US State Tax Woes for Home Office?
Imagine it is the first week of March 2020, you are sitting at a restaurant in California, sans mask of course, when you start to talk to your friends about this virus that is tearing through Italy and seems to be heading for the US. Your friends mention that in Europe, home office working has become the new norm. You start talking about home office and what it would mean to you. You are paying high rent in California and the idea of moving to a state like Ohio or Michigan to be closer to your family and pay less rent is enticing.
Fast forward three months, you’re in full-blown lock-down and all the positive aspects of living in California are gone. You see this is not going to be over by summer, so you decide it is time to move to Ohio and work from your parents’ house. Professionally, you provide life coaching, and you can call your clients from anywhere so why not move to a “cheaper” state?
Unfortunately, just moving to a new state may not be enough to avoid the long arm of the state tax law. For example:
- Tax Nexus Laws: This is the relationship between taxable income and the collecting authorities, cue S. Dakota v. Wayfair. If you took this time to really get your Etsy shop into high gear and everyone wants to buy your tie-dyed sweatsuit, you may have tax liabilities in the states in which your customers live.
- California may tax self-employment income of non-residents of California where the benefit of the service is received by a California resident. For example, if one is offering consulting services from Michigan to a person residing in California, depending on various factors, they may be tax on that income in California even though they never set foot in California.
- New York may tax an employee for work performed at his home (telecommuter work), in another state. The rules for this are considered under the Convenience of the Employer test which has been around since 2006. New York was well ahead of the curve on this issue, as they have had a large telecommuter population well before COVID-19 times. Other states, including Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania, have started to lay down the groundwork for similar rules.
In these new Covid times, tax authorities are looking at ways to keep their tax coffers full. Based on the examples above, it is likely just a matter of time for all states to get into the ‘telecommuting’ tax game. Something to be aware of before you make a move based on possible tax savings.
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