Countries have double tax treaties to sort out cases where their different income tax rules subject people or companies to double tax on the same income - but the states of the USA seem more jealous of their fiscal prerogatives than that, and don't have such agreements for the most part, so it's quite easy to fall foul of the system if you're not careful.
Professor David Harvesty, of www.ecommercetax.com, explains in a article this week how New York is a particularly aggressive tax jurisdiction for those who occasionally work inside its borders. This matters more and more, as telecommuting becomes widespread in the attempt to avoid appalling traffic jams and the high costs of downtown offices (what do they do with those tax dollars, anyway?).
Hardesty gives as an example the case of a hypothetical website programmer who works from home in California for a New York-based company. During the year 2000 he spends one day in the company’s New York office, attending meetings. This is the only time spent in New York. He worked 300 days in 2000, including 1 in New York and 299 in California. His salary in 2000 was $100,000. You got it, he pays tax in New York on the whole of his income, and yes, of course he also pays tax on the same income in California. And he doesn't get a tax credit in California for the New York tax. New York? Where's that?
This is not at all a hypothetical problem: the New York courts have consistently struck down attempts by non-resident taxpayers to apportion their income according to time spent working in New York and elsewhere.
The miscreant wording that achieves this result, says the Professor, is in Regulation 132.18(a), which provides, in part:
'If a nonresident employee . . . performs services for his employer both within and without New York State, his income derived from New York State sources includes that proportion of his total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number working days employed both within and without New York State. . . . However, any allowance claimed for days worked outside of 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.'
It's obvious, if ridiculous, that a computer programmer, for instance, could in fact perform her work in New York, wherever she actually does it, so just setting foot in the New York office will be enough to bring her whole income under New York tax law.
Even when states give tax credits for tax paid in another state, the rules may be drawn in such a way as to leave the double taxation effectively unabated. For instance, in a recent case, a Connecticut resident ended up paying tax twice even though double tax is usually avoided by the state allowing the taxpayer to offset his Connecticut tax with a credit for the tax paid in the other state. The problem is that, for income from personal services, the credit is available only where the services taxed by the other state are actually performed in the other state.
As the taxpayer said in court, this rule gives a result which is apparently unconstitutional, apart from being mad: but tax law is apparently able to be both, and the court threw out the case.
Professor Hardesty says there is no indication that New York will change its rules. Not only do the current rules generate substantial tax dollars; the people directly impacted (i.e., the commuters and telecommuters) do not vote in New York. However, he hopes, as telecommuting becomes more common, New York companies may begin to put pressure on the state. Companies whose business model includes telecommuters have to consider the additional tax cost when deciding to locate in New York; and smart employees need to take the New York rules into account in evaluating potential employers.
If a New York office is a must, concludes the Professor, employers can minimize the threat of double taxation by insuring that telecommuting employees perform no work in New York.
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