As employees continue to work remotely through the COVID-19 pandemic, some states are concerned about potential lost tax revenue with respect to non-residents who normally live in a neighboring state, but work in the subject states.
Since my previous article about the state tax issues created by the extended period of telecommuting, tensions among the states rose considerably due to the shortage of state tax revenues. Also, litigation is moving forward.
For example, Massachusetts issued guidance that non-residents who normally work in-state, but due to the pandemic are now working from home, out-of-state, would be viewed by the state as earning their wages in Massachusetts and thus subject to tax on them by the Bay State. In response, New Hampshire recently initiated litigation to enjoin Massachusetts from enforcing its telecommuting directive. The state of New Hampshire has no personal income tax and many residents typically cross to bordering Massachusetts for work. Further, a pending bill in the New Jersey legislature focuses on this telecommuting issue, and considers the possibility of the state joining with New Hampshire in its effort to stop Massachusetts from taxing non-residents for work done outside of its borders.
In my earlier article, I noted that as of that date, New York had not yet articulated its position on the possibility of using its “convenience of the employer” rule to reach the earnings of workers telecommuting from out-of-state locations for in-state employers. Under that rule, employees who choose to work from an out-of-state location for their own convenience, as opposed to at the direction of, and for the convenience of their employers, must source their wages to New York, notwithstanding where their services are actually performed. Possible state enforcement of the convenience of the employer rule is problematic in a situation where the governor of the state mandated that businesses close their doors. This would result in many non-resident workers having no other choice than to work from their home offices. How could the state argue that such workers were working at home for their own convenience?
The answer was received in a rather conclusory manner through a set of FAQs issued by the New York State Department of Taxation and Finance on October 19 of this year. The state concluded that all of the wages earned by non-resident employees who normally work in New York, but are working from out-of-state locations currently due to the pandemic must source their wages to New York.
Will that position be challenged by New York’s neighbors? As state budget deficits continue to grow, states are liable to consider all available options to bring in extra revenue. Stay tuned as there are likely to be additional rounds in this fight!
If you have any questions regarding the states’ positions with respect to the sourcing of wages during the pandemic, you can reach me at firstname.lastname@example.org, or contact your Friedman LLP partner or principal.