Many employees who were initially forced to work remotely at home by the coronavirus have now made long journeys across state lines – New York-New Jersey, Massachusetts-New Hampshire, New Jersey-Pennsylvania as prime examples. But have they also given up responsibility for paying state wage taxes to employers in countries they do not live in?
Company policies focusing on working from home and working from anywhere have evolved rapidly during the coronavirus pandemic. Social media company Reddit recently said it would not only allow its workers to live anywhere, it would too Pay them as if they lived in one of the most expensive cities in the US regardless of a particular location.
“Internationally, we had a salary range per country and now the US will follow that approach,” the company said in a blog post.
That means some high-paid employees could be directed to states with no income tax, but state and local tax guidelines for employee income are inconsistent across the country. Tax treatment of non-resident workers may occur primarily in states such as New York and Massachusetts, where the income of residents of neighboring states is significant. Decades of government income Tax policy based on physical presence in a workplace can defy logic and the law in a world where remote working is becoming permanent and common.
It’s a question that could end up in the Supreme Court as a state-to-state challenge – New Hampshire is hoping the Court will take it on his case against Massachusettswho put in place a temporary measure to keep the wages of workers living in New Hampshire taxed. New York, meanwhile, is considered to be one of the most aggressive states when it comes to taxing wages for workers from neighboring states, and in late October New Jersey lawmakers unveiled a bill Formally consider how remote working might require changes in New Jersey tax policy and oppose attempts by New York State to continue to tax its residents.
According to information from the US Census Bureau’s US Community Survey for 2019, New Hampshire and New Jersey are among the states where nearly 15% of their commuters travel to work in another state, typically New York (New York City), Massachusetts (Boston) and Pennsylvania (Philadelphia). ONE Bloomberg analysis found that up to a fifth of New York City income tax comes from non-resident workers, up to $ 700 million a month.
Not only the courts are facing new legal questions. Tough decisions are being made for states in need of new revenue streams and workers and businesses rethinking where to settle because of the coronavirus. According to one estimate, at least 14 million workers in the US could be on the move in the coming years.
Can a virtual employee’s income be taxed by a state where the employer is based but which never gets a foothold?
Cars that drive over the George Washington Bridge, which connects New York City and New Jersey and has been an important part of many commuter lives for decades. According to the 2019 Census Bureau, nearly 15% of New Jersey commuters work in other states.
fotog | Getty Images
“I think we will see a lot more remote workers even after the pandemic, and if the work changes … it means states will have to rethink how they collect or collect income taxes, especially for places that were business hubs” he said to Kim Rueben, Sol Price Fellow and director of the state and local finance initiative at the Urban-Brookings Tax Policy Center.
Most notable is the New Hampshire Attorney General’s lawsuit filed in the U.S. Supreme Court this summer to prevent the state from collecting taxes on New Hampshire residents who now work from home.
The Massachusetts Rule is scheduled to remain in effect until December 31, or 90 days after the state of emergency was lifted in Massachusetts. This means that New Hampshire, which does not levy state income tax on workers, could use the lawsuit as a lever to pressure its neighbor away from entrenching the temporary measure. But before Massachusetts implemented its rule, six other states were already taxing workers where their offices were, even if they weren’t working in the state, and the problems with state taxation of remote workers won’t go away, especially as the states have been badly hit Covid-19 need to receive sources of income.
New Hampshire governor Chris Sununu recently told CNBC that the revenue problems in Massachusetts are his own, not the burden of New Hampshire residents.
“I’m not punishing them,” said Sununu, a Republican, on CNBC’s “Squawk Box”.
“Our employees work in New Hampshire, and when Massachusetts has revenue problems it should cut taxes, remove regulatory burdens, and be a very good place for businesses and families to go to instead of flocking to downtown. So must they advance their own solutions. “
“There may have to be some pretty significant changes in the way states finance themselves. For example, when Massachusetts says, ‘Hey, we want to fund our state government, 15% of which is based on people commuting to our state.’ “You need to rethink your tax regime,” said Dan Kidney, director of Wipfli’s state and local tax practice (SALT).
Jared Walczak, vice president of government projects at the Center for State Tax Policies of the Libertarian Tax Foundation, says the seven states have the so-called “convenience of employer” rules in place likely targets in this battle, including New York. The idea is that workers assigned to an office by a resident employer in a particular state, subject to the employer’s “convenience”, are subject to income tax in that state.
“Part of the logic encumbered by convenience rules is that taxpayers need substantial association with the taxable state, need substantial contact with the state, and simply because an employer is there, usually not as is considered sufficient to meet this threshold. ” “Said Walczak.” The rules are inconsistent. … which is why they are ripe for a constitutional challenge. … There is no guarantee that they will accept this, but it is a very important question as we move more towards remote working. States like New York and Massachusetts expand understanding. “
The seven states that have so called Convenience of employers laws, including the Massachusetts Temporary Measure, are New York, Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania. There is one rule in Connecticut that is similar but not exactly the same and that only targets New York.
Many states have reciprocal agreements with neighboring states whereby employees who pay income tax to both a working state and a state of residence receive a credit for double taxation from their home state. However, the convenience rules allow a state to continue to levy these taxes even if the workers assigned to an office no longer commute to that office. The states of residence also no longer have to grant the loan, although New Jersey has decided to credit its residents for the time being if they are taxed by New York.
“If you live and work in New Hampshire, we don’t think there is any reason to pay taxes to Massachusetts,” Walczak said.
While taxpayers have challenged New York law in the past because it wasn’t a state-to-state battle, it failed to reach the Supreme Court. “This would be the first time these rules have been challenged in federal court,” Walczak said, adding that tax experts who believe tax policy is wrong but New York courts in the past have deferred the state. “If New Hampshire prevailed, it would jeopardize all convenience rules,” he added.
However, if the court were to rule with Massachusetts, chances are other states looking for more revenue might consider adding convenience rules.
There will be more competition between states as they try to figure out how to thrive as business and population centers in the post-pandemic period. They can get even more aggressive with changes in tax policy on remote workers, but the risk for states like New York and the Manhattan office center is too aggressive in their policies in the face of a nationwide shift to remote working and less reliance on permanent corporate office space.
“States with large cities with drains are trying to cling to revenue. Ultimately, this is short-sighted and can lead to relocation,” said the Tax Foundation analyst.
Other tax experts say too much emphasis is placed on taxes as a driving force behind location decisions, and there isn’t enough evidence to suggest that taxes are the deciding factor.
There are compromises to be considered. If the workers of a New York company are taxed even if they move to Florida, the employer may not get the benefits of satisfied workers or the workers may ask for higher salaries and the employer may not stay in New York.
It’s a logical discussion, but the notion that companies vote based on tax climate and put states high on the list based on tax climate doesn’t hold up, said Darien Shanske, professor at the UC Davis School of Law. “I wouldn’t overdo it.”
Walczak says the minor problem is the bigger one. “Basically, these are not income taxes. If we lose that definition, we have lost all sense of income taxes. Don’t set income for people who have no income in your state.”
A recent proposal proposed by the Senate Republicans as part of pandemic relief was the Remote and Mobile Workers Relief Act, which essentially sets a threshold of 30 days of physical presence for the worker in a state in order to trigger a tax payment to that state. for 2020 this threshold will be moved to 90 days.
Taxes are typically paid by out-of-state commuters on the basis that they have received some benefits from the working state, such as: B. Use of roads and government services. However, some tax experts believe that this definition should change in the future, away from focusing on physical presence.
Shanske said when the world changes Tax law can evolve to. He said there is a solid constitutional question on challenges that New Hampshire hopes the Supreme Court will hear, but he argues that there is an argument that states have the right to tax teleworkers.
“Not being in the office every day is a positive thing for work-life balance and gender, but it’s not clear why New York shouldn’t be eligible,” he said. “That’s too strong. The main problem is that the New York Statute is from a different era. Just a few years ago, people would not have imagined this amount of teleworking and being completely separated from an office.
He believes the New York approach is less flawed or unconstitutional than it is simply out of date. “Why use physical presence when the whole problem can work virtually?”
Leveraging physical presence in a workplace, whether because of employer rules or suggestions like the youngest of the Senate Republicans, is not the way to go, Shanske recently wrote in a blog post in the Columbia Journal or the Tax Law.
It’s a legal argument that set a precedent for the Supreme Court case back in 2018, namely the “Wayfair” case, These states may require out of state sellers to collect and remit sales tax on sales to consumers in the state, even if the seller does not have a physical presence in the consumer’s state.
“Physical presence is an increasingly weak agent when a jurisdiction is providing sufficient services to warrant collecting a tax.”
As an example, he cited a partner in a large law firm that works in New York City but lives in New Jersey and, even if she only comes to the office 29 days a year, has a network of connections that the law firm can access because of the agglomeration of expertise and capital in New York. Only a law firm with a significant New York presence, known as the metropolitan economy, can pay the attorney millions of dollars annually.
The world of work and the US economy must encourage agglomerations of talent as well as mobility.
Shanske suggests that instead of thinking of taxpayers physically moving between states, tax authorities should remember that they are moving “virtually” between states.
“If we really are moving to a more mobile / remote workforce, I think states should consider taxing workers whose presence is virtual using a apportionment approach. That way, we end up taxing interstate company income and so on.” It’s not clear why we shouldn’t do the same for workers, “he wrote.