Usually, if you work in one state for a company based in a second state, the second state does not impose its income taxes on you. Telecommuters, for example, rely on such laws. This is now in danger, as discussed in Telecommuters beware the tax man. In this case, a state appellate court upheld New York’s decision to tax the income of an out of state telecommuter who worked for a NY company, even though he only spent about 25% of his time in New York. The US Supreme Court declined to hear the appeal, even though there are constitutional reasons why this kind of tax arguably violates the Constitution’s interstate commerce clause.
Source link: http://blog.mises.org/4312/the-tax-man/
The Tax Man
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jjf]d
The rationale for the commerce clause is that (not sensible rationale that I agree with) is that anything that theoretically would effect interstate commerce in any way is with the province of congress to legislate upon.
Stephan,
The link is apparently defective.
Regards, Don
I would have to say that I don’t see where invoking the Commerce Clause as a way for the Supreme Court to hear this makes much sense. Even though I think it’s incredibly short-sighted and wrong for the parasites in Albany to try this, I don’t see where the federal government has a justified say in the matter. The market will adjust accordingly (to the detriment of NYC).
Scott: Yes, I have to say, as my views become increasingly hyper-federalist, I am a bit skeptical of any federal overturning of any state law (though there are some cases where it is constitutionally justified). I was always sympathetic to the argument that the IC clause was meant basically to establish an internal free trade zone in the country, and to authorize Congress to legislate so as to accomplish this–to overturn state trade barriers, etc.
The “dormant commerce clause” argument is an offshoot of this and basically says that even without Congressional legislation (if I remember this right), some state laws are unconstitutional per se, if they are such as to impeded the flow of interstate commerce. Discriminating against outsiders is one way of doing this; another is imposing double taxation burdens–thus taxes need to be apportioned. In fact while in law school in Louisiana, I remember that Texas banned Louisiana’s Dixie Blackened Voodoo Lager beer, on the ostensible grounds that it contributed to all this Santeria-style human sacrifice or cult-stuff. Louisiana threatened to retaliate by banning some Texas beer–Lone Star I think. Whether the Texas ban was unconstitutional, the Louisiana ban apparently would have been more clearly unconstitutional since it was clearly aimed at Texas merchants merely for being Texan. Anyway, I think Texas backed down, the wimps.
So I will say I am open to the argument that federal overturning of overreaching state tax laws based on the dormant commerce clause us unjustified and unconstitutional. I am not sure.
One more point though: another problem with New York’s taxing the out of state resident, besides burdening interstate commerce, is that it is an assertion of jurisdiction over someone over whom it arguably has no or limited power. So if the guy refused to pay (and never set foot in NY) then I would support his home state refusing to give “full faith and credit” to New York’s attempt to tax him–just as I would say that a tax bill received by an Italian from the Mexican government could be thrown away.
Stephan,
New York State is BAD in this regard. Their official position is that any dollar of wages earned, paid, collected in, or passing through the state is theirs to tax. I know literally dozens of people who paid taxes to their home states while working on travel in NY, and every one of them had to pay New York State income tax, whether or not their company or their residence were in the state. The City of Philadelphia does the same thing with the wage tax. Fortunately many are able to ignore it.
Interestingly, the State of New Jersey credits its residents who work in Philadelphia and pay City Wage Tax dollar-for-dollar. Incredibly, this was last upheld by, of all people, former governor Jim McGreevy.
Pennsylvania, on the other hand, does not, with the result that there is a significant tax incentive for people who work in Philadelphia to relocate to NJ.
I’m sure the resulting current overdevelopment and traffic problems are shrugged off as “externalities”. But it does show there is some “tax competition” between the states. And New York appears to be winning, or losing, depending upon your point of view.
Stephan,
The link would not open, so I have a questions. Did New York tax only 25% of his pay, based on the 25% of his time spent in New York? Did the employee’s own state credit him for taxes paid in New York?
Yancey–all of it. The link has been fixed.
BTW, I am aware that some professional partnerships avoid (not evade! tax avoidance is legal, tax evasion is not) state income tax by the following technique. Suppose you have a partnership which does a lot of business in New York, but has an office in, say, Florida. NY has income tax, but Florida does not. Suppose the partnership gets 75% of its income from NY business. A partner in Florida (Mr. A) has income attributable to NY and Florida operations–and has to pay NY state income tax 75% of his income. So Mr. A creates a corporation, Mr. A Corp., that becomes the partner of the NY partnership, with Mr. A as its sole employee (in Florida). Mr. A Corp. then passes through all of its net profits to Mr. A as salary. While Mr. A Corp, the partner, technically owes NY state income tax on 75% of its profits–it has zero profits, since it passes it all on to its employee, Mr. A. But Mr. A is a Florida employee, working for a Florida corporation, so is not subject to NY tax.
Now, it seems to me that perhaps something similar could be done to avoid the NY tax grab at issue in the above-mentioned case. For example, the NY company could retain the services of a Tennessee corporation, which employs a Tennessee employee. (One snag is that in the reported case, the Tennessee resident spent 25% of his working time in NY.) I am not sure if this would work; tax experts would need to be consulted.
It would seem that, with this reasoning, New York could tax any employee of a business located in New York, regardless of where the employee actually performs this work or lives. In fact, I don’t even see why the business would have to be located in New York.
“Discriminating against outsiders is one way of doing this; another is imposing double taxation burdens–thus taxes need to be apportioned.”
But NY isn’t imposing double taxation in this case; it isn’t their fault (nor obligation to adjust for) the person’s home state also imposing an income tax. I suppose one could argue the other way, that if someone lived in NH and commuted one week a month to NY, they would have an unfair advantage against people who live in NY. Should the federal government step in and “correct” that?
Again, I personally think the NY decision is bad, just playing devil’s advocate with regard to whether the federal government should get involved. As to Yancey’s concern that having a business in NY, regardless of where the employees are located, would mean all employees might suffer from this…I know at least one big company headquartered in Armonk that wouldn’t take too kindly to that idea. And that company has defeated the federal government in court, NY would be child’s play.
If it were possible to adjust the state withholding down to zero, then the employee would have some power to negotiate with the state of New York, but I don’t think citizens have this kind of power over state income taxes.
Stephan,
On what basis did the Supreme Court not take the case, or did they just decline without comment? It might be that the case is not yet ripe. It seems odd to me that the appeal went directly to the Supreme Court from a state appellate court.
Yancey–not sure, I have not seen the details. But your implication is right–the mere fact of not taking a case does not mean the Court’s jurisprudence in this area has changed.
Scott: “But NY isn’t imposing double taxation in this case; it isn’t their fault (nor obligation to adjust for) the person’s home state also imposing an income tax. I suppose one could argue the other way, that if someone lived in NH and commuted one week a month to NY, they would have an unfair advantage against people who live in NY. Should the federal government step in and “correct” that?”
Well, I don’t know if it should, but the idea that double taxation is prohibited in this case means that it is NY’s fault for taxing the other 3/4 of the guy’s income. If someone wants to work half in Texas and half in New York, then he pays tax to NY on half his income and no state income tax on the other half.
Vince: “I know literally dozens of people who paid taxes to their home states while working on travel in NY, and every one of them had to pay New York State income tax, whether or not their company or their residence were in the state.”
This is b/c they were present in NY while working. Even pro athletes have this to contend with, I understand, as they make big bucks traveling around the country.
“The City of Philadelphia does the same thing with the wage tax. Fortunately many are able to ignore it.”
Well, I used to live around there–Philly would impose a flat wage tax on you if you either worked for a Philly company, or lived there. It was higher in the latter case. In the former case, your local county taxes would offset against the philly wage tax (or vice-versa).
How state units handle these things within a state does not implicate the Constitution–if the county where someone lives and where he works both tax him to the max, that does not burden interstate commerce.
“Interestingly, the State of New Jersey credits its residents who work in Philadelphia and pay City Wage Tax dollar-for-dollar. Incredibly, this was last upheld by, of all people, former governor Jim McGreevy.
Pennsylvania, on the other hand, does not, with the result that there is a significant tax incentive for people who work in Philadelphia to relocate to NJ.”
Interesting. I think this example assume the people live in NJ and work full time in Philly. If this is the case Philly/Pa has the right to tax them 100%; and I would assume NJ would not, but I am not familiar w/ the intricacies of how all this works.
On the international sphere it is even more complex; and the US is apparently among the worst in how outrageous it is in taxing its subjects who live overseas. Even if you live and work in a tax-free country, I believe, you still have to pay US income tax–even if you could offset US income tax if you did have foreign tax to pay.
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