The CPA Journal

TELECOMMUTING: WHICH STATE IS THE EMPLOYEE IN?

By Debra M. Simon, MST, CPA, The Videre Group, LLP, Parsippany, N.J.

Many employers allow employees to telecommute—that is, work from home while communicating with the office through telephone, fax, and e-mail. If an employee lives in a state other than the one in which the employer maintains an office, under certain conditions both states might claim primary rights to tax the income and neither state allow a credit for taxes paid to other states.

Some states determine the right to tax the income of a telecommuter via a straightforward physical presence test. If a state applies this test, the employee’s income is taxed by the state in which she was present when the work was performed. If 30% of the employee’s time was spent telecommuting, then the income is taxed 70/30 to the employer’s state and the employee’s state of residence.

Other states apply a different test, the convenience versus necessity test, which focuses on the reason for telecommuting. If the telecommuting is determined to be for the employer’s necessity, then the income is taxable by the state in which the employee is physically working. If, however, the telecommuting is found to be for the employee’s convenience, then the income is taxable by the state in which the employer’s office is maintained. Many rulings have determined that insufficient office space at the employer’s place of business does not meet the definition of necessity. If a state applies this test and 30% of the employee’s time is spent telecommuting and the necessity test is not met, then the income is 100% taxable by the state of the employer’s place of business.

If the employer’s state and the employee’s state of residence apply differing tests, it could happen that they will both tax the same income. For example, Connecticut applies the physical presence test, whereas New York applies the convenience versus necessity test. If a resident of Connecticut works at home for her convenience, both states will claim the right to tax the income. Connecticut will not allow a credit for taxes paid to New York because it will not recognize New York’s right to tax the income.

In one recent case, George Wallace, an engineer, moved from New York to Maine eight years ago while continuing to work from home as president of a company with its principal office in Plainview, N.Y. Wallace was found liable for New York State personal income taxes. The administrative law judge found that Wallace could not meet the necessity test (817182).

In another case, a professor at the Benjamin N. Cardozo School of Law (N.Y.) who often works from his home in Conneticut appealed to the Tax Appeals Tribunal a determination of another administrative law judge who refused the professor’s claim for a refund of nonresident income taxes. The administrative law judge justified application of the convenience versus necessity test because of the public services New York made available on the days that the professor worked at his home in Connecticut. The professor’s brief argued that New York has an obligation to apportion taxes fairly based on in-state and out-of-state physical presence. He further argued that New York would violate the due process clause by taxing Connecticut residents on the theory that citizens of that state can use New York public services if they wish.

Unfortunately, there is no available resolution to this problem. The issue has been identified as a significant one by the North Eastern States Tax Officials Association (NESTOA). Tax administrators at all levels continue to try to agree as to which test to apply, with no success. At present, New York, New Jersey, and Pennsylvania apply the same test (convenience versus necessity). Some neighboring states, however, including Connecticut and Delaware, apply the physical presence test.

State and Local Editor:
Stewart Buxbaum, CPA
S. Buxbaum & Company P.C.

Interstate Editor:
Nicholas Nesi, CPA
BDO Seidman LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

STATE AND LOCAL TAXATION