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Federal Tax Watch

U.S. Supreme Court strands telecommuter, taxes imposed

Telecommuters and their employers were left out in the cold when the U.S. Supreme Court refused to hear a New York state income tax case.

Thomas Huckaby, a computer programmer living in Tennessee, is employed by the National Organization of Industrial Trade Unions (NOITU), based in Jamaica, New York.

Huckaby’s employer agreed he could work  primarily from his Nashville home. He traveled to the New York office only to “gather guidelines for revision of existing or creation of new computer programs and to instruct NOITU’s New York  personnel in their use.”

NOITU set up a data line to Huckaby’s home office and reimbursed Huckaby for office expenses.

Huckaby testified he worked about 25 percent of his days in New York and 75 percent at home. Huckaby conceded that NOITU didn’t require him to work in Tennessee and wouldn’t have objected had he worked full time in New York. Huckaby remained in Nashville after accepting employment with NOITU for personal reasons.

By denying Huckaby’s petition, the Supreme Court let stand a March 2005 decision by the New York State Court of Appeals (Huckaby v. New York State Division of Tax Appeals, 2005 NY Slip Op 02413, *17, Ct. App. March 29, 2005).

In a 4-3 decision, New York’s highest court held Huckaby liable for New York income tax on 100 percent of his earnings.

While many telecommuters might benefit from a credit against their home state income tax for income taxes paid to their employer’s state, the tax paid to the employer’s state could be higher than the credit allowed by the home state.

And some states, notably Connecticut, deny a credit for taxes imposed on resident telecommuters by New York’s “convenience of employer” rule.

Because Tennessee has no state tax on earned income, Huckaby will not benefit from any credit.

Unlike other courts of appeals, the U.S. Supreme Court decides for itself which cases it wants to hear. And Huckaby’s case wasn’t one that piqued the court’s interest.

Importantly, the fact that the court refused to hear the case is no indication that it agrees with the outcome.

New York, like virtually every state that imposes an income tax, taxes income based on the location where the services are performed. Accordingly, Huckaby would be subject to New York state income tax on 25 percent of his income.

However, the New York rule states, “any allowance claimed for days worked outside of New York State must be based on the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties.” [20NYCRR 132.18(a)]

It appears that the “convenience of the employer” test was added after residents of surrounding states who worked full time in New York attempted to treat a portion of their income as exempt from New York income tax on days they elected to work from home, including weekend days.

The New York State Court of Appeals wasn’t swayed by Huckaby’s argument that his situation was not motivated by tax avoidance.

So far, only a handful of states, notably Pennsylvania and Nebraska, have instituted rules similar to New York’s.

In 2004, Congress failed to act on the Telecommuter Tax Fairness Act, which seeks to prevent states from collecting taxes from employees for work performed outside that state.

If you telecommute or employ telecommuters, consider reviewing the language in your employment contracts. Where appropriate, the contract should clearly state when telecommuting is required by the employer as a condition of employment.

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