Telecommuting and Its Effect on State Income Taxes

By Eric Rothenburg

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MARCH 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.


The 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).

Whether 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.”


Before 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.

This 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 might have:

  • 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.
  • Develop 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.

To 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, January 2005).


In 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, 2005)].

In 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).

New 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.

The 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 applied.”

Many 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.

Tax Laws and Outsourcing

The 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.

Antiquated 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.

Eric Rothenburg, CPA, is an associate professor of accounting at Kingsborough Community College of the City University of New York, Brooklyn, N.Y.




















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