telecommuting: don’t allow state tax issues to disrupt...

Telecommuting: Don’t Allow State TaxIssues to Disrupt the Connection

by Hollis L. Hyans and Amy F. Nogid

Hollis L. Hyans Amy F. Nogid

Telecommuting has grown exponentially in thelast few years. The number of employees workingremotely at least one day per week rose 74 percentfrom 2005 to 2008,1 with 20 million to 30 milliondoing so in 2008. Recently the U.S. Senate unani-mously passed the 2010 Telework Enhancement Actto expand telecommuting opportunities for federalemployees.2 A white paper issued collaboratively bythe U.S. General Services Administration and theTelework Exchange, a public-private partnership,set out some of the benefits of telecommuting, in-cluding:

• reduction of carbon emissions because of de-creased vehicle use;

• increase of employee morale and decrease ofstress;

• accommodation of employees with disabilitiesand those with family care issues;

• reduction of office space needs and operatingcosts; and

• continuityofoperationsduringemergencysitua-tions (for example, terrorist attack, pandemicinfluenza, and natural disaster).3

State and local government agencies are alsorecognizing the need for and are implementing tele-commuting programs.4 By one estimate, if 33 millionAmericans were to telecommute, oil imports woulddecrease by between 24 percent and 48 percent,greenhouse gases would be reduced by up to 67million metric tons per year, and as much as 7.5trillion fewer gallons of oil would be consumed peryear.5

Despite the burgeoning telecommuting workforcein government and private industry, and the clearimperative supporting the institution of broad-basedtelework programs, state and local income tax lawsand withholding tax provisions remain muddled andinconsistent and, when employers and employeesare not careful, risk placing telecommuters andtheir employers at a considerable disadvantage froma state and local tax perspective.

NexusNo good deed goes unpunished. An employer that

allows its employees to telecommute and performwork in a state in which it does not already havenexus — that is, does not have a sufficient connec-tion with that state to allow the state to assert taxjurisdiction under the U.S. Constitution — couldfind itself subject to income tax and responsible forthe collection of sales tax (to name just a couple ofthe potential tax obligations a state could assert) inthe state from which the employee telecommutes.

1Undress for Success and the Telework Research Net-work, Telecommuting Statistics, available at http://undress4success.com/research/telecommuting-statistics/ (last visitedJune 9, 2010).

2S. 707, 111th Cong. (2010).

3U.S. General Services Administration and the TeleworkExchange, ‘‘The Benefits of Telework’’ (September 2008),available at http://www.teleworkexchange.com/pdfs/The-Benefits-of-Telework.pdf (last visited June 9, 2010).

4Virginia established an Office of Telework Promotion andBroadband Assistance in 2006, and Georgia established WorkAway program in 2003 and enacted a telework tax credit,Georgia Code Annotated section 48-7-29.11, which becameeffective on July 1, 2007.

5Id. at 3-4.

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Recently the New Jersey Tax Court ruled that asoftware developer that ‘‘regularly and consistentlypermits’’ an employee to work from her home in NewJersey is doing business in the state and is subject toNew Jersey’s corporation business tax.6 The courtconcluded that a corporation is ‘‘‘doing business’ atthe place where its employees are expected to reportfor work, where they are regularly receiving andcarrying out their assignments, where those em-ployees are supervised, where they begin and endtheir work day, and where they deliver to theiremployer and customers a finished work product.’’7The court also said that because the employee useda laptop provided by the employer, the company alsoemployed property in the state, which further sup-ported the conclusion that the company was doingbusiness in, and was therefore taxable in, NewJersey. The court rejected the company’s challengeunder the due process clause of the U.S. Constitu-tion, holding that the company had ‘‘fair warning’’that it could be subject to New Jersey law because ofits employment relationship with an individualworking for it in New Jersey. Also rejected by thecourt was the company’s claim that the daily pres-ence of the employee in the state failed to satisfy the‘‘substantial nexus’’ requirement of the commerceclause.

As the New Jersey Tax Court cautioned:

‘‘[I]t is for the taxpayer to make its businessdecisions in light of tax statutes, rather thanthe other way around’’ . . . That [the company]may not have realized the State tax conse-quences of its business decisions regarding theemployment of [the telecommuting employee]does not insulate the company from corporatetax liability.8

Unfortunately, once a corporate toe has beendipped in state waters, it’s not just the toe that getstaxed. States have aggressively pursued tax policiesintended to grab the maximum amount of tax rev-enue from those with the least connection to thestate, thereby exporting tax burdens. Employersshould therefore consider the implications of tele-commuting before approving telecommuting re-quests of their employees.

Personal Tax Liability and Tax WithholdingAn employee’s decision to telecommute can also

have significant, unintended state income tax impli-cations for the employee. Individuals are generallysubject to tax on all of their income by their state of

residence, regardless of where that income isearned. Also, most states that impose a personalincome tax also provide that even a single visit tothe state by a nonresident is sufficient to subjectthat employee to tax by the nonresident state.9Although most states provide a credit for personalincome taxes paid to another state, that creditmechanism has been found not to be required underthe U.S. Constitution,10 leaving the potential fordouble taxation a real and serious problem.

Employers should consider theimplications of telecommutingbefore approving telecommutingrequests of their employees.

A labyrinth of state rules — that may or may notbe tied to the employee’s personal income taxabilitythreshold — exists regarding employers’ withhold-ing obligations. For example, in at least a couple ofstates, even though nonresidents are subject toincome tax based on a single day’s presence, em-ployers are not required to withhold unless anemployee is present for at least 14 days.11 In manystates, the withholding obligation starts the firstday the employee travels to the state,12 while inother states the employee’s earnings attributable to

6Telebright Corp. v. Director, Div. of Taxation, No. 011066-2008, 2010 N.J. Tax LEXIS 4 (N.J.T.C. Mar. 24, 2010). (Forthe decision, see Doc 2010-6907 or 2010 STT 60-14.)

7Id. at 14.8Id. at 21-22 (citations and quotations omitted).

9Some states exempt some activities, such as attendanceat trade shows or seminars, from being activities that createnexus (and potential income tax liability) for an employee.

10Tamagni v. Tax App. Trib., 695 N.E.2d 1125 (N.Y.), cert.denied, 525 U.S. 931 (1998).

11E.g., Connecticut and New York.12A map provided by the Council On State Taxation to the

Multistate Tax Commission with its Mobile WorkforceBriefing Book (Sept. 9, 2009) reflects the following states asrequiring withholding from the first day that an employeetravels to the state: Alabama, Arkansas, Colorado, Connecti-cut, Delaware, Illinois, Indiana, Iowa, Kansas, Kentucky,Louisiana, Maryland, Massachusetts, Michigan, Minnesota,Mississippi, Missouri, Montana, Nebraska, North Carolina,North Dakota, Ohio, Pennsylvania, Rhode Island, andVermont. Those states fail to recognize that a single-day visitto a state is de minimis and should be an insufficient basis tosupport a nexus determination. See, e.g., Arizona Dep’t ofRevenue v. Care Computer Sys., Inc., 4 P.3d 469 (Ariz. Ct.App. 2000) (seven visits of out-of-state personnel within aseven-year period to solicit business and follow up onbusiness opportunities was deemed sufficient to establishnexus); Orvis Co. v. Tax App. Trib., 654 N.E.2d 954 (N.Y.),cert. denied sub. nom. Vermont Info. Processing, Inc. v.Comm’r, 516 U.S. 989 (1995). Twelve visits over a three-yearperiod were found to be sufficient to establish substantialnexus. As the U.S. Supreme Court stated in WisconsinDepartment of Revenue v. William Wrigley, Jr., Co., 505 U.S.214, 231 (1992) (citations omitted), ‘‘the venerable maxim deminimis non curat lex (‘the law cares not for trifles’), is partof the established background of legal principles againstwhich all enactments are adopted, and which all enactments(absent contrary indication) are deemed to accept.’’

A View From the Front Line

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the state must exceed a specific wage threshold, andyet other states use an alternative threshold usingnumber of days or dollar amounts.13 Even when aday threshold is adopted, the determination of whatconstitutes a day is not always clear: Does travelingthrough a state count? Does a portion of the daycount? Implementing a tracking system for employ-ees is essential, but even with such a system in placedifficulties in administration exist. Some stateshave reciprocal agreements with other states thatallow an employer to withhold income taxes in theemployee’s state of residence regardless of where theemployee performs those services, which can helpreduce an employer’s burden.

For employees who are telecommuting and per-forming services in multiple states, ensuring thatthe employer withholds and remits taxes to theappropriate jurisdictions can also be a challenge.Generally, an employer is required to withhold andremit taxes only in the jurisdictions in which it doesbusiness, but its employees may be telecommutingfrom and providing services in jurisdictions in whichthe employer maintains that it is not doing business(despite the potential nexus issues discussed above).Some states authorize an employer to deduct andremit withholding taxes to the state of a nonresidentemployee if the employee provides written authori-zation.14 However, if a telecommuting employee hasincome tax obligations to multiple jurisdictions, notall states provide an easy mechanism for a nonresi-dent to direct the employer to limit withholdingbased on the portion of services rendered in state.15

Further complicating personal income tax andwithholding are issues such as New York’s ‘‘con-venience of the employer’’ rule.16 New York’s ruleprovides that days spent by a New York state non-resident employed to provide services in New York,but who works at home outside the state, are to be

sourced to the New York office, unless that work wasperformed outside the New York office for the neces-sity of the employer rather than the employee’sconvenience.17 New York courts have consistentlyrejected challenges to the convenience of the em-ployer rule.18 The state’s basis for the convenience ofthe employer rule is that in the absence of such arule, in-state and out-of-state employees would notbe on a level playing field; residents would not beable to exclude income attributable to the work theyperform in their homes while nonresidents would beable to do so.

Recently, an administrative law judge rejectedNew York state’s assertion of tax against a softwareconsultant and programmer and recognized thateven the convenience of the employer rule has itslimits.19 The individual was a New Jersey residentwho worked exclusively in and reported all of hiswages to New Jersey. His employer was an Illinois-based company with a one-room office in New YorkCity. The individual did not, however, ever workfrom the New York City office, and on those facts theALJ held that no New York tax was due. Althoughthe proper result was reached in this case, theassertion of a liability under this factual scenario is

13The COST map lists 16 states as having thresholds otherthan one day of travel into the state. Nine states are listed onthe COST map as having no general personal income tax(Alaska, Florida, Nevada, New Hampshire, South Dakota,Tennessee, Texas, Washington, and Wyoming).

14See, e.g., Ariz. Rev. Stat. section 43-408; 18-125-803Maine Code R. section 3; N.J. Admin. Code section 12:55-2.5.The voluntary collection and remittance of withholding toanother jurisdiction may not ‘‘eliminate, reduce or replace’’the employer’s obligations to the state in which the employeris doing business. See, e.g., N.J. Admin. Code section 12:55-2.5(g).

15Cf. New York IT-2104.1, which allows nonresidents toallocate withholding tax based on the estimate of the percent-age of services that will be performed, with NJ-W4, whichdoes not address decreased withholding for nonresidents whoonly perform a portion of their services in New Jersey. Seealso 20 N.Y. Comp. Code R. and Regs. section 132.18(a).

16Other states that have analogous provisions includeNebraska (316 Neb. Admin. Code 22-003.01C) and Pennsyl-vania (61 Pa. Code section 109.8).

17See ‘‘New York Treatment of Nonresidents and Part-YearResidents Application of the Convenience of Employer Test toTelecommuters and Others,’’ TSB-M-06(5)I (N.Y.S. Dep’t ofTaxation and Fin., May 15, 2006). The report sets out thedepartment’s policy on application of the convenience of theemployer test, and specifies the factors to be considered indetermining whether an employee’s home office will be con-sidered a ‘‘bona fide employer office.’’ The primary factor iswhether the home office contains or is near specializedfacilities. Secondary factors include whether the home officeis a condition of employment; the employer has a bona fidebusiness purpose for the employee’s home office location; theemployee performs some of the core duties of his or heremployment at the home office; the employee meets or dealswith clients, patients, or customers on a regular and continu-ous basis at the home office; the employer does not provide theemployee with designated office space or other regular workaccommodations at one of its regular places of business; andthe employer reimburses expenses for the home office.

18See, e.g., Huckaby v. New York State Div. of Tax App., 829N.E.2d 276 (N.Y.), cert. denied, 546 U.S. 976 (2005) (anindividual working for a New York-based employer from hishome in Tennessee had his entire income sourced to New Yorkeven though he spent only 25 percent of his time in NewYork); Zelinsky v. Tax App. Trib., 801 N.E.2d 840 (N.Y. 2003),cert. denied, 541 U.S. 1009 (2004) (a New York University lawprofessor who worked from his home in Connecticut andtaught in New York City a few days a week was held not to beworking from home for the convenience of the employer, andit was held that taxing him on 100 percent of his NYU salarydid not violate the commerce clause). (For the decision inHuckaby, see Doc 2005-6487 or 2005 STT 62-21; for thedecision in Zelinsky, see Doc 2003-25309 or 2003 STT 228-10.)

19In re Kumar, DTA No. 822747 (N.Y.S. Div. of Tax App.,Admin. Law Div. May 6, 2010). (For the decision, see Doc2010-10791 or 2010 STT 97-20.)



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a potent reminder that state tax issues can ariseeven when an employee has only the most tenuousconnections to a state.

The welter of rules, exceptions to rules, andnuances of rules can place a significant withholdingcompliance burden on companies. Telecommutingemployees are at risk for tax assertions by thejurisdictions to which they have traveled or in whichthey have performed services. In the current eco-nomic environment, the quest for tax dollars (par-ticularly from nonvoters) has increased and states’enforcement of nexus and withholding rules haslikewise increased.

Employers will also have to determine the juris-diction of employment for telecommuting employeesfor unemployment insurance purposes. Under thedefinition of employment adopted by most states,employment by a single employer of an employeeperforming services in multiple states is not to befragmented, but should be allocated to the statewhere the employee is most likely to become unem-ployed and seek work. States apply the followingsuccessive tests to determine the state of coverage:

• localization of employee’s services;• employee’s base of operations;• place of employer’s direction and control of

employee; and• residence.Under those statutes, split coverage will be al-

lowed only if none of those tests results in theservices being attributed to a single state.20

New York’s highest court applied that definitionto an employee telecommuting from Florida whoperformed services for a New York-based corpora-tion.21 The court held that the telecommuter waslocated in Florida, where she was physicallypresent, and that therefore Florida, not New York,was responsible for the payment of unemploymentinsurance benefits. However, when a telecommuterperforms services in multiple jurisdictions and is notlocalized to a single jurisdiction, it is unclear howthe uniform rule will be applied by state labordepartments and courts.

Federal InterventionIn response to increased audit activity over the

last few years, business groups have proposed fed-eral legislation to prohibit states’ use of the conven-ience of the employer rule and to provide a uniformthreshold before employers would be required towithhold taxes.

In August 2004 the Telecommuter Tax FairnessAct22 was first proposed. It would bar the conven-ience of the employer rule and require that anemployee be physically present in the state as aprecondition to imposition of tax on that worker. Thelegislation was most recently reintroduced in May2009.23

The Mobile Workforce State Income Tax Fairnessand Simplification Act was first introduced in 200624

and reintroduced most recently in 2009. That legis-lation would address the taxation of nonresidentemployees (excluding professional athletes, profes-sional entertainers, and some public figures) andwould set a threshold of days below which a statecould not subject the nonresident to state incometax. Although the initial bills had proposed a 60-daythreshold, because of state clamor a compromise wasreached between employers and states, and in themost recent iteration of the bill, a 30-day thresholdwas proposed.25

The Multistate Tax Commission has proposed amobile workforce withholding and individual incometax model statute that would decrease the thresholdto 20 days. The MTC’s model statute provides that anonresident’s income from work performed in thestate of nonresidence would be exempt from with-holding if the nonresident:

• has no income derived from the nonresidentstate;

• worked fewer than 20 days in that state (daysin transit would be exempt from the day count);and

• resides in a state that has a reciprocal exemp-tion or does not impose a personal income tax.

The MTC’s model statute takes a broader viewthan most states do of the types of individualsexcluded from the withholding protection: profes-sional athletes, persons of prominence who performservices on a per-event basis, professional enter-tainers, construction laborers, and key employees.Qualifying employees would not have a filing re-quirement in the state of nonresidence and em-ployers would not have a withholding requirementregarding qualifying employees. However, the modelact does not explicitly address nexus issues. At leastone state, Montana, has criticized the MTC’s modelstatute and the ‘‘working presence test’’ as creatingcomplexity in states that have an income threshold

20New York State Department of Labor, ‘‘DeterminingJurisdiction of Employment When Services Are Performed ina Number of States’’ (undated), available at http://www.labor.state.ny.us/ui/pdfs/ia1163.pdf; N.Y. Labor Law section511.

21In re Allen, 794 N.E.2d 18 (N.Y. 2003).

22H.R. 1360; S. 785, 109th Cong. (2005).23H.R. 2600, 111th Cong. (2009).24H.R. 6167, 109th Cong. (2006); H.R. 3359, 110th Cong.

(2007); H.R. 2110, 111th Cong. (2009).25H.R. 2110, 111th Cong. (2009).


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for taxability, even claiming that nonresidents work-ing fewer than 20 days could receive ‘‘special, favor-able tax treatment’’ because a nonresident high-income earner would be excused from filing returnswhile a resident with lower income would have tofile.26

Although states take umbrage at the potentialincursion on their sovereign immunity by Congress,

the patchwork of disparate rules and the consider-able compliance burdens decrease the competitive-ness of companies in the worldwide marketplace andwarrant federal intervention under the commerceand foreign commerce clauses to ensure that inter-state and foreign commerce is not unduly impededby a myriad of state and local rules. With theexplosive expansion of technology facilitating tele-commuting, and the environmental, societal, andsecurity concerns addressed by telecommuting, con-gressional action is sorely needed. In the meantime,employers and employees alike must consider thestate tax implications of telecommuting arrange-ments and plan ahead to avoid unexpected asser-tions of nexus and withholding duties for the em-ployer and personal income tax issues for theemployee. ✰

26Montana appears to minimize the fundamental differ-ence between residents and nonresidents (who are taxable onall of their income regardless of where it is earned, subject toa credit if offered by the state). Clearly, greater governmentalresources are expended to maintain the infrastructure andprovide governmental services for individuals who are in thestate 365 days a year than for those who are in the state forless than 20 days. In its comments to the MTC model act,Montana also criticized the MTC’s adoption of a physicalpresence test, which it views as inconsistent with the eco-nomic nexus standard long supported by the MTC:

If the Commission were to endorse a physical presencetest for individual income taxes, it has the potential forundermining the credibility of the Commission withregard to its historic opposition to federal legislationimposing a physical presence test on states for theimposition of their business activity tax. The commis-sion should be consistently supporting economic mea-sures, instead of physical presence measures, withregard to the imposition of different forms of incometaxation.E-mail from Dan Bucks, director of revenue, state of Mon-

tana, to Shirley Sicilian, MTC hearing officer (May 10, 2010)(available at http://services.taxanalysts.com/taxbase/eps_pdf2010.nsf/DocNoLookup/10431/$FILE/2010-10431-1.pdf). Theeconomic nexus test fails to give appropriate consideration tothe fourth prong of Complete Auto Transit, Inc. v. Brady, 430U.S. 274 (1977), which requires that the tax imposed be fairlyrelated to the benefits provided by the state to the person thestate subjects to tax and be reasonably related to that person’spresence or activities in the state.

Hollis L. Hyans and Amy F. Nogid are with Morrison &Foerster LLP in New York City. Hyans can be reached [email protected] and Nogid can be reached [email protected]. The authors would like to thank MollieB. Gabrys for her valuable assistance with this article.Portions of this article were included in ‘‘How to SaveGas . . . and Prevent Heartburn: The Legal Issues Sur-rounding Telecommuting,’’ published in Morrison & Foer-ster LLP’s Employment Law Commentary (June 2010),which Hyans and Nogid coauthored with Edward Froelich,Kalinda Howard, and Janie Schulman.

© Copyright 2010 Morrison & Foerster LLP. The viewsexpressed in this article are those of the authors only, areintended to be general in nature, and are not attributable toMorrison & Foerster LLP or any of its clients. Theinformation provided herein may not be applicable in allsituations and should not be acted on without specific legaladvice based on particular situations.



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