in their state of residence and in any states where they work physically for more than 90 days in 2020.
For calendar years 2021 to 2024, employees would have to spend more than 30 days for their out-of-state income to be taxed, according to the bill.
Walczak said there hasn’t been enough “political will” to move these bills forward; however, elected officials will have to fix the situation soon.
“All of this is front of mind now because we are seeing a revolution in how people work,” he said. “The forced expansion of remote work is working, and a tax code that stands in the way of that is something that cries out to be addressed.”
