and Its Effect on State Income Taxes
2006 - Even though statistics show that only approximately
5% of Americans work exclusively at home, the number of Americans
telecommuting for a certain portion of their “normal
workweek” is growing dramatically. The impact of telecommuting
on state income taxation should be addressed and analyzed.
following is a brief example of what various state taxing
authorities may confront in the near future. An August 1999
Business Week article, “The Nomads Shall Inherit the
Airport Lounge,” discussed John Gruetzner, an executive
vice president of a Canadian consulting firm who spent two-thirds
of his workweek consulting throughout China and also traveled
in Asia and North America. His official residence was in
Toronto, but he was rarely home. In two weeks he had traveled
on 17 flights. With today’s technology, one could
argue that he didn’t need a residence (Diane Brady,
BusinessWeek, August 30, 1999).
he was physically traveling or telecommuting, how could
a state or local jurisdiction tax Mr. Gruetzner? The concept
of a physical office where most of one’s work is conducted
is quickly eroding. With laptops, videoconferencing, fax
machines, e-mail, and Internet access, the days of physically
reporting to the same given office are gone. State and local
taxing authorities are behind the times and have not addressed
the taxation issues presented by the “new workplace.”
discussing tax implications, what exactly is telecommuting?
The word “telecommuting” was first coined by
Jack Niles to describe “a work arrangement in which
employees enjoy flexibility in work, place, and time (within
certain limits). ... Workers can telecommute from home or
a location other than their primary place of work.”
Management cares only that the work is done efficiently.
A secondary goal is that, through telecommuting, management
can minimize costs.
article will limit itself to telecommuting conducted within
the United States. State and local taxation laws were developed
before the technological revolution arrived. With telecommuting
setting in, the following are choices that states and municipalities
Tax the employee based on the physical location where
the employee lives, no matter where the work is conducted.
Tax the employee based on where the work is conducted,
no matter where the employee lives.
Prorate the income based on where the work is conducted.
For example, if an employee works 50 days of the year
from home and 150 days from the office, allocate 25% to
the home and 75% to the office.
tax credits so that an employee is not unduly subject
to double taxation on the same income by more than one
state or municipality.
Do not tax the employee on earned income at all.
complicate matters further, some states developed the “convenience
of the employer rule,” whereby a nonresident employee
may allocate income between two states (assuming the employer
is in a different state) only if it is for the employer’s
convenience. A question arises, however, between the words
“convenience” and “necessity” (John
Caher, “Taxing of Telecommuters To Go Before New York
State’s High Court,” New York Law Journal,
the controversial case of Huckaby v. New York State
Division of Tax Appeals, Thomas L. Huckaby’s
home was located in Tennessee and his employer was in Queens,
New York [Huckaby v. New York State Div. of Tax Appeals,
2005 WL 705977, 2005 NY Slip Op 02413, *17 (Ct App Mar 29,
the course of his work, 75% of his income was earned in
Tennessee and 25% was earned in New York. He prorated the
numbers accordingly and paid the appropriate tax to New
York and to Tennessee (Tennessee, however, taxes only unearned
income such as interest and dividends, not wages).
York did not agree with this. Because the telecommuting
was for Huckaby’s convenience, not the employer’s,
and the work Huckaby performed could have been performed
in New York, the court ruled that 100% of Huckaby’s
income was taxable in New York.
court stated: “While the convenience test might be
considered unfair and unsound as a matter of tax policy
and a discouragement to telecommuting, it would not upset
the Legislature’s and the Commissioner’s considered
judgment so long as the convenience test has been constitutionally
large corporations have left New York because of, among
other reasons, outdated tax laws like the one illustrated
by the Huckaby decision. The days of corporations
having to physically operate in large, urban areas are long
gone. This began with the manufacturing sector, and now
it is happening with many service businesses.
Laws and Outsourcing
Telecommuter Act of 2004 stated that a taxpayer should be
taxed on the state level only to the extent that the taxpayer
is “physically present in such State for such period
and such State may not impose nonresident income taxes on
such salary with respect to any period of time when such
nonresident individual is physically present in another
state.” This bill has not been passed, and it contains
some shortcomings as well.
tax laws do not suit contemporary business practice. Outsourcing
is increasing at a dramatic rate, so not only must the logistics
of multistate taxation within the United States be dealt
with, but multinational taxation must be dealt with as well.
Telecommuting greatly clouds the issue of comparative advantages
between states. The 21st century needs a state and local
income tax system that complements our technological society.
Rothenburg, CPA, is an associate professor of accounting
at Kingsborough Community College of the City University of
New York, Brooklyn, N.Y.