Taxing Time for Workplace Innovators

Last Wednesday the President and First Lady hosted a media event at the White House urging businesses in America to institute more innovative and "flexible" workplace policies, especially strategies like "nontraditional stop and start times, working remotely, job sharing" and the like.

Two days later a New Jersey court ruled that a Maryland software company had to pay corporate income taxes in the Garden State because an employee of the company who had been working remotely from home moved to Jersey, which in the court's opinion established that the company now maintained an office in the state. The result is an extra tax bite for the firm and the headache of filing corporate taxes in yet another jurisdiction.

"This case shows New Jersey is not friendly to business," said a lawyer in the case.

Yes, but Jersey is not alone. In fact, even as the President holds media events urging American businesses to institute flexible work policies (though in fact our labor markets are already far more flexible than most other developed countries), government is doing its best through tax policy and regulation to assure that businesses pay a price for their workplace innovation.

Jersey's grab at more corporate tax revenue is part of a growing trend where states attempt to extend the definition of what constitutes a tax nexus, that is, a taxable presence of a company or individual in their jurisdiction, so that government can tax them. And much of this effort is aimed at taking advantage of innovations in work policy driven by technology, the kind of stuff that the White House supposedly wants businesses to do more of.

Several years ago, for instance, those arch fiends who run the tax department in New York State put the bite on a Tennessee man who worked for a New York employer via telecommuting. New York claimed taxes on all of the man's income, including the 75 percent that he earned while at home in Tennessee, because under New York law the income is taxable if he wasn't doing a job that required him to be in Tennessee. Of course, that's the very definition of a telecommuting job, one that you could do from the office but instead do from home.

The New York case, which received national attention, prompted outrage among some in Washington and a promise by some members of Congress to rewrite federal tax law to exclude such state actions against nonresidents. But of course nothing of the sort happened. In fact as state revenues skidded starting in 2008 more states starting chasing down telecommuters and dunning them. At last count some 37 states say they will tax the income of an out-of-state telecommuter. As a New York Times report noted, "This tax issue is of growing urgency for small businesses, which often run lean operations and rely on a scattered work force." Many now face the extra administrative task of keeping track of different state tax laws and adjusting withholding rates.

The issue has made businesses more aware of where their employees are located. In one case a small New York manufacturing firm continued operating on Long Island after a key employee moved to Florida and worked out of his home. When New York state officials taxed all of his income, the firm decided to move the entire business, amounting to about 50 jobs, out of New York.

The White House event last week aimed to encourage flexible work policies that were ‘family friendly,' because that's the kind of stuff that makes folks in Washington feel all warm and fuzzy inside. But much of the nimbleness that firms exhibit has little to do with being family friendly. Instead it's aimed at helping firms leverage their resources, work smarter and be more productive, all of which gives a jolt to the economy and raises standards of living.

Among those leading the charge has been Amazon.com, in the forefront of the massive switch from bricks-and-mortar retailing to online selling. You want a family-friendly innovation? How about being able to sit home with your young children on a Saturday during the hectic holiday shopping season and do your Christmas shopping from a computer?

But now states are scrambling to extend their tax nexus to Amazon.com. One target is the company's affiliates program, in which the retailer persuades other websites to link to it and gives the operator of the site a small commission on any sale that comes to Amazon.com through the site. Several states have already passed laws demanding that Amazon collect sales tax on transactions that are referred from websites whose operator is physically present in their state, even when Amazon itself has no such presence. Thus, a mere link on a website now constitutes a sufficient presence to claim tax authority. Amazon has fought back by ending relationships with affiliates in states that have enacted the tax. The cost of fighting government, however, is to end an innovative marketing policy that extended the company's reach at low cost and provided a boon to its affiliates.

At last week's Washington workplace conference, organized by the White House Council on Women and Girls (a new creation of the Obama administration), the head of the council said, "We are convinced that a productive and efficient work force is one that modernizes to reflect the times that we're in."

Businesses agree. Now if government will only let them do just that with policies that matter, not with meaningless Washington conferences that ignore the disincentives that government itself is putting in the way.