Where is income tax going to end up?

Great Debates
#1

People were already beginning to work from home before 2020 but the pandemic greatly accelerated the process. And as this becomes more normal, I feel we’re going to see a lot of people seeking a greater divide between the place the live and the place they work. It’s going to become normal for people to live in one state while working in a different one.

One issue this will effect will be taxes. Which state will collect income tax? The state where the business is located? The state where the employee is located? Both? Neither?

This is essentially the same issue we went through a decade ago, except with sales taxes and online sellers.

#2

Canada had this figured out years ago. My office is based in Ontario and we have no other physical presence. I have employees in Alberta and BC.

I withhold tax based on the Ontario rates, but they file and owe based on residence. Statutory holidays are however based on the office location.

The employee can file with Canada Revenue Agency (our IRS) to adjust withholdings downward to match their projected tax bill. They can have withholding increased just by requesting that the employer do so.

If I opened a physical presence in their province, then that jurisdiction would apply.

#3

It’s already quite normal, with people commuting into Manhattan from New Jersey and Connecticut, or from New Hampshire into Massachusetts. Even the idea of remotely working for a location in a different state isn’t new; we’ve had people doing that for a long time. The states already have policies in place for income tax on remote workers.

#4

It’s interesting that you used NH / Massachusetts as an example, because NH is suing MA right now over an MA rule implemented during covid that taxed out-of-state residents who telecommute to work in MA.

#5

I think the bigger issue will be the corresponding headache for businesses. Currently, I pay my remote employees based on the states they are in. So I pay to Washington, Virginia, and Colorado for unemployment and other personnel taxes. My business is only in Colorado so I pay quarterlies here. If I had to spread out my quarterlies to all of the states that my employees were in it would be a hassle if we also had to pay to all of the states they had clients in which is over a dozen different states I’d need to hire a full time bookkeeper just to stay up on the paperwork which would either push us out of business or drive me rates up 25% or so.

I’m sure there is a point it doesn’t matter. Amazon is already paying taxes in all 50 states with payroll to boot so having remote employees shouldn’t effect their overhead. Between my 4 person company and Amazon there is going to be some increasing scale of headache that is going to hurt small business more.

#6

We live in Washington State. Washington State has no state income tax. My wife works across the river in Oregon. Oregon has a state income tax. I file our joint federal return, and the Oregon return for my wife. Only her income is subject to Oregon tax.

With COVID-19, both of us telework. Oregon only collects income tax when you are physically in the state working. Since my wife teleworked about 75 percent of her job in 2020, she is due for a substantial state income tax refund for 2020. Easy peasy.

#7

I feel the existing policies won’t be in tune with the changing circumstances.

Working from home is different than commuting to work from a nearby state. A remote worker can be hundreds of miles away and have never even visited the state where his job is. The only significant group that has been working like this are employees at call centers and tech support lines. And most of these people have relatively low income jobs.

When remote working becomes a common practice for people like doctors, lawyers, engineers, and business executives, the stakes will rise. These people have significant incomes.

I feel some states will try to target these people. They have large incomes but they don’t vote in the state; they’re perfect for hitting with a high income tax rate. These states can protect local voters by creating exemptions that only apply to state residents.

Other states will go the opposite route. They’ll try to get these people to relocate to them by acting as a tax shelter and enacting laws that protect state residents from any out of state income tax claims.

I think we’ll see situations where Massachusetts, for example, imposes a high income tax rate with exemptions that protect Massachusetts residents while Tennessee, for example, enacts a law saying Tennessee residents aren’t required to pay any out of state income taxes. And we’ll see court battles when a guy who lives in Nashville and “works” in Boston gets told he has to pay taxes and refuses to do so.

I think eventually it will settle down and there will be a national policy over these taxes. But I predict some arguments ahead before we reach that point.

#8

The issue is, how do you determine what state they are “working” in. My company’s main office is in Illinois, but we have branch offices in all 50 states. The work being done can be done really anywhere. So now that everyone is remote, where can you say the income is come from?

#9

The states already have agreements to work these out. Sometimes you are only liable for the one you earned the money in, sometimes you have to file both but can claim a credit for the amount already paid to the other state.

This isn’t quite equivalent to the Amazon sales tax situation. You’ve always had to pay sales tax if your state has it. If it wasn’t collected at purchase, you instead have to render the amount you should have paid as a special “use tax,” usually with your regular return. Generally most people don’t know about this and don’t pay it, but I’ve heard of California coming after people.

It’s just that the law said a company didn’t have to collect tax if they don’t have a physical presence in the state - a very good idea to not put the onus on some mom and pop who doesn’t have the ability to navigate multiple states AND localities and their tax rates. Amazon and others argued that they only had to collect on their HQ state. They were eventually forced to collect everywhere, but small companies still don’t do this.

#10

It gets really interesting when you have a state that has an agreement with some surrounding states but not others…

I’m one of these complicated ones; I live in one state, I have a full-time job in a neighboring state, and I have a part-time job in the state where I live. My full-time job simply does not withhold state taxes. Instead, I jacked up additional state withholding on the part time job to cover both so I don’t owe when I file.

But I’ve been a HR person in a small business with locations in multiple states. It gets onerous, especially when local income taxes come into play as well.

#11

Yeah, it could definitely be simplified

Things also get weird if you involve community property. Oregon is one of the few western states without it, so in that case Duckster’s situation is not too hard, but if Washington started collecting income tax things could get weird.

#12

My son lives in WA and works for a company based there. Before the pandemic he physically visited companies all over the US and occasionally elsewhere (most interestingly Belarus). It was arguable that if he visited a company in NY he owes taxes on his earnings there to NY. But he never paid any. But now he carries out all these “visits” from his living room (or for a few weeks from my living room). Now there is even less obligation for him to pay tax out of state. For that matter should he pay Canadian taxes for those few weeks. This is all unclear.