One of the most lasting changes wrought by the pandemic is proving to be how and where Americans work. Gallup data on workers capable of working remotely shows that, while 60 percent worked exclusively in-office in 2019, that number has plummeted to just 22 percent as of this last year. Many of those newly-remote workers may not have even given much thought to how that change could complicate their tax status.
Cities in particular were aware of it, however, and sought to make sure that valuable tax revenue didn’t slip out of their grasp even as the taxpayers themselves did. One city, St. Louis, just got smacked down in court for bending the rules in order to keep the tax revenue flowing.
St. Louis levies a 1 percent earnings tax on the earnings of St. Louis residents and employees working in St. Louis. This tax makes up a significant portion of the city’s revenue, estimated at more than a third. About half comes from nonresidents who commute into St. Louis.
Except, due to the pandemic, a lot of those nonresident commuters stopped commuting. Nevertheless, St. Louis wasn’t about to let the mere fact that these people may not even set foot in St. Louis during the year stop it from trying to tax them anyway.
Without any sort of official policy change, St. Louis’s Collector of Revenue unilaterally decided to simply stop granting refunds for teleworkers no longer commuting into St. Louis. His reasoning, that the pandemic had created a “whole different set of circumstances,” fails to change the relevant circumstances that these taxpayers were not working in St. Louis.
That’s a line of thinking that only a government official could arrive at. Imagine if restaurants tried to continue to charge the customers who stopped patronizing them when the pandemic began because they had switched to making dinner at home. Too often, courts grant far too much deference when government officials claim that not being able to enforce even the most questionable tax obligations would create revenue hardship.
Fortunately for taxpayers, this time that didn’t happen. Unimpressed by St. Louis’s arguments, Judge Jason Sengheiser correctly noted that fiscal hardship did not give St. Louis the right to retroactively tax nonresidents that it never previously claimed the right to tax.
That’s not the end of these battles, however. Other cities across the country still require payment of taxes from taxpayers who switch from commuting into their jurisdiction to working remotely outside it.
Four states — Delaware, Nebraska, New York, and Pennsylvania — also enforce such “convenience of the employer” rules. A fifth, Connecticut, enforces a retaliatory version only against residents of the above four states. New Jersey may soon join Connecticut with a retaliatory convenience rule of its own.
“Convenience of the employer” rules aren’t the only tax issues that newly remote or mobile workers have had to grapple with. A new report from the National Taxpayers Union Foundation, the Remote Obligations and Mobility (ROAM) Index, provides the first comprehensive ranking of states on tax policies affecting remote and mobile workers.
Rather than trying to fight change, state legislators should respond to remote work by trying to make their states more appealing locations for remote and mobile workers in the future. The best way to do this is not to try to force their tax webs out onto nonresidents, but to craft competitive tax codes that don’t wrap up taxpayers in needless complications.
