With the advent of faster internet connections and cheaper, more powerful computer equipment, telecommuting has developed into a viable and widely used work arrangement. In many cases, taxpayers telecommute from states outside the state in which their employers are located.
The majority of states apportion a taxpayer’s employment income based on where the taxpayer performs his or her services. A minority of states use the convenience of the employer test, under which in almost all cases a telecommuter’s income is apportioned entirely to the state in which the taxpayer’s employer is located.
The application of the convenience of the employer test can lead to double taxation where the employer’s state applies the test and the state from which the employee is telecommuting does not. A number of solutions to this problem have been suggested, including a federal law prohibiting the use of the convenience of the employer test
In the past two decades, telecommuting has become an important part of American business. Telecommuting is the use of telecommunication to work outside the traditional workplace by means of an electronic connection with the employer’s office. This form of technological arrangement allows an individual residing in, for example, a midwestern state to work from home for a New York–based company.
Currently, some state laws allow governments to tax individuals who choose to telecommute to work from a different jurisdiction than that of their employer. State and local taxation has a great impact on the telecommuting trend and may directly affect its future. As an economic policy, tax legislation may promote the growth and development of telecommuting within a state or hinder its existence. This tax issue also affects businesses and managers who rely on a scattered workforce or engage in multijurisdictional operations and employ telecommuters who may be at risk for paying additional taxes. This article discusses how state and local tax laws affect telecommuting and what the federal and state governments can do to prevent taxes from having a negative effect on the growth of the telecommuting movement.
Trends in Telecommuting
Telecommuting as a trend first emerged during the 1980s. It has grown rapidly with the emergence of the internet, the modernization of computers and supporting equipment, and improvements in the telecommunication infrastructure. Based on a report by the American Interactive Research Group, in 2003 there were 4.4 million employees working from home through a broadband connection. A year later, the same study showed that the number of telecommuters had increased by 84% to 8.1 million. By 2006, roughly 34 million American workers participated in telecommuting.1 This number has steadily increased and is predicted to reach 100 million by 2010.2 In a country with a total population of over 300 million, almost a third of the population would be engaged in telecommuting.
Telecommuting is beneficial for both employers and employees. Employers generally benefit from being able to attract the best new talent, reduced work space and turnover costs, the elimination of employee relocation expenses, improved management of the workforce, a more integrated electronic commerce system, increased productivity, and various other cost savings. Given the current state of our economy, telecommuting provides a viable solution for reducing operating costs and retention of employees.
Telecommuting allows a business to have both a physical and an intangible form of operations. In addition to its physical headquarters, a company may have an internet-based center where business can continue through web meetings, e-mail, instant messaging, and telephone. Such diversity may reduce business interruption costs during an emergency or when other major disruptions occur near the main office. For instance, if a fire, bomb threat, terrorism, or transit strike directly affects a company’s offices, telecommuting employees can continue company operations.3
Employees benefit by saving the time and expenses of commuting, work schedule flexibility, lack of work-related stress, and the comfort of working from their own home. Telecommuting from home, or telework, provides an opportunity for employees nearing or in retirement and disabled individuals to continue earning income for their support.
The benefits of telecommuting have also affected our surroundings. Telecommuting is viewed as a green initiative that reduces pollution levels by removing cars from the roads. According to one report, telecommuting saves 840 million gallons of fuel annually in the United States.4 Telecommuting may bring new internet-based jobs to rural areas and bring more new business to those rural areas to support telecommuting employees’ demands for supplies and additional services.
As a result of these developments, the federal government has recognized the importance of telecommuting and expressed its support. In 2001, a law was passed requiring federal agencies to make telecommuting an option for their employees whose performance would not be diminished by telecommuting.5
Taxation of Telecommuting
Local taxation may have a great impact on telecommuting in the near future. At the moment, many states either do not have an income tax,6 tax only income earned from dividends or interest,7 or assert tax nexus on employers based only on the presence of telecommuting employees.8 States in this third group tax an employee only on services the employee performs while he or she is physically present in the state. As a result, an individual working in two or more states must apportion his or her income based on the amount of time worked in each state. For instance, if an employee spends 20% of his or her time telecommuting from a home office, that employee’s income is taxed 80% to the employer’s state and 20% to the employee’s state of residence. Such a law is consistent with the Constitution’s Due Process and Commerce clauses, which do not allow states to project their taxing authority outside their borders or tax extraterritorial values.9 This physical method of allocation is used by 36 out of 41 states that impose tax on earned wages.10
The five other states—Delaware, Nebraska, New Jersey, New York, and Pennsylvania—deviate from the aforementioned taxation methods by employing the convenience versus necessity test.11 This allows these states to tax the income of a nonresident telecommuter if his or her employer is located in the state.12
Of the five states that allow for telecommuting tax, New York has been the most aggressive in collecting tax revenue from telecommuters.13 New York taxes its nonresidents on all income derived from or connected with New York sources.14 This source income includes revenue attributable to a business, trade, profession, or occupation carried on in New York.15 If a nonresident works partly in New York and partly in another state, the New York source income is determined by apportionment and allocation in accordance with regulations prescribed by New York’s commissioner of taxation and finance.16 Thus, New York taxes nonresident employees on work performed in New York and on work performed outside New York.17 This law allows for double taxation of tens of thousands of nonresidents who work for companies in New York.18
Currently, for New York State taxation purposes, the apportionment and allocation of income is limited by the convenience of the employer test. This statutory provision allows New York to use a farther-reaching taxation approach than other states. Under the convenience of the employer test, “any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.”19 The rationale behind the convenience of the employer rule is to prevent inequality between New York State residents and nonresidents. Since a New York State resident would not be entitled to special tax benefits for work done at home, neither should a nonresident who performs services or maintains an office in New York State.20
Due to the potential for abuse, there is a strict standard for judging the employer’s necessity.21 The case law states that “an employee’s out-of-state services are not performed for an employer’s necessity where the services could have been performed at his employer’s office.”22 Thus, if work performed in an out-ofstate jurisdiction could just as easily have been performed at the employer’s New York office, it is work performed for the employee’s convenience and not for the employer’s necessity.23 Accordingly, unless the taxpayer presents evidence that services he or she performed at the outof-state residence could not have been performed at the employer’s New York office, the services will be considered to be performed out of state for the employee’s convenience.24
Taxpayers have unsuccessfully challenged the interpretation and constitutionality of New York’s tax statute several times. In Zelinsky,25 a taxpayer commuted three days a week from Connecticut to New York City, where he worked as a law professor at Cardozo School of Law. The other two days he worked from his Connecticut home for his own convenience. Although Zelinsky apportioned his income under N.Y. Tax Law Section 631(c) on his nonresident tax return, the New York State convenience of the employer provision required that all his work days be counted as New York days because it was not necessary for him to work from home and was not required by his employer.
This led to double taxation of Zelinsky’s income by New York and Connecticut. Connecticut taxes its residents on all wages earned, even when the residents work outside the state. Connecticut allows credit for income taxes paid to another state derived from or connected with sources in the other taxing jurisdictions.26 Credit applies for “income tax imposed by another jurisdiction upon compensation for personal services performed in the other jurisdiction.”27 However, Connecticut does not allow a credit for work performed in Connecticut, even if the taxpayer pays taxes to another state on the income from the work.28 After the administrative law judge, the tax appeals tribunal, and the appellate division all ruled against him, Zelinsky appealed, arguing that the statute’s convenience of the employer provision violates the U.S. Constitution’s Commerce and Due Process clauses.
On appeal, the court disagreed with the taxpayer and ruled that the statute’s convenience of the employer provision does not violate the Commerce and Due Process clauses. The court held that there was no violation of the Commerce Clause because the tax was both internally and externally consistent and thus fairly apportioned. The tax was held to be internally consistent because if “every state were to impose an identical tax, no multiple taxation would result.”29 Since the entirety of Zelinsky’s salary and “benefits of tangible and intangible protections,” including police, fire, emergency services, public utilities, and prominence of an academic position in the law school, were derived from New York sources, the tax was externally consistent because New York’s tax did not reach beyond the portion of value that is fairly attributable to economic activity within the taxing state. The court held that provision also did not violate due process because it did not tax extraterritorial values. The court concluded that Zelinsky purposefully availed himself of an economic market in New York, had a minimum connection to New York via his employment, and received tangible and intangible benefits from working in New York City.
A taxpayer again challenged the constitutionality of the statute two years later. In Huckaby,30 a taxpayer lived and worked as a computer programmer in Nashville, Tennessee, and was employed by a company located in Jamaica, New York. As part of his employment, he and the company agreed that his primary work location would be his home in Tennessee and that when necessary he would be required to travel to New York. Further, the company assisted the taxpayer with establishing a home office and reimbursed him for his monthly expenses. Thus, on his tax returns the taxpayer allocated his income based on the percentage of his physical presence spent working in Tennessee and New York—75 and 25%, respectively.
On an audit, the New York State Department of Finance and Taxation determined that the taxpayer was subject to taxation on 100% of his income in New York based on the convenience of the employer clause of NY Tax Law Section 631.
Huckaby appealed and alleged that the New York tax statute is unconstitutional because it violates the Constitution’s Due Process, Commerce, and Equal Protection clauses. The Court of Appeals, in a four to three decision, disagreed with the taxpayer and stated that the taxation based on the rule of convenience does not affect or violate his constitutional rights.
The Huckaby decision was followed by Holt.31 In that case, the taxpayer was a human resource compensation consultant who worked from his Florida home for two companies located in New York. On the tax return, the taxpayer apportioned the number of days he worked for the New York companies and paid the corresponding nonresident tax. The taxpayer argued that he was not present within New York State on the days he did not work there and thus should not be subject to tax on days spent outside New York.
Despite these arguments, the New York Division of Tax Appeals concluded that the taxpayer worked in Florida for his rather than the employer’s convenience and thus was liable to pay New York nonresident income taxes. The court stated that the taxpayer’s services “were not of such a specialized nature that they could not have been performed at his employer’s offices.” Since the employer’s allowance to work from home did not meet the necessity requirement, the taxpayer made the resulting choice to work at home. The court stated that it would not deviate from the precedent established in Zelinsky and Huckaby because the facts in Holt were essentially indistinguishable from the previous cases.32 Accordingly, since it was not necessary for the taxpayer to perform services at his Florida home and the work location was for his convenience, the taxpayer was “not entitled to treat such at-home working days as non– New York days for purposes of income allocation.”33
On a rare occasion, the court ruled for the taxpayer and held that the taxpayer’s work from home was due to the employer’s necessity and not the employee’s convenience because of the case’s very particular facts. In Fass,34 a New Jersey resident edited and published several magazines dealing with a variety of special topics such as sports cars, motorcycles, firearms, home improvements, dogs, and horses. As part of his job Fass tested, analyzed, and investigated new products in these areas and reported on them in articles prepared for various New York magazines. To perform duties for his New York employers, Fass required peculiar accommodations available to him on his New Jersey farm: access to a firing range with ballistics equipment, storage facilities, a garage to store automobiles and motorcycles for testing and evaluation, and a stable and kennel to house the horses and dogs that he analyzed and photographed. During the trial, Fass testified without contradiction that these facilities were not available at or near his employers’ New York City offices. Accordingly, the court ruled for the taxpayer and held that the work he “performed at the New Jersey locations concededly could not have been performed at his employer’s New York City office.”35
As of now, the courts have not addressed the issue of whether an employer and employee can create necessity through careful drafting of employment contracts. For instance, a business with limited work space in New York City may ask its workers to telecommute from home and only occasionally be physically present at work. The business is strategically dependent on this limited setup to keep its operating costs low and attract the most qualified candidates for the jobs. Its out-of-state employees perform the same tasks as though they were physically present at work while enjoying the benefits of telecommuting from their homes. If the employment contract is drafted to limit employees’ physical presence at the employer’s headquarters because of necessity, due to the wide differentiation of current case law it is hard to predict whether such an agreement would be respected by the courts.
The practical result of New York’s convenience of the employer test and the court decisions interpreting it is a system of double taxation for taxpayers who telecommute from states that have an income tax but do not use the convenience of the employer test or allow a full credit for taxes paid to another state. Instead of apportioning income, in almost all cases New York simply claims all of a nonresident taxpayer’s income regardless of where the taxpayer performed the services generating the income. As a result, telecommuters in the New York tristate area and beyond are subject to double taxation of their earnings, which is likely to have a negative effect on this technological labor trend.
The Telecommuter Tax Fairness Act of 200536 (TTFA) was supposed to eliminate the double taxation dilemma created by the New York statute and its convenience of the employer test. However, the bill never passed. In 2007, the TTFA was reintroduced but was again not enacted.37 It was reintroduced in 2009 and as of this writing has been referred to the House Subcommittee on Commercial and Administrative Law.38
The TTFA, if enacted, would provide that a state may impose a tax on nonresident individuals only when the nonresident individual is physically present in or is working in that state. Accordingly, the state could not impose nonresident income taxes on compensation for any period of time a nonresident individual is physically present in another state. In the determination of physical presence, the states could not deem nonresident individuals to be present in or working in a state on the grounds that a “nonresident individual is present at or working at home for convenience” or a “nonresident individual’s work at home or office at home fails any convenience of the employer or any similar test.”39
Given the slowing economy and budget deficits in many state and local governments, other states may enact laws similar to New York’s convenience of the employer provision to raise additional revenue. Enactment of such state and local laws will have strong negative effects on the growing trend of telecommuting. Although the collection of revenue is essential for state and local governments, it should be done without ignoring the potential negative impact it may have on current technological and labor trends. To prevent future double taxation, create consistency between states’ tax policy, simplify the already complicated tax code, and further support the growth of telecommuting, Congress should enact a uniform law or provide other similar relief as soon as possible. On a local level, states and localities should not enact tax legislation without considering its overall implications and effects on the benefits of telecommuting.
For states that impose income taxes on wages, another solution is to provide offsetting telecommuter credits for taxes paid to another state. If done without limitations, this option would eliminate double taxation. However, if a state imposes a limit on the amount of tax credit, there still will be a potential for double taxation on a reduced amount of income.40
Similarly, the problem of double taxation does not exist if one of the states does not impose income tax. For instance, although in Huckaby the Tennessee taxpayer was required to pay a greater portion of income tax for telecommuting to New York (100% of the tax instead of 25%), he was not double taxed on the income earned while telecommuting because Tennessee does not tax wage income.
Another suggested solution is to provide for tax allocation only if an employee telecommutes a certain percentage of the work time in a given time period.41 For instance, if a taxpayer telecommutes from Massachusetts to New York more than a certain percentage of his or her overall time in the course of his or her employment in a given time period, an allocation of earned income between the two states will be allowed if the taxpayer can provide substantiated acceptable evidence of such allocation.
While waiting for federal and state governments to address the issue of telecommuting taxation, practitioners must advise clients on how to minimize potential tax liability. The New York State Department of Taxation and Finance issued a technical memorandum addressing situations in which a nonresident or part-year resident employee whose assigned or primary work location is in New York performs services for an employer at that location and at a home office located outside New York.42 The other states that impose tax on telecommuters have not issued similar guidance.43 However, because New York has taken a hard-line stance on the taxation of telecommuters, knowledge of these rules should be useful in predicting what other states that have adopted or will adopt the convenience of the employer test may require.
The New York guidance does not limit the state’s ability to tax telecommuters, but in certain circumstances the guidance makes it possible through planning to reduce or eliminate a telecommuter’s tax liability. According to the memorandum, a nonresident telecommuter can meet the necessity requirement by satisfying either of two prescribed tests: (1) the primary factor test or (2) a secondary factor test plus three other factors.
The primary factor test requires the employee’s home office to contain or be near specialized facilities. The primary factor test will be satisfied if the “employee’s duties require the use of special facilities that cannot be made available at the employer’s place of business, but those facilities are available at or near the employee’s home.”44 This test is analogous to the court’s holding in Fass suggesting that an employee’s telecommuting from home is deemed necessary if the job must be performed at or near the employee’s home office, such as testing cars on a track. Conversely, if an employee’s job can physically be established at the employer’s place of business located in New York, such as by the presence of specialized scientific equipment, the employee’s home office would be considered a mere convenience rather than a necessity.45
The taxpayer can meet the secondary factor test by satisfying at least four out of six prescribed factors and three out of ten other factors. The secondary factors are:
- The home office is a requirement or condition of employment. For example, this factor will be satisfied if a written employment contract states that the employee must work from home to perform specific duties for the employer.
- The employer has a bona fide business purpose for the employee’s home office location. This factor is fulfilled, for example, if an employee works on several projects in a home state and it is necessary for the employee to have an office near these projects in order to meet project deadlines.
- The employee performs some of the core duties of his or her employment at the home office. For example, this factor is met if core duties of employment, such as executing stock purchases for a stockbroker, are performed at the employee’s home office.
- The employee meets or deals with clients on a regular and continuous basis at the home office. This factor is satisfied, for example, if an important part of the employee’s duties consists of physically meeting with clients and if those meetings are performed on a regular and continuous basis at the home office.
- The employer does not provide the employee with a designated office space or other regular work accommodations at one of its regular places of business. For example, this factor is met if the employer reduces its New York office space and no longer provides designated office space or regular office accommodations in order to decrease rental costs but allows the employee to telecommute from home and provides temporary accommodations when the employee is at the employer’s regular place of business.
- The employer reimburses substantially all the expenses related to the employee’s home office (e.g., utilities, insurance) or pays the employee a fair value for the home office space used and furnishes or reimburses the employee for substantially all supplies and equipment used. For the purposes of this factor, “substantially all the expenses” means 80% or more of the expenses.46
The other ten factors, three of which must be met, are:
- The employer maintains a separate telephone line and listing for the home office.
- The employee’s home office address and phone number are listed on the employer’s business letterhead and/or business cards.
- The employee uses a specific area of the home that is separate from the living area exclusively to conduct the employer’s business. The home office will not meet this factor if the area is used for both business and personal purposes.
- The employer’s business is selling products at wholesale or retail, and the employee keeps an inventory of the products or product samples in the home office for use in the employer’s business.
- The employer’s business records are stored at the employee’s home office.
- The home office location has a sign indicating it is a place of business of the employer.
- The employer’s advertisement shows the employee’s home office as one of the employer’s places of business.
- The home office is covered by a business insurance policy or a business rider to the employee’s homeowner insurance policy.
- The employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes.
- The employee is not an officer of the company.47
Structuring employment agreements and accommodations for telecommuters in accordance with New York guidance may diminish out-of-state telecommuting employees’ potential state and local tax liability. Similar guidance from other states that impose taxation or plan to tax telecommuters in the future would further allow for planning to reduce the telecommuting employee’s potential tax liability.
Telecommuting is a significant growing trend that is here to stay. Its numerous cost-cutting, time-saving, and environmental benefits will continue to affect employers’ decisions pertaining to business operations and competitive strategy. As telecommuting’s popularity grows, more clients who choose to telecommute from their home offices will be affected by conflicts between the tax regime of the state in which their employer is located and that of the state from which they telecommute. Given the current fiscal status and budget deficits of many states, it is possible that states will begin to aggressively enforce existing tax laws or create new legislation that taxes telecommuting. While waiting for federal or state legislation eliminating or simplifying telecommuter tax, practitioners must be aware of potential multistate double taxation of telecommuters in order to avoid unfavorable outcomes for their clients.
Ilya Lipin is an attorney in Philadelphia, PA, who concentrates his practice on state and local taxation issues and commercial litigation. For more information about this article, contact Mr. Lipin at firstname.lastname@example.org.
1 Sullenger, “Telecommuting: A Reasonable Accommodation Under the Americans with Disabilities Act as Technology Advances,” 19 Regent U. L. Rev. 537 (2006–2007).
2 Telework Facts, Telework Coalition, (accessed December 22, 2009)
3 87% of federal employees with the option to telework would be able to continue their work via telework if their office were closed due to a storm or some other catastrophe. In comparison, only 62% of nonteleworkers said they would be able to perform their jobs. See “Telework: Shifting into Gear,” CDW-G Federal Telework Report.
4 TIAX LLC, report to the Consumer Electronics Ass’n,“The Energy and Greenhouse Gas Emissions Impact of Telecommuting and e-Commerce,” p. 45 (July 2007).
5 Department of Transportation and Related Agencies Appropriations Act, P.L. 106-346, §359.
6 Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
7 New Hampshire and Tennessee.
8 Federation of Tax Administrators, “State Individual Income Taxes 2008.”
9 MeadWestvaco Corp. v. IL Dept. of Rev., 553 U.S. 16 (2008); ASARCO Inc. v. ID Tax Comm’n, 458 U.S. 307 (1982).
10 Lafond and Schrader, “State Taxation of Telecommuters,” 207 Journal of Accountancy 70 (June 2009).
11 Oregon recently declared that it is also considering legislation that will impose a tax on telecommuting (id.). See also Simon, “Telecommuting: Which State Is the Employee In?” CPA J. 59 (July 2001).
12 Lafond and Schrader, “State Taxation of Telecommuters.”
13 Korzeniowski, “Telecommuting Climate Getting Chilly,” E-Commerce Times (December 22, 2005), .
14 N.Y. Tax Law §§601(e)(1) and 631(a)(1).
15 N.Y. Tax Law §631(b)(1)(B).
16 N.Y. Tax Law §631(c).
17 N.Y. Comp. Codes R. & Regs. tit. 20, §132.18(a) (2006).
18 Belson, “Work an Hour, Pay Tax on 2. Is That Fair?” New York Times (January 20, 2008).
19 N.Y. Comp. Codes R. & Regs. tit. 20, §132.18(a) (2006).
20 Speno v. Gallman, 319 N.E.2d 180 (N.Y. 1974).
21 Kitman v. NY Tax Comm’n, 92 A.D.2d 1018 (N.Y. App. Div. 1983).
22 In re Holt, No. 821018 (NY Div. Tax App. 11/1/07), citing Phillips v. NY Dep’t of Tax. and Fin., 267 A.D.2d 927 (N.Y. App. Div. 1999).
23 Fass v. NY Tax Comm’n, 68 A.D.2d 977 (N.Y. App. Div. 1979).
24 Page v. NY Tax Comm’n, 46 A.D.2d 341 (N.Y. App. Div. 1975); Simms v. Procaccino, 47 A.D.2d 149 (N.Y. App. Div. 1975).
25 Zelinsky v. Tax App. Trib., 1 N.Y.3d 85 (N.Y. 2003).
26 Conn. Gen. Stat. §12-704(b).
27 Conn. Agencies Regs. §12-704(a)-4(3).
28 Lohman, “New York and Connecticut Income Taxes—Double Taxation and the Zelinsky Case,” Office of Legislative Research Report 2004-R-0063 (January 13, 2004).
29 Zelinsky, 1 N.Y.3d at 91.
30 Huckaby v. NY State Div. of Tax App., 829 N.E.2d 276 (2005), cert. denied, 546 U.S. 976 (2005).
31 In re Holt, No. 821018 (NY Div. Tax App. 11/1/07).
32 Zelinsky, supra n. 25; and Huckaby, supra n. 30.
33 In re Holt, supra n. 31.
34 Fass, supra n. 23.
35 Id. at 978.
36 Telecommuter Tax Fairness Act of 2005, H.R. 2558, S. 1097 (2005).
37 Telecommuter Tax Fairness Act of 2007, H.R. 1360, S. 127 (2007).
38 Telecommuter Tax Fairness Act of 2009, H.R. 2600 (2009).
39 Telecommuter Tax Fairness Act of 2009, §2(a).
40 Cristy and Smith, “New York’s ‘Convenience-of-the-Employer’ Rule: From Defending the Fisc to Punishing Telecommuters,” 24 J. State Tax’n 17 (March–April 2006).
41 Id. at 22.
42 N.Y. State Department of Taxation and Finance, Office of Tax Policy Analysis, Technical Services Division, Memo TSB-M-06(5)I.
43 Lafond and Schrader, “State Taxation of Telecommuters.”
44 N.Y. State Department of Taxation and Finance, Office of Tax Policy Analysis, Technical Services Division, Memo TSB-M-06(5)I.