State Tax - Working from Home

[Golden Rocket]

Years ago there was a discussion about this on this forum, but I'm not sure anything was ever settled. Probably depends on court rulings which may or may not be definitive. But I'm going to ask if anything reliable was ever determined.

Companies are allowing (and sometimes encouraging) their employees to work from home. One universally accepted doctrine is that the state source of income is "wherever the work is done." States have become aggressive in recent years to horn in on as much taxable income as they can.

One particularly litiguous case was a New Jersey employer who allowed a New York resident to work from home. New Jersey insisted on taxing this guy with New Jersey wages on his non-resident return. New York insisted on taxing the guy for a proportional amount of earnings worked from his home. The employee was confronted with paying taxes to both states on the same income. The thing ended up in BOTH state courts (neither of which were expected to be objective).

The New York court ruled taxation in favor of New York and of course insisted they were applying state law irrespective of what another state ruled. New Jersey court ruled the entire salary was taxable to New Jersey and expressed it was irrelevant what New York did. Thus neither state govt was interested in any action against the other state to settle anything, although the situation was receiving notoriety everywhere.

My question: Has anything been settled -- and I'm not speaking just of NY and NJ. I'm interested in knowing whether there has been a convention or agreement among states that is being widely observed???

[Lion]

Each state has their own definition of state-sourced income. I work with CT residents who commute to NYC and might work from home. NY considers the employee under the control of the NY company while on the job even at home; only "out" of NY if sent to another state to a client's site or for training or other business reason that could not be accomplished in NY. CT considers CT-sourced income as that earned while physically in CT. Different states, different laws. I don't see either budging. Ever.

I had some midwest company require a CT resident to work from home as his job was sales in the northeast and they had no location in the northeast. Forget what state that was, but they did not argue that the income was anything other than CT.

States are getting more aggressive and not less.

[Roland Slugg]

This is the way it's been done by all, or almost all states for a long time. The state of residence taxes its residents on all income, including income earned in or from another state, and the other state taxes the same income. The state of residence then allows an "Other State Tax Credit" on the resident's tax return. The "other state" credit does have limitations, so a person may end up paying a little more state tax altogether than he would if the income was all earned in his home state. I also seem to recall that there are one or two non-reciprocating states. Most of the time, though, when all is said and done, out of state income is only taxed one time.

[Lion]

OP was asking about the case where the resident state does NOT consider the income out of state income; it considers it earned in the resident state, at home. But, the nonresident state considers the income earned there because it's under the control of the out of state company and not necessary to be performed at home. The two states have two different regulations re state-sourced income. So, one taxpayer could be taxed by two different states on the same income. Especially with aggressive states like NY and NJ. It's up to us to help our clients structure their employment to pay the least legal tax. We can be heroes. I've gained a few clients who had NYS letters and came to me to amend CT after paying NY. They are now my long-time clients.

[Golden Rocket]

Tax Credit Denied

The state of residence then allows an "Other State Tax Credit" on the resident's tax return.

I failed to state in the original post that the "credit for taxes paid to other states" was disallowed. The effect was the taxpayer was taxed twice on the same income.

Taxpayer was a resident of New York, meaning that he had to report income from everywhere on his New York return, even under the most benign of circumstances. NY didn't want to give him credit for what had been paid to NJ because they didn't regard working at home to be NJ source income. This disallowance was the cause of all the moaning and groaning by the taxpayer.

[TAXNJ]

Convenience

I failed to state in the original post that the "credit for taxes paid to other states" was disallowed. The effect was the taxpayer was taxed twice on the same income.

Taxpayer was a resident of New York, meaning that he had to report income from everywhere on his New York return, even under the most benign of circumstances. NY didn't want to give him credit for what had been paid to NJ because they didn't regard working at home to be NJ source income. This disallowance was the cause of all the moaning and groaning by the taxpayer.

Think you might be talking about "The Convenience Rule" NY used in some of its court cases and upheld in NY favor. There has been a number of court challenges. Be interesting to know the one you are referring.