State Taxes and Telecommuting

As the country continues to struggle with the coronavirus pandemic, more people are telecommuting than ever before. While some work from home arrangements are expected to be temporary, many employees can expect to be working from home indefinitely. This has created complexities in the way that state income taxes are imposed. Not all employees live and work in the same state. States have only begun to grapple with the complexity of what happens when an employee is actually performing the work in one state, but the employer is located in a neighboring state. The impact could be significant, especially where state income tax regimes are particularly different.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether state governments should impose state-level income taxes on workers who are telecommuting during the COVID-19 era.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: States are struggling with intense revenue shortfalls and sharply increased public spending during this unprecedented year. Millions of Americans continue to collect unemployment benefits—and tax revenues are expected to be lower than ever before. Those workers fortunate enough to have a telecommuting option should be expected to contribute to the state in which the work is actually performed, not the state where the business is located.

Byrnes: The telecommuting phenomenon is temporary. It's a logical and sensible response to an unprecedented situation—and a great way to keep workers as safe as possible. We don't know when we'll see the end, but we will someday return to normal working conditions. Revamping state-level rules about income tax nexus makes absolutely no sense and would only serve to further complicate an already complicated situation.

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Bloink: With workers telecommuting more than ever, it only makes sense that states should have the ability to bring those workers into their income tax system--even if their physical office is located in another state. The relevant concept here is where the work is actually being performed--not where the employer happens to be located. That's always been the governing principle behind imposition of state-level taxes.

Byrnes: States shouldn't have the authority to introduce chaos into their respective tax regimes by attempting to tax telecommuting employees who wouldn't ordinarily earn income in their state of residence. State and local taxes are governed by a system that’s complicated enough without states' trying to capitalize by changing the entire tax landscape.

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Bloink: The employment has changed dramatically in just a few short months. States are understandably struggling across the board. Those states should have the ability to make corresponding changes necessary to support services within their states—after all, if an employee no longer commutes into the neighboring state, it makes very little sense for the employee to fund that neighboring state’s programs and policies.

Byrnes: When workers are working from home temporarily, the same principles that have always applied should be kept--at least for the time being. A chaotic patchwork of state-level changes is the last thing anyone needs to be dealing with right now. We have to expect that life will return to some degree of pre-pandemic normalcy at some point. We shouldn’t take steps that we’ll then have to undo a few months down the road. It’s the employee who will suffer the most by the type of uncertainty this type of tax regime would create.