New York Court Says Telecommuters Must Pay NY Tax

hal9000(jr) writes "The Boston Globe is running this story on an out-of-state programmer working for a New York company who had to pay state taxes. '"New York has the right to tax 100% of a nonresident employee's income derived from New York sources," according to the 4-3 decision by Court of Appeals. The court relied on a fairness rule called the "convenience of the employer" under law that says a worker's income is taxable if he chooses to live outside the state, as opposed to if he or she was transferred there.' The dissenting opinion: 'Judge Robert Smith argued that the basis of the majority's decision that all income is taxable is "that the commissioner says it is ... The majority cites no authority at all, and offers no persuasive reason, in support of this new interpretation."'"

So does this mean ..

[Anonymous Coward]

He will get taxed the NY Income Tax AND where he is currently located? That would suck.

Re:Hrm, I wonder.

[__aaasvk1266]

No state tax in AK, FL, NV, TX, SD, WY.

NH, TN tax dividends and interest only.

RI is a % of Fed liability.

All others are a % on earnings (NY 4% - 7.7%):

http://www.taxadmin.org/fta/rate/ind_inc.html

Re:Lets wait for the appeal

[Anonymous Coward]

Just FYI, the New York State Court of Appeals is the highest court in that state, so the Supreme Court of the United States is the next option.

Re:Fine...

[Anonymous Coward]

uuh? do you even know how to file taxes ? your employer deducts only 1 state at source and you use that as an offsetting credit...are you a complete moron ?
time spent in state is a % of what you pay to that state. not more, not less.

Re:So does this mean ..

[superphreak]

I didn't think the states were supposed to regulate interstate comerce

section 9 clause 5? Clause 5: No Tax or Duty shall be laid on Articles exported from any State.

Re:I, for one, welcome our NY tax refugees!

[DAldredge]

Don't forget Texas is trying to pass a "It isn't an income taxes because we are calling it something else" income/payroll tax.

Things in texas are rather screwed up at the moment.

H&R

[Mr. Underbridge]

As long as I am only taxed in one state. Last year I was taxed in 2 states because my residence was listed in one and I worked in the other. But now that I want to file a refund to get that money back in one or the other, neither will want to give me anything back.

I think it'd be a pretty good idea if you went to H&R Block this year. Probably bring along that tax return you nuked last year too.

Re:So does this mean ..

[pete6677]

No. The state in which he is a resident will allow him to deduct the amount of taxes paid to other states. I have worked in one state and lived in another before, and that was how it was done. I don't think too many people would work in a different state than their home was in if it meant double taxation.

hmmm

[khallow]

While I find New York's argument dubious, it does appear that this is a fairly common problem [state.pa.us] and that some states would rule in the same way that New York did. From the link above (for Pennsylvannia):

I can provide you with the position that the Commonwealth would take, had taxpayer been a nonresident of Pennsylvania during 1999 and 2000, in respect to the situation described in your letter. This may prove helpful in understanding New York's activities.

Under the personal income tax, a nonresident individual who earns compensation for services performed in Pennsylvania is subject to the income tax because it is Pennsylvania source income. 72 P.S. 7301(k). The employer would be responsible for withholding and remitting state income tax for all payroll periods in the tax year when such person performs services in the Commonwealth.[2]

With the advent of individuals being permitted to work at locations other than the employer's place of business, states began examining whether their income tax laws were being complied with. If an employee is permitted to perform services/duties from his home or a place other than the within the state where he would normally report for work, and when such person's employer has no business reason[3] to have the employee work outside of the office/facility, such state could attempt to subject the income to tax. The rationale for this rule, at times referred to as "the convenience of the employer test" is that if the employee is permitted to work at home for his/her own convenience/ preference, the state where he/she would normally report for work should be entitled to the income tax for compensation or wages earned during those time periods.

While not published in a regulation, Pennsylvania follows this theory for resident and nonresident individuals who would report to a Pennsylvania location for work, but actually work elsewhere for their own convenience.

In other words, this seems common practice and I really don't see that this hinders telecommuting unless the state of residence also attempts to tax those same wages.

Here's an interesting bill called the Telecommuter Tax Fairness Act [telcoa.org]. From it:

Convenience of The Employer Rule

The Telecommuter Tax Fairness Act (the Act), first introduced last September by Sen. Christopher Dodd (D-CT) and Rep. Christopher Shays (R-CT), would eliminate a state tax rule known as the "convenience of the employer" rule. New York is among the states to apply the convenience rule. Pennsylvania and Nebraska have maintained similar rules.

Under the rule in New York, a nonresident who elects to telecommute part-time to a New York employer may owe taxes to New York on 100% of his or her income, including the income earned at home. Because the telecommuter's home state may also tax the income earned at home, the telecommuter risks taxation by both states on the same income.

Consider, for example, a Connecticut resident who works for a firm in Manhattan and telecommutes 2 days a week. In addition to taxing the income the employee earns while physically in New York, New York may tax the telecommuter on the income he or she earned at home in Connecticut: New York may consider the income the telecommuter earned in Connecticut as New York source income.

Connecticut, however, may take a different view. It may regard the income earned in Connecticut as Connecticut source income. Thus, Connecticut may tax its resident on the income earned there and may not grant a credit for taxes paid to New York on that income. As a result, the nonresident employee may be taxed twice on the income earned at home. By making telework costly for nonresidents, the convenience rule discourages this kind of interstate employment.

New York's Harsh Ap

Re:So does this mean ..

[4alexnyc]

Not exactly - you can deduct the tax paid to the state with the higher tax rate as a credit against tax paid in the state the lower one. Since NY has one of the highest state tax brackets (in fact, I think it might be the highest) it's usually the only state tax paid. Of course, we didn't discuss the NY City tax... (ugggh)

Re:I, for one, welcome our NY tax refugees!

[PipianJ]

Actually, New York and Texas have almost identical laws when it comes to the law that (in Texas) has been interpreted to mean that someone with 6 dildoes is committing a misdemeanor.

Texas (Texas Penal Code, Title 9)

43.21. DEFINITIONS

(7) "Obscene device" means

a device including a dildo
or artificial vagina, designed or marketed as useful primarily for
the stimulation of human genital organs.

43.23. OBSCENITY

(c) A person commits an offense if, knowing its content and

character, he:
(1) promotes or possesses with intent to promote any
obscene material or obscene device; or
(2) produces, presents, or directs an obscene
performance or participates in a portion thereof that is obscene or
that contributes to its obscenity.
(d) Except as provided by Subsection (h), an offense under
Subsection (c) is a Class A misdemeanor. ...
(f) A person who possesses six or more obscene devices or
identical or similar obscene articles is presumed to possess them
with intent to promote the same.

New York (New York Consolidated Laws, Title MA235)

235.00. Obscenity; definitions of terms.

1. "Obscene." Any material or performance is "obscene" if (a) the

average person, applying contemporary community standards, would find
that considered as a whole, its predominant appeal is to the prurient
interest in sex, and (b) it depicts or describes in a patently offensive
manner, actual or simulated: sexual intercourse, criminal sexual act,
sexual bestiality, masturbation, sadism, masochism, excretion or lewd
exhibition of the genitals, and (c) considered as a whole, it lacks
serious literary, artistic, political, and scientific value. Predominant
appeal shall be judged with reference to ordinary adults unless it
appears from the character of the material or the circumstances of its
dissemination to be designed for children or other specially susceptible
audience.
2. "Material" means anything tangible which is capable of being used
or adapted to arouse interest, whether through the medium of reading,
observation, sound or in any other manner.

235.05 Obscenity in the third degree.

A person is guilty of obscenity in the third degree when, knowing its

content and character, he:
1. Promotes, or possesses with intent to promote, any obscene
material; or
2. Produces, presents or directs an obscene performance or
participates in a portion thereof which is obscene or which contributes
to its obscenity.
Obscenity in the third degree is a class A misdemeanor.

235.10 Obscenity; presumptions.

2.

A person who possesses six or more identical or similar obscene
articles is presumed to possess them with intent to promote the same.

Re:A shitty school

[mandolin]

And so hot that you can't go out of summer

It's only REALLY bad in August. You can build up resistance to July and September, and the other months are fine. Unless you live in Brownsville.

Of course, if you're the Colorado type that starts sweating like a pig when it hits 80F, you might want to reconsider.

It's also a good motivation to lose weight, since all that extra insulation is exactly what you don't want. Unfortunately (by all appearances), a lot of people down here disagree.

As far as shitty schools. I thought that was a nationwide problem, and last I checked we still taught evolution at least. But to hear some of my teacher acquaintances tell it, yes our schools have gotten steadily worse.

this is not new

[mibat]

This is pretty par for the course in New York state.

This year, I had the fun experience of doing my taxes as a part-time New York resident, and half of my income was foreign-earned and tax-exempt for that time. In order to not pay New York state income tax on the part that was foreign-earned and federally-exempt because I was physically not in the country, I had to demonstrate that I had only been a part-time tax resident of New York.

The thing about tax residency is that it's separate from voting residency, and one of the criteria for being a "New York tax resident" is "income is derived from a New York source." I forget the exact wording on the tax forms, but basically, if I had lived in Pennsylvania full-time but my work was at a New York company, I'd have to pay New York tax on it.

I also got screwed once when I moved away to Pennsylvania for college and didn't realize all of this crap about tax residency, and the fact that New York will continue to try to collect taxes on all your income until you are cold in your grave if you've ever been a resident. I'd worked part of the year in New York, moved to PA, and worked there in college, and ended up having to pay New York income taxes on my Pennsylvania income. Why? Because I didn't know to file my taxes as a "part of the year" resident. In the following years I remembered to file my forms as a "Pennsylvania tax resident" despite still having my pernament residency in New York.

This worked because 1) I was not physically present in New York *AND* 2) my income wasn't derived from New York sources.

The thing is, this doens't surprise me at all because the working of "derived from NY sources" is certainly vague enough to include "telecommuting to a New York company." I don't think it includes, as one other poster was raving about, "if you work in another state at the office of a company that ALSO has an office in New York you will get hit with New York taxes."

In short my state goverment is a bunch of thieving bastards. (can i also be bitter that they take this income tax and then spend it all on new york city? bastards. *shakes fist at gaping pot holes in road*)

Interesting stories on Business Trips

[COredneck]

In the 15 years I have been in the "Wonderful World of Work", I have seen a few things.

First, a guy that I know who works in the same DoD company as I do spends quite a bit of time in Maryland. He is a Colorado Resident. He has to do two different state tax returns. One for MD and the other for CO. He mentioned it is a pain to deal with.

Second, in the same company, a few of our people spend quite a bit of time working in California - job site at an Air Force base. They have to do a CO and a CA tax return. According to company rules, if you spend a cumulative number of days that is greater than 30, you have to pay tax to and do a return for the other state.

Third, over ten years ago, I worked in a company that was based in Indiana and when I was an IN resident at the time. We had several people who worked in NY for several months. A new plant was being built and they were installing the computer equipment such as serial and ethernet lines and hooking connections to the factory equipment. If I remember right, they never had to pay NY tax even though the cumulative time spent there was 3 or 4 months. If this happened today, this would be a different story epsecially if Corporate Legal had something to say about it and how cautious companies are to toe the line to cover their proverbial rear end compared to even 10 years ago.

Re:judicial activism?

[txmadman]

The term "judicial activism" has been around for a lot longer than that. It was used freely during the court-ordered busing conflicts in the '70s, for example. Before my time, I suspect it was used during the school racial integration decisions in the '50s.

Generally, "activist judges" are those who seem to find new rights where they previously had not existed or been spelled out in law (ie the 'right' to gay marriage in Massachusettes, the 'right' to an abortion in the Constitution, etc.).

In this case, as the minority opinion states, the majority basically said that New York ought to be able to tax a telecommuter, without saying where the law mandates it, or citing precedent.

Re:judicial activism?

[odin53]

IIRC the term "activist judge" first appeared when the gay marriage debate sprung its head, and the Bush administration and its shills started bitching about how judges weren't "representing the will of the people."

The term "judicial activism" has been around for a long, long time. I would say that it first appeared around the time of Earl Warren's Supreme Court in the 1950s-1960s, since that's the earliest I can remember the term being used, but I know that I would be making the same mistake as you did -- that the term is much older than that. In fact, I suspect that John Marshall, the early 1800s chief justice of the SCOTUS who essentially invented the concept of judicial review, was called "activist judge" by the press and general public back then.

Flawed linguistics

[alexo]

> We don't need you prostate subjects, you just screw the whole thing up
> for everyone with your worshipping of the government [...]

The goverment seems to fail to ensure equal access to education but, luckily, slashdot can rectify that.

The subject of today's lesson is the difference between prostate [tabtote.com] and prostrate [knom.org].

Re:Double taxation?

[mls]

The rules probably vary from state to state, but in general, you pay taxes to the state where the SOURCE of your income comes from, assuming your employer doesn't have another location in the state you live in.

A number of posts discuss allocating revenue by % of the year you are a resident. This typically would apply if you had a Job in State A, then moved to a Job in State B. Residency should only apply for investment income and the like.

Road warriors who work for themselves, or a company in the same state where they claim legal residence, pay in the state of their residence.

Workers who live in a state with income tax, but work in a different state that doesn't have income tax, pay in the state of their residence.
The same applys for those who work in Washington DC (which is a District, not a state), which is apportioned it's operating budget by congress.

If you work in DC, live 50% of the year in Virginia, and 50% of the year in Maryland - guess what - you pay to both states for the duration of your residency.

Some states have reciprocity agreements with each other to simplify this. But in general, you don't get double taxed.

IANAL - find someone qualified for your situation.

Re:I'd also want use of their services

[keraneuology]

Here's a link to the reference : http://makeashorterlink.com/?F5CC216CA

"In Washington state, where we have a presence, we get police protection, we get fire protection. We send our kids to local schools. All that stuff happens for us. I don't see why ... since we get no services from North Carolina, that they should be able to force us to collect taxes for them."

- Jeff Bezos, BookExpo America, 2000.

While the call for allowing this victim of government greed to vote in New York seems fair and reasonable on the surface, I have to disagree. I don't think that anybody should be allowed to vote for more than one US Senator or US Representative and the government that can't prevent undocumented aliens from voting certainly would be utterly incapable of preventing people from casting more than one federal ballot. Once it got out that to get more than one federal vote all you had to do was to pay a dime in income tax in another state you would suddenly see the voting rolls expand at a rate not seen since the dead learned how to pull levers in Chicago.

Re:judicial activism?

[j0nb0y]

The President can send laws to Congress, but these are really just suggestions. Congress can ignore them, amend them, or whatever. If they never vote for it, it will never become law. Also, once Congress passes a law, the President has to sign it before it becomes law. If the President doesn't sign it, it's considered veto'd. Congress can override the veto with a two thirds majority. Vetos aren't overridden very often. I'm not sure when the last time it was done, but I'm pretty sure it hasn't happened in the last ten years.

All three branches of our government have become much more powerful in the last century. The legislative branch can legislate just about anything they want using the commerce clause of the Constitution. The executive branch has gained lots of government agencies to control, and the judicial branch has a lot more leeway to interpret laws and the Constitution.

Re:Flawed logic

[metamatic]

People who apparently don't like the United States and its Bill of Rights, did vote--that's the problem...

Not so fast, buckaroo

[PigBoyOhBoy]

The state in which he is a resident will allow him to deduct the amount of taxes paid to other states.

I live in New Hampshire and worked for a Massachusetts company for a few years. Massachusetts siphoned off its full income tax during those years with absolutely no recourse to me because New Hampshire has no income tax. Now that doesn't for a moment mean that I don't pay tax in New Hampshire. We make up for that tax free status by having outrageous real estate taxes instead.

But do you suppose Massachusetts cares how much I pay in real estate taxes? Boohoo.

The real killer last tax year (2004) was that at least half of my income came from Florida. And because my deductions on the Massachusetts form are factored by the percentage of income from Massachusetts, they wanted even more of my money than usual. The more I earn outside of Massachusetts, the more I pay to Massachusetts in taxes. Go figure!

Sorry Dude, hard to believe you...

[jjn1056]

I've lived in NYC for 10 years. I can't see how it is possible that if you are making 150K per year (federal tax bracket averages out to about 25% or so) is going to be less than the 2-4% you pay in NYC (depending on the year, in general city taxes have been lowered year after year during the 1990's but slipped up again after the budget crisis that occurred after 9/11)

Maybe if you had a bunch of crazy deductions or something I suppose it is possible.

As far as 68% of your income going to income taxes, I can't see that either.

In 2003 I made 100K:
paid ~19K in federal Tax
paid ~6K in NY State Tax
Paid ~3K in NYC Taxes

I don't have a single deduction, excluding the personal deduction, so my tax percentages are a bit higher then most people in the US at my income level (most people in my income bracket are paying morgages, so they get to deduct that)

So I paid about 28% of my income to taxes.

How the hell di you get up to 68%! I'm not saying it's impossible, I'm just wondering how you pay 40% more of your income in taxes.

Re:So does this mean ..

[Doc Ruby]

Labor isn't an article.

Re:So does this mean ..

[Doc Ruby]

NY State provides services to the NY State company that employs them. The employer should pay the tax on the services they consume to support the employee whose labor it consumes. But employers don't pay taxes in our business-serving government - so the employee does.

Re:Taxes have gotten out of hand.

[CodeBuster]

You cannot be taxed twice on the same income.

The problem is that common double tax situations have become entrenched in federal and state budgets. They either have to leave the double taxes as they are, on stock dividends for example, or else cut spending. Which one do you think appeals more to politicians?

All services, goods, and fees which are mandated by any government entity are counted as taxes

In a sense they already are. The government is charging money, or taxing if you will, to cover the cost of basic public services as you use them. These services generally include civil court, motor vehicle licensing, and in some states toll highways. They are just counted separately from income taxes, meaning that you pay them with after income tax money, and imposed as the circumstances dictate.

total taxes paid, including all income taxes, fees, sales taxes, etc., cannot exceed a certain percentage of your income. Anything in excess of, say 40% (though I think 20% would be more reasonable) of gross income gets refunded.

It would not be possible to implement this without maintaining massive centralized databases containing all transactions engaged in by all citizens during the course of a typical year. This would be a massive increase in government power and a serious threat to any semblance of privacy that we still have left. The IRS is bad enough and you want to increase the scope of their auditors?

a flat tax rate instead of the ridiculous graduated tax rates. (Where I can actually make more money and end up with less because my tax percentage jumps.)

This is a misconception. Even if you are just barely in the next highest tax bracket you will never lose 100% of the money that is in that highest bracket so it is impossible to end up with less than you would have had if you were still entirely in the lower bracket. At least this is how it is in the United States, however at one time in the United Kingdom this WAS true and the highest bracket was actually paying 105% of income in that bracket, but even the most hardened socialist cannot claim that was fair so they fixed it back to 90%. With regard to graduated rates a more elegant smooth curve, possibly involving the natural logarithm, would have been more elegant than the crude bracket system, but then again most citizens, including politicians, never took calculus and so if they cannot understand the system then it must be unfair...sheesh

taxes are subject to jurisdictional delineations; if you are not using the services provided by a jurisdiction, you cannot be taxed by that jurisdiction (including the Federal government if you live outside the U.S.

Taxes are paid were the income is earned irrespective of whether you live there or not and this is how it should be. That is why New York is not wrong to tax this man for income that is earned inside the state of New York. However, it would be wrong for that income to be taxed by his home state too. Generally though this isn't a problem because income taxes go into the general fund rather than into more specific funds meant to maintain roads, buildings, and other infrastructure. Those funds are usually covered by other taxes such as gas taxes, property taxes, and the like.

The inheritance tax should be abolished altogether. It is simply unconscionable.

Inheritance is income just like any other source of income. It should be taxed as income. Taxes above and beyond income, just because it is inheritance, for example are unfair and should not be levied.

Simple Counterexample

[void*]

This is a misconception. Even if you are just barely in the next highest tax bracket you will never lose 100% of the money that is in that highest bracket so it is impossible to end up with less than you would have had if you were still entirely in the lower bracket.

Given the tax table at www.irs.gov/pub/irs-pdf/i1040tt.pdf, if I am single, and my taxable income is $29,699, my tax from the table would be $4,156.

Say that my income, and thus my taxable income, rises $2, to $29,701. My tax from the table becomes $4,169.

Note that I would then be paying $13 more in taxes for a $2 taxable income change.

Sure, it's $11 less spending power, it isn't a lot, but given that it took me 30 seconds to find one example, and given the complexity of tax law, are you so sure there aren't others that are more significant?

Re:So does this mean ..

[wpiman]

I work in Mass and live out of state. You pay where you earn. I pay Mass tax on the money I make in Mass- and then a percentage of the money I make in NH to NH.

My brother in law does the opposite of you- lives in MA- works in RI. He has to pay the RI tax of 4% (or whatever it is)- and then make up the 1.5% (or whatever the actual number is)- to Massachusetts. What you don't do is pay double.

If you are paying twice- I suggest you get yourself and accountant and file years of ammendable returns.

Re:So does this mean ..

[anvil {UK}]

In the UK where I am, a Consultant is not an Employee and so would not be subject to Income Tax on that income as an employment.