Nicole Belson Goluboff has been kind enough to send me a more detailed description of the double taxation issues I covered a while back. Here it is. [Update, 23 October 2012:] You may also wish to see a more extended discussion of the issues here.
From East Coast to West, Calls for Telecommuter Tax Fairness
by Nicole Belson Goluboff
As Jack observed in Taxation with duplication, the double tax threat facing interstate telecommuters is a longstanding obstacle to telework’s growth. The Telecommuter Tax Fairness Act – federal legislation that has enjoyed significant support both within and outside government – would remove this obstacle. Although the measure has been introduced in multiple sessions of Congress, lawmakers have not made it a priority. They must do so and make telecommuter tax fairness the law.
The extortionate penalty for telecommuting across state lines derives from a state tax rule, which a number of states maintain, known as the “convenience of the employer” rule. New York, in particular, has become notorious for its aggressive application of the rule. Under New York’s rule, if a nonresident works for a New York employer and chooses to telecommute sometimes, New York will tax her on 100% of her wages – not just the wages she earns on the days she works in New York but also the wages she earns while working at home, in a different state. Because employees’ home states can also tax the wages they earn at home, many telecommuters are forced to pay taxes to two states on the same income.
To help their telecommuting residents avoid double taxation, some states offer a credit for the taxes the telecommuters pay New York on the wages they earn at home. However, these workers may still be penalized for their interstate arrangement. If the tax rate in New York is higher than the tax rate in the home state, the telecommuters will have to pay the higher New York rate on their home state earnings.
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