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Conference Speaker Discusses Tax Implications of Working from Home

S.J. Steinhardt
Published Date:
Dec 27, 2023


Mark S. Klein, chair of law firm Hodgson Russ LLP, led a discussion on the tax implications of a global workforce, including employer withholding and new local case law, at the Foundation for Accounting Education's New York and Tri-State Taxation Conference on Nov. 29. The session was titled “Taxation of the Mobile Workforce—An Employer’s Perspective.” 

“The world, as you probably know, is going remote,” he began, noting that nearly13 percent of the U.S. workforce is working full time from home, according to Forbes magazine. That number is expected to rise to 30 percent by 2025, he said, and currently 40 percent are in “some type of hybrid situation.”

Klein framed the discussion by asking, “What is the impact for the employer?”

The guiding issue of all of this, he said, is nexus. “Nexus means connection,” he said. “All you really need is this connection. … The law says that if you don’t have nexus with a state or a jurisdiction, they can’t tax you.”

While states used to look at property, payroll and receipts to establish nexus, now many of them look at receipts only, and they’re focusing on this nexus concept, he said. States have now adopted guidance from the Multistate Tax Commission (MTC), an intergovernmental state tax agency whose mission is to promote uniform and consistent tax policy and administration among the states. One such piece of guidance holds that a state has a right to tax a business if the business is employing someone in that state and the payroll exceeds $50,000.

"What if you have one telecommuter?" he asked, highlighting the 2012 New Jersey case of Telebright Corp v Director, Division of Taxation. The question in this case was whether an out-of-state (in this case, Maryland) corporation was considered to be doing business in New Jersey by virtue of having one employee working from home full-time in that state. The case went all the way to the New Jersey Supreme Court, which affirmed that the one employee created sufficient nexus to subject the company to the tax.

Klein drew clear distinctions between what creates nexus and what does not. He cited the hypothetical situation of someone who worked in New York, went home to New Jersey and made some calls or emails from home. Does this create nexus with New Jersey? No, he said, as incidental phone calls and the like while one was home were not a problem. But full-time employees who are based in their own homes in New Jersey “absolutely” create nexus.

“That's the issue we're getting with work from home,” he said, “These aren't incidental calls and incidental discussions that people are having. This is where they're working two, three, five days a week, and that creates nexus.” Different states have different rules that determine what triggers telecommuting nexus, he said.

Klein then turned to PL 86-272, a federal law that aimed to encourage companies to engage in businesses across the country without 50 different states imposing 50 different taxes. “The law prevents states from imposing income taxes on businesses whose only activities in the state are restricted to the “mere solicitation” of sales of tangible personal property. The law only applies to income taxes [and] sales of tangible personal property” he said.

But much has changed since the law was passed in 1959. In August 2021, the MTC issued new guidance on rules concerning mere solicitation, limiting the law’s protections in an array of circumstances.

“There’s this thing called the web,” Klein said, “[so] maybe 86-272 won't apply now. We don't want somebody chatting with customers online or clicking an icon on the business's website to get more information [because that would trigger nexus]. According to the MTC, the only thing you can do on the web [without triggering nexus] is just have an ad. But if somebody can click on the ad and do something with it, that's a problem.”

Subsequently, New York adopted the MTC’s recommendations, issuing guidelines in April 2002 that would reduce many of the law’s protections. This is important, Klein said, because “where New York goes, most states will follow.”

These rules trouble practitioners he said, using the example of putting a cookie on a person’s computer that holds his personal information and determines preferences.

“But that's triggering nexus, and what troubles a lot of practitioners is that we think this goes way beyond what the protections of 86-272 were supposed to provide. In the old days, I could have an employee sitting in a state with a telephone, talking to customers, interacting with them, answering questions. That wasn't a problem. But now, G-d forbid, you do it through the internet and they say that is beyond 86-272, so that’s an issue.

“And by the way, these rules apply to employees [who are] W-2 people,” he continued. “This does not apply to an independent contractor. If you've got somebody who's an independent contractor, that does not necessarily give you nexus. These rules apply to W-2 folks.”

Klein then turned to the convenience of the employer test, which he called “a real problem for employers.”

He briefly gave a summation of the rule, detailing that it came about years ago, when Connecticut residents commuting to work in New York chose to work one day a week at home to reduce their New York state tax liabilities. New York then adopted what is formally known as New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others. It states that for tax years beginning in 2006, a day of work spent at a home office is treated as a day worked outside of New York "if the taxpayer’s home office is a bona fide employer office." To be considered "bona fide," an employer office must satisfy either (1) a primary factor or (2) at least four secondary and three other factors.”

“That surprises a lot of people, and a number of states actually, not that many have adopted this convenience rule," said Klein.

He then pointed out that the rule still applied when then-Gov. Andrew Cuomo issued an executive order that prevented companies from having people in their offices at the beginning of the COVID-19 pandemic. Despite that order, work-from-home days for out-of-state residents were still treated as days worked in the state in which the convenience rule applied.

Klein briefly cited a number of cases in which out-of-state employees could not access their New York offices but still were considered as having worked in the state. One involves Cardozo Law Professor Edward Zelinsky, who unsuccessfully sued the state in 2003 for taxing the entirety of his income despite his working some of the time at his home in Connecticut.

Zelinsky, who worked at home entirely for most of 2020 due to the governor’s executive order, presented his case again before an administrative law judge of the Division of Tax Appeals in April 2023, arguing that he should not be subjected to the tax, as the order prevented him from working in New York.

The case is expected to be decided in February 2024. In the meantime, “keep your eyes open,” said Klein, “because I can't imagine how the convenience rule applies when it's illegal for you to go to the office.”

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