NCSL Podcasts

Remote Work and State Tax Systems | OAS Episode 199

Episode Summary

On this episode, we explore the tax ramifications for states of remote work. We’re joined by Charlie Kearns, a tax attorney, and James Privette, until recently a legislative specialist in NCSL’s Washington, D.C., office. They discussed how remote work affects personal income taxes and business taxes, and how states are responding to the changing landscape.

Episode Notes

The popularity of remote work soared during the pandemic, but only for those is some jobs, particularly tech focused or computer-based jobs. While exact figures are not available, some estimates are that more than 25% of the workforce still is working remotely or in a hybrid arrangement, where employees spend some time in the office and some working remotely. That’s a decline from the pandemic but still a significant portion of the workforce. 

On this episode, we explore the tax ramifications for states of remote work. We’re joined by Charlie Kearns, a tax attorney, and James Privette, until recently a legislative specialist in NCSL’s Washington, D.C., office.

They discussed how remote work affects personal income taxes and business taxes, and how states are responding to the changing landscape. They also had suggestions for learning more about the issue. 



Episode Transcription

Ed:      Hello and welcome to “Our American States,” a podcast from the National Conference of State Legislatures. I’m your host, Ed Smith. 


CK:      Remote work remains a very viable option for most employers ahm especially the hybrid arrangements where you are working some time at home and sometime in the office.


Ed:      That was Charlie Kearns, an expert in tax law and a partner at Evershed Sutherland in Washington, D.C. He is also an expert on the tax ramifications of remote work and my guest on the podcast. Kearns worked on the recent NCSL publication “State and Local Tax Considerations of Remote Work Arrangements” issued by the Remote Work Taxation Work Group. 


The popularity of remote work soared during the pandemic, but only for those in some jobs particularly tech folk who are computer-based jobs. While exact figures are not available, some estimates are that more than 25% of the workforce is still working remotely or in a hybrid arrangement. That is a decline from the pandemic, but still a significant portion of the workforce. 


            Charlie explained the myriad tax ramifications for states when it comes to remote workers. He also discussed how state tax systems are starting to respond. Also on the show is James Privette, until recently a legislative specialist in NCSL’s Washington, D.C., office. He discussed steps states are taking to respond to this changing tax environment and also discussed how lawmakers and legislative staff can learn more about the issue. 


Here is our discussion, starting with Charlie Kearns. 


Charlie, welcome to the podcast. 


CK:      Great. Thanks. It’s great to be here. 


Ed:      Well, this subject of remote work is something that I think everybody has been fascinated with. Something that most of us weren’t too aware of before the pandemic. You, however, are very steeped in this so we are really interested in finding out what the scale of remote work is in the country now. We know of course that a lot of people ended up working remotely during the pandemic, but it seems to have been almost company by company and organization by organization coming back into it so. So, what is the status quo now?


CK:      You’ve kind of hit the nail a little bit on the head. I mean remote work has ebbed a little bit since the pandemic, but it is still very popular. You see this in a lot of the studies that come out over the last couple of years, but also from my personal experience in advising clients, remote work remains a very viable option for most employers especially the hybrid arrangements where you are working some time at home and some time in the office. Those seem to be the most popular type. Because of that arrangement where you are potentially working in two jurisdictions, remote is by definition where you are working in one jurisdiction while at home, but off the employer’s office maybe in another jurisdiction rather that be a state or a locality. Those hybrid arrangements where its half in one jurisdiction and half in another a little bit more or a little bit less that creates the more complex state and local tax issues because you are dividing up the times spent in each jurisdiction as opposed to full time remote or full time in the office which are you know not easy by any stretch, but they’ve raised less complicated issues than the multijurisdictional work.


Ed:      So, at least for some employees and employers, this has really been more of a permanent shift even if it’s a hybrid arrangement, but a hybrid arrangement that didn’t exist prior to the pandemic.


CK:      That’s right. That’s been my experience so far. 


Ed:      So, this report from NCSL, which you were involved in and we linked to in our show notes points, out that states have a lot at stake here because of the myriad tax issues involved and I wonder if you could give listeners kind of an overview of what those tax issues are.


CK:      You might expect this or might not kind of depending on your level of experience with state taxes, but remote work touches on most, sort of the common tax types within the U.S. at the sub-national level or state or local level. So obviously remote work can impact employer withholding, unemployment insurance taxes and other employment related taxes like paid leave contributions. And related to withholding because it is tied to the employee’s earning of wages, the employee may have new or complex personal income tax obligations that they would have to file on an individual level. I think we will talk about this a little bit later, but as a general, you know, overview, having an employee in a state can also trigger a number of business level taxes especially if their employer did not have any presence in that state before the remote work began. And one final point that is a more complicated issue, in a sense, from a policy perspective is what to do about credits and incentives. You know remote work can have a fairly significant effect on jobs-based credit incentives. For example, a lot of states tie availability of a credit to the creation of name the number of jobs within the state, but also maintaining those jobs within the state for a number of years. And so, you know, you may have initially qualified for a credit before the pandemic because everybody was on-site. But now you have maybe half of those jobs are working remotely in another state. Obviously, it depends on the area of the country you are in and the company’s policy, but now you have a number of those employees outside of the original jurisdiction and so the question is does that employer still qualify for the credit. The answer is it depends. Like many of the other state tax issues we have to deal with, you have to look closely at the given state law and so forth. And of course, this could also apply on an intrastate level within the state if there are certain specified designated zones that provide employers certain credits and incentives.


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Ed:      Well, I guess to state the obvious our tax system was developed when people were working in the same state as their company. They were physically working in the office and so on and so forth. Is that really the core of the disruption that is caused by remote work this shift?


CK:      Yeah. That’s exactly right. Some areas of the country have more experience dealing with multi-state remote work and this has been going on for some time. Of course, we see more of it now, but areas of the country like the Northeast in particular. The mid-Atlantic where states are compact and close together have dealt with some of these issues for awhile as opposed to maybe the Midwest even the Western states where you have quite a bit of distance in some cases between large metropolitan areas and other areas. But you know we’ve seen this core issue as you call it really come to the forefront in the last couple of years. 


Ed:      Well, somebody who grew up in the East and now lives in the West, I can certainly appreciate how the different geography might affect that. To put it mildly after reading the white paper, it’s complicated. And I wonder if maybe we could start with the employee and personal income tax and I guess my question, and tell me if it’s the right question, how do states avoid double taxing people who work in one state but their employer is based I another state?


CK:      This is sort of a threshold issue in my mind for a lot of the … policy decisions that come about through remote work. Most commonly, the employee’s home state provides a credit for taxes paid to the work state or the other state where the employer is located. So, this is, you know, the general approach that states haven taken over the, you know, since income tax has been around really. This is a pretty good system, but complications can and have arisen in particular when local taxes are involved so there have been lawsuits that deal with when and how local tax paid can be credited against the state tax and vice versa. And so, you have some of those nuances that come about, but overall, the approach to having a credit for taxes paid against the resident’s states tax liability is the usual approach. 


            Another common approach, which I frankly like quite a bit from a tax compliance perspective to avoid double taxation, is the adoption of reciprocity agreements between the states. These agreements allow employees to pay income tax to their home state rather than their employer state. There have been you know some famous disputes I guess between certain of the states whether or not they are going to continue the reciprocity agreements. For example, between there is a reciprocity agreement between New Jersey and Pennsylvania that is still in place, but there was some concern some years ago about it continuing. Wisconsin and Minnesota have discontinued their reciprocity agreement probably about a decade ago if not a little bit more. But there’s been some discussion about reinstituting that in light of remote work. And a number of other states have these agreements that allow simplification of the tax filing and the tax payment responsibility and limiting it to the home state of the employee.


Ed:      Another area is employers general business taxes and maybe you can take a moment to explain what those are for those of us who are not that conversant with it. How is that affected by having remote employees?


CK:      So, business taxes in general are those that are imposed on the business entity level as opposed to the employee or personal level. And it could be kind of indirect taxes like sales and use taxes that are in most cases imposed on purchaser of an item. But the businesses are effectively the taxpayer because they are required to collect it so you have corporate income taxes. Sales and use taxes. Local gross receipt taxes and even some local business personal property taxes where you have desks and computers and so forth within a jurisdiction. So, it really runs the gamut of the tax types throughout the U.S.


            And this is really because remote work under common arrangements like the hybrid arrangement that we discussed earlier involves a regular presence of an employee in a state so that the employer is usually deemed to be doing business in the state because that employee is performing services for that business in the jurisdiction. And as you certainly stated correctly, filing and paying taxes in a bunch of states is time consuming and very expensive, especially for smaller employers that you know maybe prior to remote work were only doing business in one state. Now all of a sudden, they may be doing business is three or four or five, six, seven states. As we get used to remote work and it is becoming the new normal, as you said, over a couple of years now whether and when and how to allow remote work is one of those decisions businesses will need to make in order to retain the best talent and that’s where we are seeing a lot of companies struggle with now. 


Ed:      Well, I have three adult children. All three of them work remotely. All three of them work for companies that are in states other than where they live so I just on that basic family sample that it does sound like adjusting tax enforcement for remote work has got to put quite a burden on state employees who do that work. And I wonder if you’ve seen any evidence that the situation is causing states’ problems in being able to enforce tax rules, collect what is due and maybe have enough skilled employees who are able to do that.


CK:      Yeah, now that is exactly right. Having an influx of remote workers into a state can create staffing issues and compliance issues. Usually, the audit cycles take a little bit of time to develop over three or four years since the event happened. So, we are still kind of waiting for a lot of those but expect that to kind of mature over the next couple of years. Some of the enforcement issues could arise as well when tax policy has questionable legal rounds. For example, there is a handful of states that adopt the policy where remote workers need to be earning wages at their employer’s location even when physically working at home. And this policy, which we discussed in the paper, is controversial and is usually adopted at the administrative level and not the legislative level. It’s called the convenience of the employer tax. It’s a little bit of a misnomer, but that is the nomenclature we use in the tax world. And so, most of these cases that we are seeing that are in course now have been brought by the individual employees. But the policy can also impact states where the employees live because of that credit for taxes paid so the states are put in a position where because another state adopted this so-called convenience test, they now have to decide whether to provide their residents who are remotely working a credit for taxes paid to “the convenience test state” or double tax the residents. Usually, they provide a credit to their residents for taxes paid to the other state which you know impacts the treasury quite a bit because you know you are losing tax revenue. The cases that we are seeing there is a handful of them. Missouri particularly the wages in St. Louis. A number of Ohio local cases, you know, and a number of New York cases that deal with the New York state policy, which is a permanent policy that has been around for decades. I’ll mention the St. Louis and Ohio city cases, those were kind of temporary policies that came about because of the pandemic and then the factual circumstances surrounding what to employers do, what do employees do when you know this remote work phenomenon happened and nobody knew how long it was going to last. 


            We had to wait and see how these enforcement issues would play out as some of them moved through the courts and some are just kind of at level, but because the cases involve constitutional issues frequently because you are involving people in multiple states, businesses in multiple states. One of them may end up at the Supreme Court so it’s something to keep an eye on over the next several years. These things do take a lot of time and we just got some of the cases where they are and more detail in the white paper so it’s worth a quick read if you are really interested in that kind of thing.


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Ed:      Well, Charlie, another question I want to ask you is about the disruption that remote work can cause in communities where people are moving. I’ve seen this effect where I live in Colorado cause so many of the mountain towns are desirable places to live, but we were facing really severe housing shortages before the pandemic and now in some places the people actually do the work and run the restaurants and the other shops can barely afford to live. And I’m wondering what if anything legislatures can do to address that problem?


CK:      Sure. Ah you know we’ve seen a couple creative approaches over the last several years and even before that because this is you know affordability and housing has a direct impact on tax issues especially property tax issues right. So historically there have been tax policies that involve what have been called property tax circuit breakers that either provide a credit or limit the amount of property taxes that can be owed due to a rapid increase in the value of a home. And so, you know there have been a number of approaches under this circuit breaker type policy that had been adopted to you know protect long-time residents and particularly seniors from rapidly increases in home value so that’s one thing to think about. Another interesting approach that we’ve seen particularly in some larger cities is providing tax incentives to convert vacant or underused office buildings for affordable housing so apartments and so forth. You’ve seen some here in the District and I know other cities have talked about that as well. 


            I think from an overall basis these are very important policy issues that policymakers both at the local levels have to really consider. I think one thing I would note from a tax attorney perspective whatever the potential solution is policymakers should have legislative counsel review the proposals and ensure that they pass muster under the U.S. Constitution. These are all very complicated issues that no matter the good intent of the proposal may give rise to a particular clause under the Constitution mainly the Commerce Clause, the Equal Protection Clause and the Privileges and Immunities Clauses, which directly relate to multistate business and multistate remote work.


Ed:      Well, it does sound like this is a watch this space kind of a situation that this is going to be cooking for quite a while and I wonder as we wrap up just generally what sort of steps, other steps do you see other states taking trying to deal with this really very challenging situation, which they did not have a huge amount of experience with before.


CK:      I would really like to see more simplification and uniformity achieved through ahm cooperation among the states and the business community ahm in particular by entities like NCSL and others that are really taking the lead on developing best practices and so forth to address these complicated issues. We’ve seen some good examples with the reciprocity agreements that we talked about earlier where states worked together to solve these client’s problems. But also in the unemployment insurance space, there are rules for assigning wages to a given state that are uniform that have been around since the 1940s called the Localization of Service Rules that are much simpler to apply in most cases than say non res and withholding personal income tax rules that are all over the place really from a policy perspective. And then more recently, the adoption by several states of right line nonresident withholding thresholds that these compliance burdens for traveling employees, which may include remote workers who want to go you know work at their vacation home or a family member’s house for several weeks at a time which supplies a little bit of overlap in protection there and we discussed some of those solutions in the white paper as well. 


Ed:      Well, it certainly sounds like an extraordinarily complicated situation and I appreciate you explaining it to those of us who are not tax lawyers, so well done. Thank you very much, Charlie, and take care.


CK:      All right. Thank you very much.


Ed:      I’ll be right back after this with James Privette from NCSL.


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            James, glad to have you on the podcast. 


JP:       Thanks Ed. Really appreciate it. Thanks for having me on. 


Ed:      So, I was talking with Charlie Kearns earlier in this podcast about some of the state tax ramifications of remote work. You work in the NCSL D.C. office and I know you keep track of this and I’m wondering if you could sketch out what types of steps states are taking in this area and really if they are doing much work at all.


JP:       In my opinion, I think a lot of states could do a little bit better job as far as like working with each other. It’s a lot of reactionary policies especially done through the courts like we’ve already seen. The pandemic was really the turning point to really see that there was really a need to address this issue. I mean, we had remote workers prior to the pandemic, but now it’s almost a requirement of the working force. You know you have more people that want to be remote workers and so there is just more interest from legislators to really try to find a way to tackle this type of issue. So, starting with the courts, I mean we have you know the conversations that we are having in New York with the rulings that the surrounding areas because obviously New York is doing stuff and so we have reciprocating legislation in that region, but not too much else around the country. 


Ed:      Are there any approaches that states seem to favor and what action they have taken. Any kind of trends? 


JP:       From what we saw, we pulled a couple of bits of legislation that may be introduced this upcoming cycle. I mean it seems like Georgia has a HB263 that is trying to address these types of issues. Of course, you now with the political landscape and everything just to even start these conversations and really start to educate legislators on the issues on the different aspects of it, I think that’s where we really are right now is really in the education stage of policymaking.


Ed:      Now I understand one thing some states have tried to do is streamline the process for employers and made it a little easier for them to say yes, my employees are giving complete information on their withholding. Is that a trend? Is that anything that is going on in a lot of states?


JP:       Well, I believe so because I mean a lot of states have incentive to do so because a lot of times, they have lost revenue during the pandemic, especially after all that Covid money, Covid-19 money, that came from the federal government they are no longer going to have access to that. And so, you know and states--and likely the Utah’s and Wyoming’s and those in the middle of America--are going to encourage the remote workers especially high paying remote workers you now add to the revenue stream for the states in these state coffers. So, I mean there is a lot of incentive to encourage that.


Ed:      So, it does sound like its sort of a watch this space situation. There’s going to be a lot more stuff coming down the line. What can NCSL do to help legislators and staff out to better understand some of this material. We will of course link to that in the report, but anything else that they can do to help bring themselves up to speed on this?


JP:       Listen to this podcast here. I mean Charlie Kearns is honestly one of the foremost experts we believe in this space and even the working group that included both legislators and the private sector in this space. And when we did a webinar earlier in October 2023 that included some other tax professionals alongside with Charlie Kearns, Charlie Kearns actually moderated that panel. It is available through NCSL to allow you know be able to talk through these spaces as well. And also, I just wanted to add to your previous question of yes, it’s great for states that are encouraging remote workers to come in, but there’s also kind of a detriment for those states that are losing remote workers. California and New York. I live in Washington, D.C. You know, we see a lot of the city itself losing a lot of revenue because, you know, the offices are empty now. So now you have commercial real estate dealing with that if you have more remote workers in your state. So, I think it’s really going to be touching a lot of different proponents in the physical space as well.


Ed:      James, thanks so much. We will of course link to the webinar. We will link to the report. And if we come up with any other materials, we will put those in there, too. James, thanks very much. Take care.


JP:       Thanks Ed.


Ed:      I’ve been talking with tax attorney Charlie Kearns and James Privette from NCSL about how the shift to remote work has affected states and their tax collection process. Thanks for listening.


You can check out all the podcasts from the National Conference of State Legislatures by searching for NCSL podcasts wherever you get your podcasts. This podcast “Our American States” dives into some of the most challenging public policy issues facing legislators. On “Across the Aisle” host Kelley Griffin tells stories of bipartisanship. Also check out our special series “Building Democracy” on the history of legislatures. 


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