The Dangerous Tax Implication of 'Tele-Working'
Even before the outbreak of the novel coronavirus, telework was growing, with nearly 15 percent of Americans primarily working remotely. The pandemic has put an exclamation point on this trend — nearly half of the American workforce is now working from home. While the option to telework offers flexibility and has likely saved the jobs of millions of Americans, it also can expose both employers and individuals to unexpected tax complications.
A few weeks ago, I wrote in this space about the need for states to clarify that they will not seek to claim new tax authority arising from coronavirus-related telework as employees work from new locations — or, failing that, that Congress should act to protect taxpayers from new filing obligations. While Congress has not yet stepped in, a few more states have, including Minnesota, North Dakota, Indiana, and Pennsylvania. Unfortunately, while some states are acting to treat remote work more appropriately for tax purposes (albeit on a temporary, crisis-related basis), others are moving in the opposite direction.
In late February, Arkansas became the latest state to institute a so-called “convenience of the employer” test. In doing so, it joined states like Pennsylvania, New Jersey, Nebraska, and New York.
The concept of a “convenience of the employer” test is as elegantly simple as it is insultingly illogical. New York, for example, requires employees whose office is located in New York but who work remotely for any period of time to prove that such remote work could not have been performed in their office. If the remote work could have been done in the employee’s New York office, the state treats it as work performed in New York for tax purposes.
Of course, there are very few reasons why a remote worker absolutely has to work remotely. Most do so because of the convenience of spending time with family, to make living situations outside of major urban centers feasible, or to avoid lengthy commutes (such as the notorious one into New York City, for example). Remote work subject to “convenience of the employer” tests, therefore, usually incurs tax liability in the state with the test.
The taxpayer falling afoul of this rule may be surprised to discover that they are liable for income taxes to two states for their period of remote work, as the state where the work was actuallyperformed will claim income taxes as well. As a result, these rules can cause unsuspecting taxpayers to get caught between two aggressive tax departments.
Taxpayers who moved to a state with no income tax to do remote work can also find that income taxes follow them nonetheless. The case that led to Arkansas’s adoption of a “convenience of the employer” test involved an employee that worked in Arkansas before moving to Washington State (a state with no income tax) to do the same work remotely. Because of Arkansas’s “convenience of the employer” test, this employee found that, despite living on the other side of the country, Arkansas still demanded taxes on their income.
The pandemic further illustrates how backward this approach is. The explosion of unplanned remote work because of the pandemic means that states should treat coronavirus-related remote work as in-office work as a simplification measure. Yet ironically, a “convenience of the employer” test would suggest that states with such rules should not be able to claim nexus for pandemic-related out-of-state remote work, as offices have been forced to close by law.
There have been efforts by members of Congress to rein in this form of state overreach. One such bill, the Multi-State Worker Tax Fairness Act, was introduced in 2016 in both houses of Congress by Connecticut legislators fed up with New York, New Jersey, and Pennsylvania’s application of “convenience of the employer” rules. This legislation was unsuccessful, but it would have barred states from attempting to collect income taxes based on “convenience of the employer” tests.
The expansion of this type of test to Arkansas should remind members of Congress of the need to address such aggressive state actions. The pandemic has reminded American workers and employers of the value of having telework as an option — this option should not be restricted because of arbitrary state rules that threaten double taxation.