The technological progress of the 21st century can wreak havoc on the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rules and regulations of the 20th century. A good example of this tension can be seen in the issue of telecommuting. If a person works from home for a company located in another state, which state gets to tax the worker’s income? Senator Christopher Dodd (D-CT) and Representative Christopher Shays (R-CT) will shortly introduce federal legislation to help clear up this question.
The legislation is intended to reverse two recent decisions by New York courts. The latest, called Huckaby v. New York, concerned a worker (Huckaby) who was employed by a New York based company, but did most (around 75 percent) of his work from his home in Tennessee. He was physically present in New York for only 25 percent of his hours worked. On his New York nonresident tax return, he apportioned only 25 percent of his income to New York state.
New York tax officials responded by sending him a tax assessment based on 100 percent of his income. Their rationale? Since Huckaby was telecommutting based on convenience, and not necessity, New York law requires him to pay tax on all of his income paid by his New York employer.
The problem with this ‘convience of the employer’ rule is that it leads to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. . Huckaby is forced to pay tax on 100 percent of his income in New York, and his home state of Tennessee could also force him to pay tax on 100 percent of his income (thankfully, for Huckaby, Tennessee is one of nine states without a personal income tax).
The forthcoming bill by Congressmen Dodd and Shays will prevent the double taxation of telecommuters like Huckaby. The bill would require an employer to be physically present while work is performed in order for the state to tax it. Dodd and Shays have a lot of Connecticut constituents who telecommute from their homes for New York employers. They are also undoubtedly getting pressure from Connecticut tax collectors who rightfully want to collect tax for work performed in Connecticut.
This bill (based on a similar bill introduced last Congress) would allow states like New York to tax Huckaby for his work that is physically performed in New York, while protecting the right of Tennessee to tax him for his work physically performed in Tennessee. The physical presence rule contained in this forthcoming legislation is the right way to resolve the tension between the states’ need to collect taxes efficiently and the workers right to avoid double taxation.
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