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Telecommuters Beware of Potential Income Taxes In Other States


Friday, Nov. 04, 2005

If telecommuting is a postive wave of the present and future, then why did the United States Supreme Court just decline to consider and refuse to overturn a lower appellate decision that allows New York to impose state income taxes on telecommuters who live outside of New York but who are employed by New York based companies? Inquiring minds want to know.

Given this recent legal development, telecommuters may no longer be feeling so smug about their telecommuting arrangements. They may have set up a nice life, whereby they can work from home, and they can avoid the expense and hassle of commuting to work. But just when all seems fine, they now learn that they may have to pay state income tax on ALL of their income with respect to a state where they do not live and where they do not work. How can this be?

New York Appellate Decision

In a case called Matter of Huckaby, a New York state appellate court, in a 4-3 vote opinion, ruled earlier this year that a telecommuter who works for a New York company but who lives and performs most his work in Tennessee still must pay New York state taxes on 100% of his income. The court so ruled even though this particular employee spends no more than a quarter of his working time in New York for his employer.

Under New York's "convenience of the employer" test, if a given employee works outside New York for a New York employer, New York asserts its ability to tax all of the employee's earnings for the New York employer, regardless of how much time, if any, the employee spends working inside of New York.

In Matter of Huckaby, the appellate court ultimately cast aside constitutional challenges to this convenience of the employer test and ruled that this test does not cause commerce or due process violations of the United States Constitution.

Appeal To United States Supreme Court

Not surprisingly, this result has come under harsh criticism. There is the concern about potential double taxation of employees in their homes states and where their employers are located. In addition, this type of result is seen as a threat to the very notion of telecommuting, which otherwise has many favorable attributes. Indeed, millions of people now work from home, according to U.S. Census Bureau statistics.

Given the adverse result and the importance of the issue, Huckaby filed a further appeal to the United States Supreme Court, hoping the that high court would overturn the decision by the New York state appellate court.

However, on Halloween day, a fitting date in this instance, the United States Supreme Court delivered a trick and not a treat, by deciding not to accept and consider Huckaby's appeal, thus letting the decision of the New York state appellate court stand. The Supreme Court ducked the opportunity to clarify whether states can seek income taxes based on the location of employers and employees.


Meanwhile, the only partially good news here is that most states, unlike New York, apportion income for taxation purposes. Thus, a person working for a company not based in New York and who works in a different state than where the company is based likely would pay income taxes in both states, but on an apportioned basis in terms of how much time the person spent working for the company in his or her home state and where the company is based.

Eric Sinrod is a partner in the San Francisco office of Duane Morris (, where he focuses on litigation matters of various types, including information technology and intellectual property disputes. His Web site is (, and he can be reached at To receive a weekly e-mail link to Mr. Sinrod's columns, please send an e-mail with the word Subscribe in the Subject line to This column is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this column are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.

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