Growing battles among the states over how they levy income taxes on nonresident remote workers could be resolved under legislation that’s languishing in Congress.
Bipartisan Senate legislation would set a 30-day in-state threshold before states could levy income taxes on nonresident workers.
Sens. Sherrod Brown, D-Ohio, and John Thune, R-S.D., recently reintroduced their Remote and Mobile Worker Relief Act (S. 1274), which had 38 bipartisan cosponsors in the last Congress.
The 2020 House companion bill, HR 4796, authored by Rep. Hank Johnson, D-Ga., had 15 bipartisan cosponsors.
This year the Senate bill has added a two-year pandemic-related waiver to the proposal in order to not penalize workers who temporarily have relocated to another state.
Included in the waiver are health workers such as nurses who temporarily moved to COVID-19 hot spots and are facing the unexpected payment of state income taxes from those locations.
The 2021 House bill was introduced Jan. 20 by Rep. W. Gregory Steube, R-Fla., and has no cosponsors.
There are no waivers in the House bill, but other House lawmakers are considering introducing a companion to the latest Senate bill.
Twenty four states -- including New York, Vermont, Colorado, Louisiana, North Carolina and Missouri -- require either the employers or the employee to pay nonresident income taxes after even one day of work there.
New York in particular has been aggressive in enforcing that law with employer audits to find out if out-of-state employees traveled there briefly for even a convention, said Maureen Riehl, executive director of the Mobile Workforce Coalition.
Other workers have permanently relocated to other states, but are continuing to be charged state income taxes.
The proposed congressional legislation is supported by the Mobile Workforce Coalition, a group of state chambers of commerce, CPA organizations, travel organizations and major corporations.
Riehl, who is also general counsel at the consulting firm MultiState Associates, is pessimistic about the prospects for passage in the current Congress.
Two key New York Democrats who oppose the legislation -- Senate Majority Leader Chuck Schumer and House Judiciary Chairman Jerrold Nadler -- believe it would be harmful to their home state’s finances.
But Illinois elected officials saw the economic damage that their one-day law was inflicting on their state and changed their law to 30 days about five years ago, Riehl said. Arizona and Hawaii also have a 30-day rule.
Connecticut, Georgia, New Mexico, and North Dakota set the threshold between 15 and 29 days before nonresident state income taxes are imposed.
In January the Supreme Court invited the Biden administration to weigh in on the issue of whether states can impose income taxes on out-of-state remote workers who no longer commute there.
The high court wants to know the White House’s position because it will rule during its next term on a New Hampshire case that challenges Massachusetts’ effort to tax remote workers during the pandemic.
The Granite State is among the five states with no state income tax. More than 103,000 New Hampshire residents, about 15% of its workforce, worked for Massachusetts-based companies in 2017.
The New Hampshire case has fiscal implications for five other states that, in addition to Massachusetts, rely on income taxes paid by out-of-state commuters for a significant amount of their revenue.
New Jersey, Connecticut, Hawaii, and Iowa have filed a friend of the court brief in support of New Hampshire, noting many of their residents are in the same position of being forced to pay income taxes to another state where their job is based.
New Jersey said more than 400,000 of its residents and 78,000 from Connecticut commuted to jobs in New York City prior to the pandemic.
The New Jersey-led states said in their brief they are “sacrificing billions of dollars in tax revenue on account of these unconstitutional state laws—and this Court is the only forum that can remedy their harms.”
New Jersey estimates that during 2020 the state may credit anywhere from $928.7 million to $1.2 billion to its residents for income taxes paid to New York state while working at home in New Jersey.
The pre-pandemic annual loss was estimated to be a much lower $28.5 million in an EY study completed in 2015 for the Mobile Workforce Coalition based on personal income tax credits paid by New Jersey residents to other states.
Either way, New York is considered to be the nation’s biggest beneficiary in the collection of nonresident state income taxes.
Arkansas, Delaware, Nebraska, and Pennsylvania also have similar taxes on nonresident commuters.
The proposed congressional legislation goes beyond the issue of telecommuters.
Reihl said it also covers business travel, including convention attendees.
“When we get back to some normalcy and workers are traveling physically to states for work, we want to see a 30-day safe harbor for what we call a nonresident tax,” Riehl said.
Riehl said there’s an inconsistency to enforcement because New York overlooks government workers who should also be paying the tax.
She gave as an example a Washington-based staffer on the payroll of Schumer who may accompany the senator on travel to New York. They are legally required to pay nonresident New York personal income taxes for every day they work there.
