The Future Of Tax Coverage For Distant Employees

Timothy Noonan of Hodgson Russ LLP discusses how some states tax distant workers and the impact of momentary pandemic tax modifications.

This transcript has been edited for size and readability.

David D. Stewart: Welcome to the podcast. I am David Stewart, editor in chief of Tax Notes Right this moment Worldwide. This week: tax and distant work.

In March 2020 because the world shut down and plenty of corporations switched to totally distant work, few have been excited about the tax penalties of all these new teleworking workers. However because the pandemic dragged on, many states put into place momentary tax legal guidelines establishing that distant workers could be topic to taxes within the state of their employer, much like the comfort of the employer guidelines, that are a coverage that is been round for a while in states like New York and Pennsylvania.

Now, two years later, many corporations proceed to supply a distant possibility for his or her workers. But these quickly enacted pandemic guidelines are ending, inflicting many to marvel about the way forward for tax coverage for distant employees.

Tax Notes State reporter Paul Jones will speak extra about this in only a minute.

Paul, welcome again to the podcast.

Paul Jones: Thanks, David. It is nice to be again.

David D. Stewart: Now, Paul, I perceive you are one in all our totally distant reporters. The place are you based mostly and are you influenced by a comfort rule?

Paul Jones: Sure, not like a lot of the Tax Notes crew who’re based mostly out of Virginia, I really work out of sunny California all yr. Now, Virginia would not have a comfort of the employer rule and that implies that my earnings is taxed solely by California the place I work. In fact, notably, California additionally would not have a comfort of the employer rule. But, anyway.

David D. Stewart: I perceive you lately talked with somebody about these guidelines. May you inform us about your visitor and what you talked about?

Paul Jones: Certain. Our visitor skilled is Timothy Noonan. He is a associate within the New York workplace of Hodgson Russ LLP. He spoke with me lately concerning the controversy over states’ longstanding comfort guidelines and likewise concerning the potential fallout from these comparable momentary withholding guidelines that plenty of states adopted in the course of the pandemic.

David D. Stewart: All proper, let’s go to that interview.

Paul Jones: Thanks for becoming a member of us, Tim.

Timothy Noonan: Completely satisfied to be right here. Thanks, Paul.

Paul Jones: As we all know, comfort of the employer guidelines have been round for some time. I believe there’s roughly 5 states that impose them, relying on the way you depend which states have a rule. In the course of the COVID-19 pandemic, there was an elevated give attention to folks working exterior of their regular areas, together with throughout state traces, and there was an elevated consideration centered on comfort of the employer guidelines.

Earlier than we bounce into that, are you able to give us a fast overview of those guidelines, the place they got here from, what their unique goal was, and the way they’ve advanced since? Additionally, what are among the challenges they pose? Why have these been controversial over time?

Timothy Noonan: Certain, Paul. The comfort rule was traditionally constructed into the tax legislation of a handful of states. New York just about being essentially the most notable as a result of the problems appeared to come up most within the New York courts and in New York tax audits.

The genesis initially was actually one round tax avoidance or curbing tax avoidance. States like New York did not need taxpayers who lived in a border state like New Jersey or Connecticut to get some type of tax profit by merely not going to work. If the worker might save a pair share factors in earnings tax by staying house as an alternative of commuting into work on a specific day, that to the New York legislators and tax division of us appeared like an unfair benefit to individuals who lived in New York and commuted from their home down the road.

That was the preliminary rationale behind these guidelines. Like I stated, there wasn’t a lot of motion on this in states exterior of New York. In New York this turned a scorching button situation partly due to New York being a monetary heart, a industrial heart, and being proper on the border of a pair different states, and partly as a result of New York took a fairly broad interpretation of what the comfort of the employer rule actually meant.

The comfort of the employer rule mainly says that, “For those who’re working from house on your personal comfort and never out of any employer necessity, the state’s going to deal with that day as a day labored in New York.” So, New York circumstances began to return out and New York was taking a really broad interpretation of what was a comfort day. Then they prolonged this, in another circumstances, past simply native telecommuters to individuals who have been working remotely from throughout the nation.

That type of led to this genesis. All of this, in fact, is pre-COVID-19.

However even pre-COVID-19, the problem was the inconsistency within the guidelines as a result of solely a handful of states had these guidelines and the states proper instantly round New York, like New Jersey, Connecticut, and Vermont, did not have these guidelines. The large drawback plenty of instances was double taxation.

That was really the case in Connecticut for years. Connecticut did not have a comfort rule, traditionally, so if we had a telecommuter that paid tax in New York, Connecticut wasn’t giving their residents a credit score for that. That precipitated a lot of challenges for employers and workers and led to plenty of the previous controversy. This ended up getting mounted by Connecticut in 2019, nevertheless it nonetheless might have come up in plenty of states.

Pre-COVID-19, earlier than everybody began telecommuting rather more, there already was brewing controversy. It simply was fairly restricted to New York and environs as a result of most states did not have the principles and telecommuting wasn’t as prevalent.

Paul Jones: Proper. Now let’s speak about among the challenges which have come up as a result of these guidelines are asserting the suitable of a state to tax somebody who’s working exterior of their jurisdiction, and so there have been some authorized challenges. We have had lots of people speculate or assert that these guidelines might or do run afoul of the Structure. However the challenges to those guidelines on these grounds haven’t been profitable.

Can we talk about a few these? Particularly, clearly, we will speak about Zelinsky v. Tax Appeals Tribunal of New York and Huckaby v. New York State Div. of Tax Appeals.

Timothy Noonan: Certain, and people circumstances are 15 or 20 years previous at this level. However each of these taxpayers introduced, as you stated, constitutional challenges to New York’s comfort rule on a pair completely different grounds. One type of on a commerce clause floor that there was double taxation. Clearly, that was the problem with Professor Edward Zelinsky, who lived in Connecticut and was topic to the double taxation situation I discussed a minute or so in the past.

Mr. Thomas Huckaby did not dwell close by in New York. He lived down in Tennessee however was a distant employee for a software program firm. His problem wasn’t actually based mostly on double taxation as a result of there is no earnings tax in Tennessee, however on extra of a due course of kind floor that it simply did not appear proper that constitutionally New York was in a position to make use of its lengthy arms to tax somebody who was working in one other state like that.

Nicely, once more, each of these taxpayers misplaced. These circumstances went to the Court docket of Appeals in New York, which is New York’s highest courtroom. The Supreme Court docket denied taking both attraction. It has been the legislation of the land in New York for no less than the previous 15 years or so.

There was additionally round this time interval a lot of different litigation in New York’s administrative courts, in New York’s Division of Tax Appeals the place taxpayers have been making an attempt to defend themselves in opposition to some fairly aggressive positions taken by the New York Division of Taxation and Finance on this comfort rule.

There have been some circumstances the place an employer requested the taxpayer to work from home as a result of they did not have sufficient area for them of their workplace. Or they requested the taxpayer to work from home as a result of their job was of a confidential nature they usually did not actually really feel like they’d the privateness programs in place on the workplace to guard consumer data or no matter.

In circumstances like that, taxpayers stored shedding. The courts have been saying, “Nicely, look. The work that this worker is doing is of the character that it might have been carried out in New York, so although their employer requested them to remain at house, we nonetheless assume that it is a comfort day.”

That appears to throw the entire idea of the comfort rule on its head. The comfort rule says that should you’re working from house on your personal comfort and never for employer necessity, then that is handled as a New York work day.

Loads of these circumstances appear to make use of a wider interpretation. The thought being if the work was of the character that it might have been carried out in New York, nicely, then New York ought to have the ability to tax it even when the work was carried out at house.

Along with the constitutional points that we noticed come up in Huckaby and Zelinsky, these different administrative circumstances actually made it troublesome on the authorized situation for taxpayers to win. New York was taking an actual broad interpretation of the principles they usually have been profitable.

Paul Jones: We got here virtually to possibly a homeostasis after which COVID-19 hits and you’ve got lockdowns in an try to regulate the unfold of the virus and other people begin working from house, together with out of state. A complete bunch of states come beneath stress to situation tax guidelines to deal with withholding nexus, and many others.

The rationale we’re speaking about that is that among the guidelines by these states, I believe most notably Massachusetts, perform like a comfort rule. They do not particularly state that should you’re working from house for comfort in a special state, then they’re nonetheless going to tax your earnings.

Fairly, to each shield their income and for functions of simplicity for employers, they stated, “If an individual usually works on this location, in our state, hold withholding for them.” In fact, this is not common. States all had completely different variations.

However they established all of those guidelines that asserted this proper to tax somebody who was now not doing work in that state. These have been momentary guidelines, however presumably there are going to be audits of employees for this era that come up. They could be appealed and probably even litigated.

I am curious, leaving apart the bigger constitutional questions on comfort guidelines, do you assume that a few of these pandemic period guidelines, if they’re challenged, are going to face up? Or are there going to be points like whether or not there was statutory authority for a tax division to situation this rule with out new laws to allow it?

Timothy Noonan: Sure, I do count on there to be litigation. What’s fascinating is of the 30 or so states who got here out with some pandemic degree steering on this situation, it was under no circumstances uniform.

A variety of states did not make use of one thing like a comfort rule. A variety of states stated, “You understand what, should you’re bodily working in our state, nicely, that is a piece day in our state. We do not care that you simply’re working remotely on your employer who is likely to be in New York or Connecticut or California.”

You not solely had states popping out with this emergency steering, however you had it being completely different. I believe at one level after we have been monitoring it carefully, 16 states had stated, “Use a comfort kind rule,” and 15 states stated, “No, we will use a bodily presence rule.”

I believe on the constitutional foundation, Massachusetts already received its dispute with New Hampshire, or no less than the Supreme Court docket refused to take their case. Whether or not or not different taxpayers could make a constitutional declare in opposition to a state who put in one in all these emergency guidelines, that is open to query. I am unsure.

However the situation round whether or not or not the tax departments have been even approved to situation these emergency rulings, I believe is a very good one. It simply jogs my memory of the airport masks mandate that bought thrown out.

All these mandates are getting thrown out, not based mostly on testimony by medical doctors. They’re being thrown out as a result of the executive companies within the federal authorities or the states simply did not have the ability to do it. You undoubtedly might see that as an avenue for taxpayers to problem a few of these guidelines.

Paul Jones: One other factor concerning the pandemic period that I believe is fascinating is most of those states have been popping out with these guidelines advert hoc to try to tackle the state of affairs. However in fact, you even have states like New York, which has an on the books comfort rule. I imagine that New York is both auditing or is predicted to audit employees in the course of the 2020 yr, the 2021 tax yr, and many others., and can presumably apply its comfort rule in locations it thinks that it ought to apply.

In a state of affairs the place somebody is understanding of state due to concern about COVID-19 or as a result of their employer’s involved about COVID-19, and even in response to a lockdown order, if a state’s making an attempt to impose its taxation on that individual for understanding of state beneath their comfort rule, does the context of the pandemic and the need of individuals to keep away from an infection lower into the state’s skill to argue that working remotely is from comfort?

Timothy Noonan: Nicely, New York would not assume so. Shortly in spite of everything these lockdowns began, New York issued some steering on their web site that mainly stated, “Establishment. Even should you’re working remotely because of a lockdown or your employer asking you to make money working from home, that does not matter. The conventional comfort guidelines nonetheless apply.” Now, whether or not that holds up is one other story.

I am going to let you know, Paul, you talked about auditing by New York. New York did one thing fairly exceptional or uncommon final yr and it continues. A number of taxpayers who filed their taxes in April or Might of 2021 for the 2020 tax yr or in October of 2021 for the 2020 tax yr, they bought an audit discover instantly. In some circumstances the following day, instantly issued.

These weren’t the everyday residency audits or area audits that we see regularly that New York state runs. These have been extra what we name desk audits, that means it was virtually like a pc generated discover issued to a taxpayer instantly after submitting.

A standard audit would come a yr or so after somebody information a tax return. These desk audits have been coming per week or so after the tax return was being filed. They’re all the identical. It was the identical letter and it was indiscriminate. I noticed one the place a taxpayer reported $10,000 of earnings and bought one in all these notices and a few who reported $10 million of earnings and bought one in all these notices.

They got here out with this program, all asking questions across the comfort rule. The difficulty that we will face is that does the context of the argument change when somebody’s working from house because of a authorities order? As an instance if the federal government shut down the workplace and stated everybody needed to make money working from home, how might New York maintain a place that that was a comfort day? It appears awfully inconvenient and it undoubtedly looks like somebody’s working from house in that state of affairs based mostly on necessity.

Equally, even after plenty of these authorities mandated shutdowns went away, later within the spring or summer time of 2020, a lot of employers, significantly in New York Metropolis, stated, “You understand what, why do not we simply keep closed? It appears to be working, individuals are nonetheless involved, so do not are available.” A number of corporations simply locked their doorways. Nobody might are available. Some corporations made it elective. However most individuals have been advised to remain house.

That provides a wrinkle to the entire comfort rule evaluation. Lots of the states who put in these momentary guidelines did not actually use the comfort tag. They simply stated, “Look, should you used to work in our state after which the lockdown occurred and also you’re working remotely some place else, we will deal with that as a day labored in our state.” That was the Massachusetts rule.

However New York is married to its comfort rule idea, and I believe to your direct query, there’s only a completely different evaluation that may very well be utilized right here. If in case you have the federal government shutting down your workplace, you’ve got your employer shutting down your workplace. The taxpayer, I believe in that case, has a very good argument that this is not a comfort day in any way. This can be a necessity day. “I used to be working from my house in New Jersey or my dad and mom’ basement in Florida, I used to be doing that out of necessity. I could not go within the workplace, for crying out loud.”

That undoubtedly goes so as to add a wrinkle to the authorized arguments right here for certain.

Paul Jones: Let’s transfer ahead, although, as a result of that is the fallout from this specific time frame. In lots of situations, distinctive circumstances the place folks have been working from house as a result of they’re involved concerning the virus or their employer’s making an attempt to take care of the fallout from this pandemic and all of those countermeasures being taken to regulate the unfold of it.

However we have additionally seen, now that we have now increased charges of vaccination and decrease charges of hospitalizations, one thing resembling a return to, if not normalcy, no less than an acceptance of the endemic section of the COVID-19 pandemic. As that has occurred, what individuals are observing is outwardly there was an acceleration of what was a pre-existing pattern in the direction of elevated telecommuting. It appears to have elevated considerably and on a everlasting foundation.

We’re most likely going to see increasingly more folks, significantly these whose work mannequin permits them to make money working from home, telecommuting both more often than not, the entire time, or no less than a part of the time with these versatile work guidelines that some employers are permitting. Because of that, it is fascinating to check out how that might have an effect on comfort guidelines.

However I believe one of many first questions is, is that going to place an onus on states like New York to extend their enforcement of comfort guidelines? Additionally, are different states going to be trying probably at imposing and even adopting comfort guidelines as a method for shielding their tax base?

Is without doubt one of the reactions we would see to elevated telecommuting going to be stricter enforcement of present comfort guidelines and extra taxing authorities and legislatures imposing comfort guidelines or creating comfort guidelines in order that they’ll go after cellular employees?

Timothy Noonan: Yeah, definitely on the enforcement query, for certain. Particularly in a state like New York.

New York actually actually cannot afford it. They cannot afford shedding the income from the entire of us who at the moment are on a extra common telecommuting mannequin. So, completely.

As I discussed with the brand new audit program in New York, that is already being performed out in 2020. We have seen the identical quick audits for 2021 taxes. Elevated enforcement, undoubtedly.

Do we expect different states are going to undertake a comfort kind rule or a telecommuting rule? Look, there’s winners and losers. Some states will profit like Colorado. That is a state the place possibly a lot of folks will or have gone to hang around and work remotely. They won’t need a comfort rule as a result of they may have plenty of New Yorkers who’re simply hanging out in a trip house working. They’d prefer to tax these days.

However a state like California is an actual good instance as a result of California is a bodily presence state traditionally. Which means that if I work for a corporation in San Francisco, however they permit me to work remotely and I am a resident of another state, then I haven’t got to pay California tax on my compensation as a result of I am not working in California. That may very well be a giant drawback for California.

I undoubtedly assume you will have states which can be so-called “losers” in that respect, like California, who’re going to wish to reevaluate their insurance policies. They are going to look to determine a rule like New York’s rule to ensure they do not lose that income.

Paul Jones: There could also be some bigger fights on the horizon over this. However only for now, should you’re an worker or an employer and also you’re in a state that has a comfort rule, or possibly your state begins pondering of adopting it, what are among the sensible issues that workers and employers ought to look to do to try to be sure that they’ve both minimal publicity to this or that they keep away from double taxation? Or possibly they only need to keep away from being caught with a comfort rule in any respect they usually need to know inside the present rule or guidelines, what are among the issues they’ll do to keep away from them?

Timothy Noonan: Yeah, it’s definitely a problem for employers proper now. There is a struggle for expertise on so it is robust to get good folks to return be just right for you.

For those who’re in a state that has a comfort rule, like New York, it is likely to be onerous to rent somebody. You do not care the place that individual lives, you are going to permit the worker to work remotely. They is likely to be coming from Tennessee and there is no earnings tax there. That worker’s not going to need to take the job if it is going to imply 8 p.c of earnings tax on their compensation. That is a problem already for employers.

Then, once more, avoiding the potential for double taxation that might happen when you have somebody who lives in Colorado that has a bodily presence rule, however is telecommuting to New York.

The place there is a will there is a method, although. We have labored with a lot of purchasers to seek out methods to handle this or frankly, to get round it.

A method, if we’re talking within the context of New York, is to simply not come to New York to work in any respect. New York’s comfort rule solely applies to a taxpayer who’s working generally in New York and generally not in New York. For those who’re a one hundred pc telecommuter — you actually do not come into New York in any respect for someday in the course of the yr — then beneath some longstanding case legislation in New York, the comfort rule would not apply. Actually fascinating there, nevertheless it’s an all-or-nothing factor. For those who work for someday, you then’re topic to it. However should you do not are available then that comfort rule would not apply.

That is a New York particular rule, however definitely that is one solution to handle that. Not all the time sensible. Employers will need their workers to return in generally simply to see folks.

One other solution to handle it’s if there’s an workplace in one other state. These comfort guidelines will typically apply should you’re telecommuting to an workplace contained in the comfort rule state.

If I transfer to Florida and I dwell in Florida, however I am telecommuting to an workplace in New York, then the comfort rule applies. However what if my firm opens up an workplace down the road in Miami and now that workplace turns into my workplace? I am going there, that turns into my workplace. Nicely, OK, I am not working from house anymore, I am working within the Miami workplace, so the comfort rule would not apply. Nice.

Or what if my agency already has an workplace in Palm Seaside? I say, “OK, guys. Nicely, now I dwell in Miami, are you able to assign me to the Palm Seaside workplace? I am going to go there generally and that’ll be my important workplace.” Now after I’m telecommuting, I am not telecommuting to New York, I am telecommuting to the Palm Seaside workplace. We do not have to fret about New York’s comfort rule then.

Engaged on methods to get somebody linked to a special workplace, it is one thing corporations can do.

We have endorsed plenty of our purchasers in establishing preparations like that. There are info and circumstances kind issues. It is bought to be a legit workplace project. The individual has to go there no less than generally. But it surely’s a particular method round it.

The very last thing we have labored with corporations on, and this goes again to one in all my feedback earlier concerning the secure harbor guidelines which were put in place in New York to permit house workplace work if that work is completed out of what New York deems to be a bona fide workplace of the employer. That requires us assembly a laundry record of things, but when we will meet these elements, then voila, we have mounted the problem.

We have labored with plenty of corporations to arrange that kind of association, answering to some type of telecommuting settlement or telecommuting association with their worker and that will get us out of the issue. If somebody’s moved to Florida, it means we do not have to pay any tax. If somebody’s moved to Colorado, it means we do not have to pay double tax.

However there’s undoubtedly methods to handle this or get round it if of us simply take the time to determine it out.

Paul Jones: One final query right here. Once we take a look at the rise of distant work, for instance that this continues to be an possibility that turns into increasingly more enticing to folks. We’ll have most likely a bigger constituency of distant employees than we have had up to now. As that turns into the case, does that undermine the argument for these comfort guidelines in a method that possibly impacts states inside their rulemaking with their legislative course of?

We talked about some states could also be winners and losers. There could also be some states which have an incentive to try to shield their tax base. However I am questioning if distant work may additionally trigger folks to place stress on states to say, “Look, this isn’t a comfort situation and you may take a tough line on this, however we will keep away from working in your state and even placing a toe throughout the border into your state if you are going to try to tax us like this.”

Over time, it would simply make the argument as a result of after we have been speaking concerning the genesis of those guidelines as a method of going after tax avoidance, it more and more looks like these guidelines are shifting of their software away from that in the direction of simply going after individuals who do not work at their employer’s workplace in a given state as a result of that is now not a traditional work mannequin.

Is there a possible that the justification for and the premise of those guidelines turns into so weakened over time by the info on the bottom that it turns into more durable and more durable for states to maintain them?

Timothy Noonan: That is fascinating. I am unsure. I believe the premise that these comfort guidelines have been designed as a solution to deter tax avoidance died a very long time in the past.

Perhaps with the Huckaby case in New York, the place he wasn’t avoiding New York tax by working over the border, he was 1000’s of miles away. The premise was states like New York pondering, “Hey, look. For those who’re working for a New York firm and also you’re doing work that may very well be carried out in New York, you should not get a particular profit as a result of your employer means that you can make money working from home. Whether or not that is throughout the river or whether or not that is throughout the nation.”

I believe with distant work changing into regular, it is not that it undermines the premise that helps a comfort rule. I believe what it does is it shines a light-weight on the potential inequity of it. It shines a light-weight on completely different states having completely different guidelines that might result in double taxation. It results in podcasts like this, the place individuals are speaking about it. It spurs motion, and after we’re coping with taxes and tax attorneys, it results in litigation.

That would upend the rule, which from the start is slightly questionable. Why do you have to have the ability to tax any individual within the state of New York if they don’t seem to be working within the state of New York? That all the time was goofy.

I believe what the rise in these distant work preparations does is it shines a light-weight on a problem that is uncommon and that may be actually unfair. That, I believe, is what is going on to spur plenty of motion, plenty of litigation, plenty of dialogue on this for a few years to return.

Paul Jones: Nicely, thanks, Tim. It has been an actual pleasure speaking with you, and I am certain everybody appreciates your evaluation on this situation.

Timothy Noonan: Superior, Paul. Completely satisfied to take part. Thanks once more.