Unscrupulous Tax Bureaucrats Could Harass Those Working from Home

Unscrupulous Tax Bureaucrats Could Harass Those Working from Home
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A major aspect of “social distancing” as a response to the novel coronavirus has been encouraging businesses to adopt telework policies for their employees for extended periods of time. That’s great for slowing down the spread of the virus, but it could mean added headaches for workers waiting out the virus in a different state than their normal office location.

Individuals pay income taxes in the state where they work, not necessarily the state they live.  But for many employees who are teleworking due to coronavirus, this is the first time they will have substantial income earned in their home state, adding complexity and headaches to the mix. For individuals who aren’t aware of the technicalities at play, they would be left with a number of tax headaches as two states try to claim their tax revenue as their own.

Employees are responsible for having their withholding information be accurate, but many businesses and workers have far more pressing matters at hand than adjusting their tax documents to reflect their temporary telework location. As a result, many employees’ tax withholding is likely all wrong.

Adding to the confusion is the fact that many employees are choosing to quarantine with family members in places other than their normal residences. Employees doing remote work while waiting out the coronavirus at home in a state other than the one they normally reside in would technically be expected to file taxes in that state as well, further complicating tax filing in a tax season both thefederal government and nearly all states have recognized the need to extend deadlines for.

This can get even more complicated in states like Ohio, which allows local income taxes. Even someone who lives and works in Ohio could be tripped up by the complexities of living and working in different communities.

This is also impactful for employers themselves. Businesses pay income taxes too and the unique times could add confusion to their already mounting headaches. For a state to claim some portion of a corporation’s income taxes, that corporation must have some form of nexus within that state. Nexus can include warehouses, offices, or — as is relevant in this case — employees working within that state.

That means that businesses normally can be reticent to allow employees that live in states where the business otherwise lacks nexus to telecommute, as it exposes them to tax filing obligations in that state. The coronavirus has forced the issue, however, leaving many businesses with little choice but to allow telework among their employees.

States generally use an apportionment formula to determine what percentage of a corporation’s profits they have the right to tax. States use either three factors (the business’s sales, payroll, and property within the state) or just one (sales) to calculate the business’s income tax liability, but either would be affected by teleworking employees.

“Three-factor” states would of course be able to claim more in taxes because of payroll going to employees telecommuting from within their borders. But even single-factor states could use a single employee working remotely within their borders as sufficient nexus  — a potentially major shift in corporate income tax treatment for businesses that have large amounts of sales to a state but previously lacked nexus.

That means that states all across the country could suddenly begin claiming a business’s income taxes, not just states within commuting distance.

The obvious solution to this confusion would be to simply treat remote work during the coronavirus outbreak as normal office work for the purposes of tax filing. State revenue departments should act as though remote employees are working in their usual offices.

There’s signs that some revenue departments may be reasonable on this matter — Mississippi’s Department of Revenue recently announced that it would indeed treat temporary remote work as if it were work in a normal office for nexus purposes. Unfortunately, state revenue departments aren’t generally known for their restraint in going after remote workers’ income. New York state, for example, requires anyone who comes to the state for business, even a one-day meeting, to file New York state taxes, and is known for aggressively enforcing this requirement.

Therefore, rather than counting on the goodwill of state tax bureaucrats already facing revenue downturns alongside economic slowdowns, Congress should act to standardize this practice across states for the next few months at least, while working toward more comprehensive long-term solutions to this problem. Otherwise, workers and businesses alike could be facing added tax headaches and compliance costs at the worst time.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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