Paul L. Caron

Friday, May 15, 2020

Weekly SSRN Tax Article Review And Roundup: Kim Reviews Zelinsky's Coronavirus, Telecommuting, And The 'Employer Convenience' Rule

This week, Young Ran (Christine) Kim (Utah) reviews a new work by Edward A. Zelinsky (Cardozo), Coronavirus, Telecommuting, And the 'Employer Convenience' Rule 95 State Tax Notes 1101 (Mar. 30, 2020):

6a00d8341c4eab53ef022ad3a74c80200d-300wi (1)I hope everyone who reads this review stays well and healthy. Many non-essential workers have been working from home as nearly all states have issued stay-at-home orders and closed businesses in an effort to stem the tide of the virus. This raises a new question for out-of-state commuters: which state can tax the income that cross-border workers have earned at home under the COVID-19 situation? I personally have been curious about this issue because I taught two classes, Federal Income Tax class and Taxation of Business Entities, remotely from another state since spring break of this semester. Edward Zelinsky's short article, Coronavirus, Telecommuting, And the 'Employer Convenience' Rule, brings an interesting perspective to this question. He criticizes New York's policy of taxing the income earned by out-of-state telecommuters, arguing that it was bad policy in good times and even worse policy in times like today.

Let us start with the easy case of Michael, who lives in New Jersey and works for a New York firm. Michael is a New Jersey resident, but New York claims income tax on the wages he earns in New York despite the fact that he is a non-resident. Zelinsky would agree that New York's tax jurisdiction in this case is based on the benefit theory. He explains that New York properly taxes the income attributable to those days actually spent in New York, because New York was ready to provide Michael public services on those days. 

Next, consider the case of a remote worker, Manohar Kakar, who lives and works at his home in Arizona for a New York employer. Zelinsky explains that New York imposes its income tax on the days when Kakar worked at his Arizona home by implementing its long-standing employer convenience policy. That is, if the remote work is arranged for the convenience of the employer, New York may tax the income of out-of-state workers attributable to those days worked remotely. Zelinsky, along with many other commentators, have criticized the New York's "convenience of the employer" doctrine for over a decade. Under the benefit theory, New York's tax jurisdiction in this case may be challenged because it is Arizona, not New York, which provided the public services that benefited the remote worker on his work-at-home days. In addition, New York's tax jurisdiction results in double state taxation of the income the telecommuter earned at home if neither the residence state (Arizona) nor source state (New York) provides a credit for the taxes assessed by the other. Even in the case that some states, like New Jersey, provide a credit to their residents when New York exercises tax jurisdiction on teleworker income, the telecommuters would be penalized by New York's higher tax rate because states give credits at their usually lower tax rates rather than at New York’s typically higher tax rates. In addition, those credits deplete the treasuries of the states granting them.

Circling back to Michael's case. In the pre-COVID-19 era, Michael would have gone to his workplace instead of working remotely. New York would have properly taxed the income attributable to those days actually spent in New York. However, as the COVID-19 situation has evolved, Michael has been required to work remotely due to Gov. Andrew Cuomo’s “New York State on PAUSE” executive order. So, which state ought to be able to tax the income attributable to those days that people are required to work remotely due to COVID-19? The answer is not simple. First, we might apply the existing rules for telecommuting to Michael's case during the pandemic. However, in a non-COVID-19 situation, remote work is agreed to and arranged between the employer and employee; now, it is mandated by executive order. Extending New York’s extraterritorial tax jurisdiction over a remote worker’s income to the current situation may not be justified by the "convenience of the employer" doctrine. Despite this, Zelinsky seems to expect that New York will apply this doctrine and exercise extraterritorial tax jurisdiction over the COVID-19 remote workers. If so, it would be bad tax policy that would discourage telecommuting because those telecommuters would either be double taxed or be subject to New York's higher state income tax rates while residence states, like New Jersey, would be required to offer public services as they become more critical and require immense resources during the pandemic.

Alternatively, we can ignore the “exceptional and temporary change of location” due to the COVID-19 crisis and deny the change of work location or residency during the pandemic. This is the approach that policy makers in international tax are considering. On April 3, 2020, the OECD Secretariat released an initial analysis on tax treaty issues arising from cross border workers affected by the COVID-19 crisis, and provided a non-binding guidance and recommendations on the following four issues: permanent establishments, residence of a company, cross-border workers, and residence status of individuals. The bottom line of the guidance is that the exceptional and temporary change of location due to the COVID-19 crisis is unlikely to change the results of the above four issues. The notable rationale is that the intermittent use of a home office does not put it at the employer’s "disposal" or the employer's convenience; rather it is likely due to government directive, rather than a requirement of the employer.

The IRS is taking a similar approach as seen in its April 21 guidance addressing domestic law and treaty issues relevant to COVID-19 non-resident taxpayers and cross-border worker situations. (See Rev. Proc. 2020-20, Rev. Proc. 2020-27, FAQs, and Rev. Proc. 2020-30.) The IRS guidance offers to disregard up to 60 days of location change due to COVID-19 for the purposes of determining U.S. residence, U.S. trade or business or permanent establishment, dual consolidated loss, and Sec. 911 exclusion. As applied to cross-border workers in international taxation, which is analogous to telecommuters in state and local income taxation, the issue is considered as to their "residency." Does the residency of cross-border workers change because they are stranded at home or a place which is other than where they regularly work? The IRS attempts to continue the existing residency by disregarding up to 60 days of location change under the new COVID-19 Medical Condition Travel Exception rather than applying the outdated rules for remote workers in international tax. It is interesting to note that the rationale for the 60-day exemption is based on the existing medical exception. The medical exception was previously considered to be very narrow and ambiguous, but IRS officials have explained that they are going to apply this new COVID-19 Medical Condition Travel Exception broadly and flexibly to encompass all possible situations arising from the COVID-19 crisis. 

The new COVID-19 Medical Condition Travel Exception does not apply for state taxation purposes, such as source, nexus, and apportionment of income, unless adopted by the states. To avoid any confusion, I believe states should adopt the IRS guidance for state tax purposes. If they don't, states might end up applying the existing rules for taxing remote workers. The existing rules are likely not a good idea either because they have not been good policy in the past, as explained in Zelinsky's article, or because they are not anticipative of the newly emerging COVID-19 tax issues.

Here’s the rest of this week’s SSRN Tax Roundup:

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