Taxing Remote Workers

Many of us have been working remotely since the coronavirus pandemic hit in earnest last March. If your place of work and place of residence are in the same state, there’s no problem. But what if you live in one state and would work in another state — that is, if you were still going into the office? Which state gets to share in the tax revenue on your income?

New Hampshire is asking the U.S. Supreme Court to directly answer that very question, in a challenge to a Massachusetts law that says Massachusetts may tax nonresidents who used to work in the state but now work from home instead. Other states are interested, too — some because they have tax laws similar to Massachusetts (like New York and five other states) and some because they are losing tax revenues as a result of such laws (like New Jersey and Connecticut).

The stakes are high, because the treatment of remote worker taxes can mean big bucks for state budgets. New Jersey, for example, estimates it will credit thousands of New Jersey residents who used to work in New York City, but now work remotely, for about $1.2 billion in income taxes paid to New York starting in March 2020. In an era where COVID shutdowns have cost countless jobs, and many state budgets are dealing with the lower tax revenues generated by the decreased economic activity, the treatment of taxes to remote workers could tip the balance between a balanced state budget and a budget that is in the red.

The Massachusetts law being challenged in the Supreme Court was adopted in April 2020; Massachusetts said the law just maintains the status quo income tax treatment of remote workers so Massachusetts won’t have to determine precisely where they are working during the pandemic. New Hampshire, which doesn’t have an income tax, says that by taxing New Hampshire residents who formerly commuted but now are actually working from home, Massachusetts is invading New Hampshire’s sovereignty and violating the due process and commerce clauses of the Constitution. New Hampshire has invoked the Supreme Court’s original jurisdiction, which allows one state to sue another state directly in the high court, without going through lower courts, if the Court gives them permission to do so. The Supreme Court has asked the Biden Administration to weigh in on whether it should take the case. There’s some urgency to this issue, both because of the budget crisis in many states and because tax season is just around the corner.

Taxation of remote workers is just one of the many interesting legal issues that are going to be addressed as a result of the pandemic, the governmental shutdown orders, and the resulting disruption of what used to be normal practices — practices that now may be morphing into a “new normal” where remote work is much more commonplace. And you can be sure of one thing: when a legal issue raises the prospect of shifting billions of dollars of tax revenue, you can expect cash-hungry states with their eyes on their budgets to fight like cats and dogs for every cent.

Working From Home

Increasingly large numbers of Americans work all or part of the time from their homes. Estimates and data on the precise number of at-home workers vary, but somewhere between one in ten and one in five Americans regularly perform work remotely.

IMG_5989Over the past month, as I recuperated from my foot surgery, on certain days I joined the crew of periodic work-at-homers so that I could try to keep my foot elevated. I picked my spots, and for days where I did not need to be physically present at the office I brought home a lot of work-related reading, participated in meetings by phone, and used a computer and smartphone just as I would at the office. I worked full days, with a lunch break, and got a lot of work done without a problem. The work was the same; the only difference was the location where it was being done.

As the stories linked above indicate, employers debate the merits of at-home work. One of the concerns some employers have raised is whether remote workers face too many distractions and therefore won’t be as productive. People who are successful working from home would respond that the key attribute needed is discipline. You go to your home work place, and once you cross that boundary you are at work until the work day is done and the boundary is crossed again. During my intermittent work-at-home days, distractions were not a problem. (Of course, being hobbled by a bandaged foot and crutches that kept me from moving around undoubtedly helped.) In fact, in some ways working in a solitary, quiet, at-home office involves fewer distractions than working at a bustling office, where your co-workers might want to bend your ear. Whatever the venue might be, you still need to resolve to get your work done.

I can see the attraction of working from home. You cut the commute time out of your day, don’t have to pay for parking, and don’t have to worry about your attire. I found that I ultimately missed being at the office, however. I was glad when my recuperation progressed to the point that I could return to the office and rejoin my co-workers.