Tax nexus is never straightforward, but some states make it more complicated than it ought to be. When you live and work full-time in one state, it should be obvious that that is the state you owe income taxes to. Unfortunately, convoluted “convenience of the employer” rules in five states muddle this otherwise clear picture. And if a bill that just passed a New Jersey Senate committee becomes law, five will soon become six.
Convenience of the employer rules require that when an employee switches from commuting into that state to working remotely out-of-state, that employee still owes taxes to the state with the convenience of the employer rule as if they were still commuting so long as they could conceivably have continued to commute. In other words, if a New Jersey resident who commutes into New York switches to working from home in New Jersey, they would still owe New York taxes as if they were still commuting, because New York is a convenience of the employer state.
Not only is this confusing and counterintuitive, it creates the risk of double taxation. In the above example, the New Jersey resident has to claim a credit against taxes paid to New York, but New Jersey is unsurprisingly far from eager to relinquish the taxes of an individual who resides and works in-state full time.
What’s more, at its core, convenience of the employer rules represent an effort by states to restrict taxpayer agency. There are many reasons why a taxpayer might choose to work remotely, of which taxes are just one, but we know that taxes play a significant role in migration decisions. Choosing where to work is much the same.
Convenience of the employer rules remove this choice from taxpayers. And by restricting taxpayers’ ability to choose what state taxes them, states have less incentive to design competitive tax codes. States grapple with each other over tax revenue, while taxpayers lose.
Only four states have full convenience of the employer rules — New York, Pennsylvania, Delaware, and Nebraska. A fifth state, Connecticut, has a “reciprocal” version, whereby it enforces a convenience of the employer rule only against residents of states with a convenience rule.
Connecticut’s model is what New Jersey is considering adopting. And at some level, the desire to hit back at what is a fairly naked cash grab by its neighbors is understandable. But while reciprocal convenience rules make sense when only considering their impact on state budgets, the real victims are taxpayers caught in a tug-of-war between states. New Jersey’s proposed rule would hurt New York and Pennsylvania taxpayers first and foremost.
Rather than other states adding retaliatory versions of the convenience of the employer rule, the focus must be on pressuring states with full convenience rules to repeal them. We know this is possible — just last year, Arkansas repealed its convenience of the employer rule, and Massachusetts allowed a convenience rule instituted during the pandemic to lapse in the face of a legal challenge from New Hampshire.
Frustration with states’ convenience of the employer rules is understandable even for state officials, but the solution is less of these rules, not more. New Jersey should focus on other avenues to eliminate convenience rules harming its taxpayers, not fight fire with fire.
