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.

While New York’s convenience rule applies only to nonresident telecommuters who spend at least some work time in New York, just a few days a year in the New York office could suffice to trigger the penalty: An Oregon telecommuter who earns 90% of her salary in Oregon and only 10% in New York may be required to pay New York taxes on all of her wages.

The Telecommuter Tax Fairness Act would eliminate the risk of double or excessive state taxation by prohibiting states from taxing the income nonresidents earn when they are physically present in another state.

In the current session of Congress, Senators Joseph Lieberman and Richard Blumenthal have sponsored the Senate bill (S. 1811). Representatives Jim Himes and Chris Murphy introduced the current House bill (H.R. 5615), and Representative Rosa DeLauro has joined them in co-sponsoring it. These lawmakers, all from Connecticut, recognize the urgency of abolishing a powerful tax deterrent to telework. They appreciate the critical role telework can play in addressing some of the nation’s greatest challenges: stubborn unemployment; our dependence on foreign oil; relentless traffic congestion; dilapidated transportation infrastructure and inadequate preparedness for such emergencies as terrorist threats, pandemics and violent storms.

Connecticut residents are certainly hard hit by the convenience rule. Many work for New York firms. If they choose to telecommute part-time, Connecticut will tax the wages they earn in Connecticut and, applying the convenience rule, New York will tax those wages again. In 2004, an ultimately unsuccessful case challenging the constitutionality of the rule reached the U.S. Supreme Court, and, in a brief supporting the taxpayer, Richard Blumenthal – Connecticut’s Attorney General at the time – advised the high court that thousands of Connecticut residents are double taxed as a result of the rule.

Further, Connecticut residents employed in New York who cannot afford a double state tax bill are forced to forego teleworking, and, if they lose their jobs, their employment options will be needlessly restricted: They will not be able to consider openings with New York companies located beyond commuting distance.

However, Connecticut residents are hardly the only victims of the convenience rule. New York has targeted telecommuters nationwide – employees living in Florida and Maine, Tennessee and Arizona, for example. Further, although New York has hogged the spotlight, it is not the only state to enforce the rule. Like New York, other convenience rule states may target telecommuters in a neighboring state or any other state in the country. Consider Flynn v. Director of Revenue, a case involving a Pennsylvania resident employed by Bank of America in Delaware. The employee sought a refund for taxes she paid to Delaware on income she earned while working from home, in Pennsylvania. In 2011, citing Delaware’s version of the convenience rule, the Delaware Tax Appeal Board denied her claim.

The nationwide impact of the telework tax is underscored by the fact that residents from nearly all 50 states have signed a petition in support of the legislation to get rid of it.

Members of the Senate Finance Committee and the House Judiciary Committee – the committees with authority to advance the Telecommuter Tax Fairness Act – will find residents of their states on the list of petitioners: Those signing the petition hail from Alabama, Arizona, Arkansas, California, Colorado, Florida and Georgia; Hawaii, Illinois, Indiana, Iowa and Kansas; Kentucky and Louisiana; Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, and Nevada, New Jersey, New Hampshire, New Mexico and North Carolina; Ohio, Oklahoma and Oregon; Rhode Island, South Carolina, South Dakota, Tennessee, Texas and Utah; Vermont, Virginia, Washington (state and D.C), West Virginia, Wisconsin and Wyoming.

Even residents of states that maintain the convenience of the employer rule – New York, Delaware, Nebraska and Pennsylvania – have petitioned to abolish it. Some residents of convenience rule states (like the Pennsylvania resident in the Flynn case) may object to the rule because they have been harmed by another state’s application of the rule. Other such residents may be harmed by their own state’s application of the rule.

How can residents of a state be harmed by their own state’s rule? Consider the business owners who live and work in a convenience rule state. Because the rule makes interstate telecommuting too expensive for many workers, these employers may not be able to use telework to recruit their ideal staff. They may not be able to use it to shrink the cost of hiring, turnover and overhead; to lower absenteeism and increase productivity; to help assure continuity of operations when emergencies occur.

In addition, the convenience rule imposes onerous payroll obligations on business owners. For example, determining where to withhold personal income tax for nonresident telecommuters can be tremendously confusing. Should the company withhold in its own state, the telecommuter’s state or both? Employers may be forced to reject telework arrangements – and lose either desired applicants or valued current employees – because the payroll department is overwhelmed by the complexity of compliance.

Workers, as well as business owners, who reside in a state with the convenience rule stand to lose as a result of their own state’s policy. When in-state companies cannot use telework to reduce expenses and increase profitability, they have less capacity to hire anyone – including state residents. Further, states that frustrate business success and job growth by applying the convenience rule can lose business income tax, sales tax and personal income tax revenue, imperiling public services that are vital to workers living in the state.

In short, a state maintaining a convenience rule harms nonresidents and residents alike.

Our National Broadband Plan reinforces the nationwide sentiment expressed in the petition that the telework tax has got to go, specifically calling on Congress to look at the problem. Organizational stakeholders outside government, with diverse missions, have also urged Congress to act. In addition to the Telework Coalition and other telework proponents, these stakeholders include, for example, advocates for small businesses and taxpayers; homeowners and transportation alternatives, workplace flexibility, work/life balance and energy security.

Our elected officials in Washington must respond to the repeated and widespread pleas to relieve individuals and businesses of a tax that senselessly burdens interstate commerce. They must finally enact the Telecommuter Tax Fairness Act and green-light use of the Internet to access out-of-state jobs.