State Source Income Problems

[Snaggletooth]

This will be a lengthy post, so bail out now if you are short on time.

The issue has been brought to the forum multiple times, and the reason I bring it this evening is because it has never really been settled. I don't know that it is settled yet, but I would like to ask if various court cases have established a consensus.

Yes - it is the old (and apparently eternal) issue of being employed in one state and working from home in another state. This has been going on for years, and the possibility exists that the treatment could vary from state-to-state.

The first such case of which I was aware came several years ago, with an employee of a New Jersey company, who was allowed to work from home in New York. Round one ended when he initially had to pay both states. He petitioned the New York court, who said they wanted "New York money" and couldn't care less what happened to him in New Jersey. The appeal to New Jersey claimed ALL of the income was taxable to New Jersey, and couldn't care less what happened to him in New York. The "couldn't care less" position by both states allowed each state to avoid bringing the issue to a settlement amongst the two states. I've been also told the states don't like each other. I know this is true with Rhode Island and Massachusetts.

I don't know how "round two" ended up for this guy, but I do know that states have been in turmoil defining "state source income" versus "place of performance." I am hoping by now there may be a consensus among states so that court rulings particular to each state will not have to be researched. Most of my experience with multiple states is very much like New York and New Jersey - every state wants the taxes defined to be "mine" and the definition is liberal in each state.

I can almost promise that employees do not have the choice of how to report - the burden would be on employers to issue W-2s correctly with state wages shown. Problem is, I'm not sure whether employers know how to treat this either.

You can be sure the IRS won't touch this, and considers federal taxation to be aloof from the squabbles. It's possible that the U S Court system could be involved, however. And maybe the Supreme Court needs to be.

I encourage you to respond if you have any recent information - maybe by now there are "multistate tax compacts" that bring a uniform definition. This topic is old, and surfaced several times - but it has surfaced because there has been no answer that satisfies.

[dtlee]

Not a lot of time to spend on this, but here's my 2¢....

New York and New Jersey have had a tax border war for years. At one point, New Jersey created a nonresident tax form (NJTT-203) specifically to (line for line) mimic the New York State forms, essentially telling New York taxpayers working in New Jersey to compute what they would pay to New York on their New Jersey income and to pay that to New Jersey instead. Eventually, New York won a court decision to eliminate that (since it taxed nonresidents at a higher rate than residents would pay). To this day, consultants from New Jersey who work in Manhattan are encouraged to be "employed" by New Jersey firms so that it does not "look" like they have any income from New York State.

I believe that New York, Delaware, and Pennsylvania all have telecommuting laws that tax workers who are performing services for a company within their state which could be done within their state but are being done in another state "at home" due to employee preference as income earned within their states. I do not recall New Jersey having this law, but given their penchant for mimicry, I am sure they would want to apply the same rule to New Jersey workers who work from home in New York.

I do not fully understand this comment:

The first such case of which I was aware came several years ago, with an employee of a New Jersey company, who was allowed to work from home in New York. Round one ended when he initially had to pay both states. He petitioned the New York court, who said they wanted "New York money" and couldn't care less what happened to him in New Jersey. The appeal to New Jersey claimed ALL of the income was taxable to New Jersey, and couldn't care less what happened to him in New York.

Can you cite the case more specifically? I could not find it. My understanding was that only income earned from New Jersey would be taxed by New Jersey. All income would be taxed to the resident state (New York). Likewise, I would have expected that New York would care what happened in New Jersey and allow a resident tax credit for taxes paid to New Jersey on the New York return (one of the reasons why they opposed the NJTT-203). Are you saying that New York will not allow this tax credit paid on telecommuting to another state? I would like to learn more about this...in fact, I probably should know more about this (and I don't!).

I do know that Connecticut handles things that way. In Zelinsky v. Tax Tribunal of the State of New York, the New York law was upheld, but the key element in this case was that Connecticut did not allow a credit for taxes paid to New York since their credit is allowed for income taxes paid to another state from work performed there and since Connecticut considers income to be sourced from where the work is performed, if the work was done within Connecticut it is sourced to Connecticut; hence they do not allow the credit for income taxes paid to New York State based on New York's telecommuting law if the work is performed at the taxpayer's home in Connecticut.

I do not see this as a Supreme Court issue; perhaps you have a greater understanding of the law than I. I did not think that these state laws violate any federal laws that I am aware of and they do not appear to be in violation of our constitution. Are you thinking that this is an interstate commerce issue? No one is forcing these employees to work in one state nor to live in the other. I believe that these telecommuting laws would not generally be enforced for someone who has no workplace in the other jurisdiction and is working in their home state solely for the convenience of their employer. I have a friend who works in New York as the New York location for his California-based firm. He is their only employee in New York and he works here for East Coast (and European) clients due to the need for an earlier presence than the west-coast firm offers (they handle Asian hours from their location). If California had a telecommuting law and it were administered like New York's, I do not think he would be required to pay tax to California.

I also do not see this as anything the IRS would be able to deal with. It has nothing to do with federal tax law except as a deduction. Are you saying that enforcement of state tax laws could possibly be seen as an illegal federal deduction? While I agree that "the IRS won't touch this" I do not consider this to be "aloofness" since it is totally outside of their jurisdiction. Perhaps I can be enlightened by someone why I am wrong on this.

The Multi-State Worker Tax Fairness Act has been introduced in Congress more than once and since Congress generally does nothing, this has not really gone very far, but I think it would have a good impact on leveling the playing field here.

[Lion]

No time with a stack of extensions, including a trust due today, but...

I deal with CT, NY, PA, MA, and states farther away. Each state has their own definition of state-based income, either sourced from/controlled by or work performed in. Each state has their own definition of resident, also. It does lead to situations where an employee pays tax to two states on the same income. It does lead to situations where an employee is a resident of two states during the same time period. We have to report what actually happened based on the state law for each state return. But, we have an opportunity to advise our clients on how to pay the least tax legally possible.

By the way, even when a credit for taxes paid to another jurisdiction comes into play, it does NOT mean the credit is for the full amount of taxes paid to that NR state. In my most common scenario of the CT resident who commutes to NY, it means the credit is for the amount the NY employee would have paid if he had been a CT employee at the lower tax rate.

I see no prospect of the states agreeing to common definitions of state-sourced income nor residency nor several other topics.

Charge your clients appropriately for multi-state returns!

[Snaggletooth]

Thanks for Entering

Thanks Doug and Lion for entering the discussion.

I can get to Tennessee court decisions rather easily, and somewhat to Federal tax decisions, but I don't know much how to research court decisions from 49 other states, so I am really at a disadvantage. I cannot cite the NY/NJ situation but can tell you it is at least 15 years old. At the time, neither state wanted to accede any of the income to the other state, and that way they could limit their confrontation to the employee and beat up on him instead of getting sucked into a legal battle of states.

Yes, state tax law is extremely diverse, and it is possible for an individual to meet residency requirements in more than one state. "Credit for taxes paid to other states" is nebulous, and is not guaranteed, especially if a non-resident return is not filed. This factor is extremely unfair. As stated, the IRS has no reason to become involved, but I still maintain the Court system (to include the circuit courts) could play into this just as they have in the sales tax dilemmas.

From my feeble mind, I believe if a company requires an employee to work from home, there is little defense that can be had for the state of performance to be other than the reportable state. However, if the employee is choosing to work from home as a matter of his own convenience, that is another matter.

The response from Lion leaves little hope for any consistent treatment, but I suppose she is probably right. That means no conclusion or consensus can be derived at this point.

[Kram BergGold]

Physical Presence

MA can only tax work income, if the worker is physically present in MA. Quite frankly I would fight any state that tries to tax my income for work done when I was not physically present in that state. This is why professional athletes have to a dozen or more returns. They have physical presence in multiple states.