High court rules telecommuter living out of state owes full New York taxes

Interesting ruling

http://www.newsday.com/news/local/wire/newyork/ny-bc-ny--court-telecommuti0329mar29,0,5116603.story?coll=ny-region-apnewyork

 

Very interesting indeed. We have an employee who works with our office in Atlanta but telecommutes from Boston. The main company is in Boston but the real corporate headquarters is in New York. She's on the same payroll as all the other Atlanta Georgia employees. I'm very confused as to what this might mean for her!

 

Telecommuting is just a new twist on an old issue. Where a large city (let's say Chicago, for example) is near a state line (the Indiana/Illinois line, in that case), it is very common for employees to live across said state line (in Gary or Hammond in Indiana, for example) and drive to work across said state line every day into Chicago or one of its suburbs. I did it, myself, for twenty-plus years. Same thing happens in Philadelphia, PA and Wilmington, Delaware, for example; or either of the Kansas Cities... just to name a few. There are many others. In those cases, there is usually agreement between the states that wherever the employee lives (resides) ends-up being the state where said employee pays his state income taxes. And the courts have, traditionally, upheld such arrangements. So this ruling is, indeed, something of a departure from that trend.

As with relatively recent IRS rules changes which now require employers to withhold taxes even on what it pays to contract employees as long as said contract employee is sitting in the employers office, and using his stuff, and is working at the direction of the head of whatever department for he's working, how this all gets worked-out may come down to answering questions like, "Where is the employee's primary office," or "When the money was earned, in which state was the employee physically located," etc. Who knows.

Actually, I think there's some logic in the way the telecommuter in the news story was trying to handle it. He reasoned that when he's physically in New York, then he should pay that state's income taxes (which was probably incorrect and, in fact, if he had never tried to do that in the first place, none of this might ever have happened... but I digress); and when he's physically in his home state, then he would pay that state's income taxes (and, in fact, he could be in trouble with his home state for paying part of what that state no doubt reasons should have been it's fair share of his state taxes to New York). Paying based on where the employee was physically located when the money was earned might be a good way to resolve it. But, if so, then it opens up a whole new can of worms for, let's say, traveling salespeople, just to name one class.

It's kind of a mess, when you stop and think about it. It should probably work its way to the U.S. Supreme Court fairly quickly though. I mean, it's clearly an interstate matter, and the federal courts are best suited to settle such things. I'm interested in seeing how it all turns out.

 

The general rule (and I've been in the payroll business for about 11 years) is that an employee pays income tax where they live except in the case where states have worked out reciprocity agreements. I believe New York has a reciprocity agreement with New Jersey; however, telecommuting throws a monkey wrench into their opportunity to tax income. My question is, if they can tax any income earned from an employer based in New York, why do they need reciprocity agreements?

Personally, I hope either the courts or the legislature make a big mess of this. As a developer of payroll and human resource management software, things like this make our product and our commitment to compliance indispensable.

 

FWIW, the State of New York used to tax the retirement pay of people who'd worked in New York regardless of where they currently lived. That was struck down in a court case, I believe.