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October 31, 2005

Telecommuting Takes a Direct Hit from the Supreme Court

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Posted by Jim Ware

This just in, from www.siliconvalley.com. Special thanks to Catherine Adams Lee of Cognitive Business Practices for alerting me to the news.

I'm going to reproduce the whole article, with full credit, because it's so important, and fairly brief.

Supreme Court rejects major telecommuting case

WASHINGTON (AP) - The Supreme Court refused Monday to disturb New York's system of taxing the income of telecommuters who live elsewhere but are employed by companies in the Empire state.

Justices passed up a chance to hear the appeal of a Tennessee computer programmer who claimed that New York's tax law is unconstitutional.

Thomas Huckaby had been ordered to pay New York income tax for his full salary, not just the time he spent at the New York offices of the union for which he worked. He lived 900 miles away in Nashville.

The case gave the court a chance to clarify when states could pursue income taxes based on the location of the corporate headquarters, not the worker.

``This case brings to the fore the plight of every telecommuter who works in one state for an employer located in another,'' justices were told in a filing by Peter Faber, the lawyer for the worker.

He said more than 40 million people perform at least some work from their home, and that one-in-five teleworkers report to a supervisor in a different state.

New York lawyers argued that the state was entitled to tax Huckaby's earnings because the worker chose to live in another state ``solely for his own convenience.'' The income would have been exempt if he were required to work elsewhere, under the state system.

Huckaby paid some New York taxes, based on time he spent in New York state. But state courts said all his income should be taxed. The issue had split the lower court.

``New York has the right to tax 100 percent of a nonresident employee's income derived from New York sources,'' according to the 4-3 decision by the Court of Appeals of New York, which acknowledged the decision could discourage telecommuting.

The case is Huckaby v. New York State Division of Tax Appeals, 04-1734.

"Who was it who said "The power to tax is the power to destroy"? And I think I know who said "No taxation without representation."

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Comments (5) + TrackBacks (0) | Category: Distributed Work | Public Policy


COMMENTS

1. Elizabeth Albrycht on November 2, 2005 11:07 AM writes...

Did he have to pay Tennessee income tax as well? (i.e., was he doubled taxed?)

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2. Douglas Fletcher on November 13, 2005 12:23 AM writes...

I'm pretty sure there is no income tax in Tennessee.

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3. Jim Ware on November 13, 2005 1:10 PM writes...

I just checked the State of Tennessee web site, and actually there is a 6% state tax on all earned income for a Tennessee resident.

As far as I know, therefore, the individual in question was in fact double-taxed. We're doing more research on this issue.

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4. Joe Meilak on November 21, 2005 4:07 AM writes...

What we do in such cases (am based in Europe and oeprate from Malta) is to setup an offshore company wih one employee who is paid a salary just to cover his expenses. The company is setup in the least tax jurisdiction and invoices the 'employeer' for the 'employee's' work. This way the 'employee' who owns the one-man company pays only taxes in the least-tax jurisdiction and full taxes in the country where he is domiciled for tax purposes on the minim income he 'earns'. His company can then invest in his home, car and any other goodies he would like to have and charge these to his income as an operational expense or perk in the low tax jurisdiction. The contract between the real employer and the 'shell empoying company' is pretty straight forward based on an outsourcin contract model.

If you consider to have a feign company which has a double taxation agreement with the US the benefits are far more relevant. PS Bear in mind a legal and accounting tax advise bill of around USD6500 annually!

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5. Sheena on January 9, 2006 2:32 PM writes...

I've worked in TN for years and I can verify that there's no income tax in TN. At least not for a normal employment with W2 tax term. A self-employed, contract situation may be different.

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