Convenience and Similar Sourcing Rules in Action As the changing world of business transforms these rules from a nuisance to a source of significant interstate conflict, moreover, Congress may wish to step in, exercising its Commerce Clause powers to better define how far states can reach in taxing interstate economic activity.
They could, however, have an adverse effect on long-term competitiveness, as telework-friendly businesses increasingly choose to locate their offices elsewhere to avoid subjecting their employees to double taxation. If so, these rules, which treat an employee as if they worked out of their company’s office even if they never actually did so, could become increasingly popular as a short-term revenue option for states facing an exodus of increasingly teleworking employees. Constitution.Ĭompanies’ unplanned experiment in telework may yield a long-term shift in how we conceptualize the workplace. This is inequitable, inconsistent with widely accepted principles of sound taxation, and potentially incompatible with the Dormant Commerce Clause of the U.S. So-called “convenience rules” and similar income sourcing rules not only obligate workers to pay tax to jurisdictions where they did not work, but in many cases, they also strip them of eligibility for tax credits designed to avoid double taxation when someone lives in one state and works in another. But absent a federal response, many taxpayers could be in for a rude awakening when their income taxes come due. Federal lawmakers are also considering offering some relief from the practice, either permanently or as a pandemic-specific measure. States can tax your income where you live and where you work-but a growing number of states may also seek to tax your income even if you neither live nor work there, an aggressive posture that becomes increasingly consequential as more Americans work remotely both during and potentially after the COVID-19 pandemic.
In New Hampshire, which forgoes an income tax and is home to many residents who normally work out of offices in Massachusetts, the state Department of Justice is exploring Massachusetts’ new sourcing rule with an eye to possible litigation.Six states-Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania-had implemented so-called convenience rules prior to the COVID-19 pandemic, while Massachusetts adopted a temporary income sourcing rule with the same effect in response to pandemic-era telework.Seven states, however, tax people where their office is even if they do not actually work in the state, and these individuals may be denied their home state’s credit for taxes paid to another state, exposing them to double taxation.When a person lives in one state but works in another, they may have tax liability in both states, but typically receive a tax credit to eliminate double taxation of that income.
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