By Kevin J. Delaney
Some Americans will be facing big tax bills this year from states where they spent very little time living or working. Delaware, Nebraska, New York, and Pennsylvania have traditionally claimed income taxes from people who aren’t residents but work in offices there—and Arkansas and Massachusetts this year joined their ranks.
This has meant that some workers have had to pay state taxes in two states on the same income. The issue is even more acute this year as people working remotely because of the pandemic will have spent even less time in the states they’re having to pay taxes to.
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This week New Hampshire accused Massachusetts of “attempting to pick the pocket of our citizens” and filed a case with the US Supreme Court over this issue. And New York updated its FAQ documents to make even clearer that it expects remote workers to pay up.
I spoke with Professor Edward Zelinsky of Cardozo Law School in New York City, a leading expert on double taxation. Zelinsky, who lives in Connecticut, unsuccessfully sued New York state in 2003 because he didn’t believe he should have to pay New York income taxes for days he worked from home. Here's a transcript, edited for clarity:
So what do individuals need to know?
Individuals need to know that it's bad. Double taxation is bad. Double taxation is not always resolved by a credit from your home state. If they are working, or if they have an employer who is in one of the states that assert the convenience of the employer rule—and those today are New York, Delaware, Pennsylvania, and my home state of Nebraska—they risk double taxation. Because those are states which take the position that even if you're working at home out of state, if the employer is in the state, you owe them tax. There is now sign of a race to the bottom. Arkansas has recently issued a ruling along these lines. This is an ongoing and serious problem. Sometimes the tax system of the state where you are resident will give you a credit, but not always, for a variety of reasons.
And often when they give a credit it doesn't offset the full impact. New York's taxes are higher. So, for example, if someone gets a credit from a relatively low tax state like Georgia, it doesn't offset. Or if someone is living in a jurisdiction without a tax such as New Hampshire, Florida, Texas, or Tennessee, there's no offsetting credit because there's no local tax. The net result of this is that a lot of people are going to be subjected to double and or higher taxes than they anticipated. This was a serious problem before Covid. Obviously Covid has exacerbated this problem enormously because more and more people are working remotely.
The bottom line is that there is there some number of people who will have spent most of this year working outside of places like New York, but will be responsible for paying their full...
New York's highest court has taken the position that not withstanding the constitution the United States, they can send tax bills anywhere in the country. So it's not just that they've taxed me. They attacked Mr. Huckabee in Tennessee, they've sent tax bills to people in Arizona, working for a New York employer. New York doesn't know such a thing as overreach, and they have been more aggressive. But the regulations in Pennsylvania, Delaware, and Nebraska are very similar to New York's regulations. They do not have the same track record of enforcing as aggressively. But then again, this is now an environment where states are looking for money and who knows how these other state's departments are going to be.
I saw that the governor of New Hampshire has said that they're suing Massachusetts.
It's actually gone a little farther than that. The actual documents have been filed in the Supreme Court of the United States…And so that litigation has actually been started by the attorney general of New Hampshire.
You didn't mention Massachusetts earlier...
The reason I didn't do that is really more out of a matter a habit. It's only these other states—Delaware, Pennsylvania, New York—that had this on their books, pre Covid. Massachusetts and Arkansas have just taken this position with the start of Covid. Before the Covid crisis. Massachusetts was not taking this position and the regulation they have purports to say that they will go back to prior law if and when the Covid crisis ends, which of course is as indefinite a date as you're going to have right now. But yes, if you're making a comprehensive list, you have to put Massachusetts in it. Arkansas is an interesting question. The Arkansas tax department issued a letter pre-Covid, just in January, that a computer programmer working in Washington state and living in Washington state for an unnamed Arkansas employer owed Arkansas taxes. We don't know who it was. It could have been, Walmart could have been Tyson. If you would ask me two years ago, I would have said this was essentially a New York issue. Obviously with Covid and with other states emulating New York, it's becoming a much more widespread problem.
It's interesting now that people are really not working in the states, they're asserting the “convenience rule.”
That's exactly right. In the classic case, let's take someone who works for a New York employer and whose home is in Brooklyn, with a place on Lake George or in the Hamptons where they've been living—there's no issue, because those are all within New York. But this affects other folks who are crossing state lines. Massachusetts and New Hampshire is a classic case or New York and Connecticut is the other classic—that's where these cases are all arising.
What can organizations do about this?
They can lobby. There is a piece of legislation which has been sponsored historically. My case I took to the New York court of appeal, their highest court in 2003. I could not get the United States Supreme Court to review it in 2004. And at that point Chris Dodd, who was the senator here, and Chris Shays who represents Fairfield County—so they have lots of folks affected—asked me to draft legislation, which I did, and they sponsored it. And over the years it's been introduced. Most recently, it was introduced by congressman Himes, who is Shays' successor in Fairfield County, sponsored unsurprisingly by Representative Hayes here in Connecticut. And Representative Chris Pappas, who represents New Hampshire, obviously also has got a lot of unhappy people. They need support. I mean, three members of Congress are not enough to kick a bill forward. So if you said to me, what could folks do? I would start by going to your congressman or congresswoman and get them on that bill. And I would go to your senators and tell them to get on their bill. That is the most important thing that can be done. We're all going to wait and see what happens with New Hampshire's litigation, whether the court will let them litigate. And presumably if the court will, then people can file amicus briefs to make it clear to the court that this is a very serious nationwide issue and that the court should step in.
What if organizations reclassify employees working remotely because of Covid as resident in other states?
The simple answer is, I don't know. The rules get very complicated because it is New York's position that it doesn't matter whether you are a resident of that state. Their position is you are working for the "convenience of the employer." States have a very complicated set of obligations here. They've got an obligation to the employee to withhold correctly. New York is taking the position they have to withhold. They've got conflicting obligations. I hate to say this, but in some situations, the prudent thing for a conservative employer will be to double withhold. This is a very serious problem
What if an employer reassigns employees living in Connecticut, for example, to subsidiary offices in Connecticut?
Not at all clear that that will work. We do not know again how aggressive New York is going to be. So a controlled subsidiary may or may not be respected by New York.
So the mere existence of a so-called payroll provider, or an employment group—I think New York is going to look through that. I think New York's position would be even if your payroll is a Connecticut payroll, your physical office is still in Manhattan or Brooklyn. And so I would not be confident that solves the problem.
So what is the right policy? Is it just as simple as you should pay taxes based on wherever you're located for however many days a year you are located in a place?
My position is that that's both the correct tax policy, and it's also what is constitutionally required. The constitution of the United States—the due process and commerce clauses—have been understood to say, number one, that states can't reach beyond their borders to tax activity that occurs outside their borders. That is the law. It was very frustrating to me when the court would not hear my appeal, because I'm convinced that if we could get it in front of the court on the merits, that principle will be applied. I'm obviously rooting for New Hampshire to get its case in front of court. This is clearly right, both as a matter of constitutional law and of tax policy. Most people have very good intuition on this matter. If I'm in New Hampshire, I'm working in New Hampshire. I'm sending my kids to a New Hampshire school. I'm getting my public policy, my public services from New Hampshire. If I have a heart attack, Massachusetts is not sending an EMT over the border. People have a very good intuitive notion about what is right here, which is you should pay tax on income where you earn it.
Particularly in these Covid times with state budgets strapped, the question of tax revenue is important—and now we're seeing Arkansas and Massachusetts pursuing that revenue. But the flip side of that is other state governments are foregoing income tax in some cases as a result.
If they give the credit, that's the question. Some states are taking the position—and it puts their residents in the middle—but I think they're right, some of them are saying, look, we only give credits for taxes assessed by another state that are legitimate for income earned in that state. And so you've got many states take that position. You have other states—New Jersey for example—which say, we're not going to look whether the credit makes sense or not. If you pay it, we'll give it to you. That's very liberal towards their citizens. It's also not very good for the New Jersey treasury. And I don't know if that generous position's going to survive this crisis either.
You have a personal intersection with this issue as someone who lives in Connecticut and whose primary employment is in New York.
I'm a law professor at the Cardozo Law School of Yeshiva University. In good times, three days a week I commute into New York and teach my classes. The other two days a week, I stay at home either in New Haven or during the summer here in Branford. I'm here working and doing my research and my writing for Cardozo. So about 40% of my work time is physically in Manhattan. And I reported 40% of my income as being earned in New York. That strikes me, both as a matter of constitutional law and as a matter of policy, is the right thing.
But then you wound up with a court case a number of years ago...
For many years, with Eugene Gavin, who was the commissioner of revenue, and Dick Blumenthal, who was the attorney general—I used to joke about how they wanted New York to come and audit me on this. I said, well, they'll never audit a crazy law professor because he'll take them to the Supreme Court of the United States. Lo and behold, they audited me and I took them to the Supreme Court of the United States. I just couldn't get the Supreme Court to hear the case.
And New York's highest court ultimately turned you down.
Correct. It was on the merits. I've written a lot that is not very gracious about the court's reasoning. But that's because I think the court's reasoning is not very good.
Ultimately you have to pay tax in New York on 100% of your revenue?
Well, it's more interesting than that. As of January first, Connecticut in effect adopted the New Jersey rule where Connecticut will now give a credit. It very interesting Connecticut did that—people were coming up to congratulate me. Yes, it abates the problem somewhat for a Connecticut tax payer. But, number one, it doesn't solve the problem in so far as New York's rates are higher. And second of all, it's a big subsidy for the state of New York being made by Connecticut. I don't think it's a very good idea.
Prior to that, you were paying double taxes?
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