Taxing Remote Workers: “Convenience,” Conflict, And The Courts
When your commute to work takes place within the confines of your home, where should you pay income taxes? The answer is complicated. For remote workers, it could mean more work when filing their taxes. State and local budgets can pay a price, too.
Not all jobs can be done remotely. But for people who have the option, an estimated 35 percent are working from home all of the time. A McKinsey & Company survey estimates that there are 92 million people in the US who can, at times, skip their commute to other cities—or even states. When they do, they don’t need the same tax-funded public services provided to people on the ground in those jurisdictions.
But communities need people, and their tax dollars, to thrive. States and cities with income taxes can simplify the way remote work is taxed, maintain fiscal balance, and better support their communities, but state-by-state responses could lead to conflicting guidance. Absent a coordinated response from state lawmakers–or intervention by Congress–these conflicts will be settled in the courts.
The cases of Massachusetts (not heard) and New York (to be determined)
During the pandemic, Massachusetts allowed for the temporary collection of income taxes from out-of-state residents who worked from home for Massachusetts-based employers. New Hampshire sued, arguing that Massachusetts can’t tax people outside its borders. The US Supreme Court declined to hear the case.
In part, that’s because New Hampshire doesn’t levy an income tax, so it lost no revenue and sustained no harm. But 14 other states submitted briefs supporting New Hampshire’s argument. As my TPC colleague Richard Auxier explained: “As remote work becomes more common, these states do not want their residents sending tax dollars back to the state where their virtual office is located.”
Arkansas, Connecticut, Delaware, Nebraska, Pennsylvania, and New York are among the states that generally tax income earned by people who work for employers based in their states, irrespective of where the worker does the job.
New York’s situation is especially noteworthy. Before the pandemic, New York already had a commuter tax on the earnings of New Jersey and Connecticut residents who traveled to New York to work. New York has collected billions of dollars in income tax annually from several hundred thousand New Jersey and Connecticut residents. But during the pandemic, New York determined that the days a nonresident worked remotely counted as a day of work in New York. The only exception is if a remote work location is a bona fide employer office established for the “convenience of the employer”—something rather difficult to prove.
Unlike in Massachusetts, New York’s rule is still in effect today, and Edward Zelinsky, a Connecticut resident and a tax law professor at New York’s Yeshiva University, is challenging it. He argues that New York is violating federal due process and commerce clause language that prohibits extraterritorial taxation. His case is working its way through New York’s tax appeals process.
Meanwhile, just last month, New Jersey’s Democratic Governor Phil Murphy signed a bill that encourages its remote working residents to challenge their New York tax bills. If they dispute their bill and receive a tax refund from New York, New Jersey will give them a tax credit against their state tax liability. Murphy wants to “combat the unfair taxation and discriminatory treatment of New Jerseyans” and “help ensure that when workers pay taxes, the correct jurisdiction receives those tax dollars,” according to his statement.
The case of Cincinnati, Ohio (to be determined)
These disputes can also involve intra-state conflict in places where local governments are able to levy their own income tax. One such dispute is currently before the Ohio Supreme Court, which will decide whether Ohio cities can tax each other’s remote workers. Josh Schaad, a resident of Blue Ash, Ohio (a suburb of Cincinnati), has an office in Cincinnati and at one at home. Before the COVID-19 pandemic, he commuted to his Cincinnati office a few days a week. He paid Cincinnati’s 1.8 percent income tax for the days he worked in the city.
During the COVID-19 pandemic and Ohio’s stay-at-home order, Ohio did for its cities what Massachusetts did for itself with neighboring states. Ohio allowed employers to withhold municipal income tax irrespective of where their employees performed their work. Of 926 municipalities in Ohio, 649 levy an income tax. The idea was to allow local governments to maintain their municipal budgets.
Schaad paid Cincinnati income taxes as if he were still working in the Cincinnati office a few days a week, but he wants his money back. He filed for a refund and Cincinnati declined. Akin to Zelinsky, he argues that Ohio cannot allow a municipality to tax nonresidents for income earned outside that municipality.
The city of Lebanon, Ohio, (another Cincinnati suburb) has filed a brief supporting his case, arguing that cities like Cincinnati unfairly taxed individuals during the pandemic. Lebanon says it had to increase services for residents who were working remotely while seeing no increase in its own income tax collections. And Lebanon continued to offer a reduction 0.5 percent reduction credit to its residents who paid another municipal tax—like the 1.8 percent Cincinnati tax. Unlike New Hampshire, Lebanon lost revenue.
Where does all of this leave remote workers?
Congress could do something about all of this conflict. Three years ago, a Connecticut Democrat introduced the Multi-State Worker Tax Fairness Act to the House. It would limit the extent to which states can tax the income of nonresident remote workers. That could help states as they compete for businesses and workers, whether onsite or remote. But there has been no progress.
Some state governments—17 so far—cooperate with each other, setting up reciprocity agreements in which workers only pay taxes in the state where they live. But those agreements are subject to renewal and might not always survive an economic downturn when states need more tax revenue.
Maybe more remote workers with employers based in Ohio or New York will dispute their tax bills during the pandemic or beyond. That’s an understandable reaction, given the lack of coordination among governments as the nature of employment changes. Until governments work together, plenty more potential tax conflicts could arise, especially if the remote work trend is here to stay.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
