If your job is based in New York or Massachusetts but you’re now working from home in another state, you may be in for a rude surprise. These states and five others have laws that can tax you anyway.

At the beginning of the pandemic, a lot of folks were sent home with their laptop and other equipment so they could work remotely until it was safe to reopen public spaces again.

Now that things are opening up again, it could create a gray area for workers primarily in the Northeast who live in one state and work in another. The result, for some, is that they might get taxed twice on their income.

Here’s the issue. Seven states tax people based on where their job is located — even if they are residents in another state. This “convenience rule” was already in effect in Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania before the pandemic. Massachusetts implemented its own version just this year.

Out-of-state telecommuters to Boston and other major northeast hubs are vulnerable to getting taxed twice. (Photo by David L. Ryan/The Boston Globe via Getty Images) Boston Globe via Getty Images

Most states offer tax credits to offset income earned in other states so you’re not taxed twice. For example, if you live in Indiana and work in Illinois, you pay income taxes based on where you perform your work: Illinois. If you started working from home during the pandemic, income earned while working from home is subject to the tax rate of your home state: Indiana.

But not in the above seven states. Let’s say you live in Vermont, but your job is based in upstate New York. Pre-pandemic, you paid income taxes in New York state and Vermont offset that tax liability with a credit for taxes paid on income earned in New York. But the pandemic has complicated the picture. What happens to our Vermonter now that she’s working from home?

The key question, says accountant Harvey Bezozi, is whether the location of your work is out of necessity or convenience. Right now, he says, “people that work in New York state, and commute into the state from surrounding Connecticut, New Jersey, and Pennsylvania, who now are forced to work remotely, are doing so out of necessity because of the government-mandated shutdowns. There exists a strong case supporting allocating income to their home state during this time.”

In other words, our worker is paying Vermont taxes because she’s working there out of necessity. But when the economy opens up further and some employers give employees the option to continue teleworking or commute back to the office, that will create a gray area.

If the Vermonter in our example has the option of going back into the office but chooses not to — even out of concern for her health — New York could still view that as a choice, not a necessity. Therefore it could start taxing her income again even though she’s already paying income taxes in Vermont.

Bezozi is familiar with New York’s tax auditing practices because many of his clients live in the New York tri-state area and spend winters in Florida. He predicts New York to conduct “ongoing, aggressive audits” as a result of the pandemic’s impact on where people are now working.

What’s more, the conservative-leaning Tax Foundation warns that more states may follow suit. “These rules, which treat an employee as if they worked out of their company’s office even if they never actually did so,” writes analyst Jared Walczak, “could become increasingly popular as a short-term revenue option for states facing an exodus of increasingly teleworking employees.”

Massachusetts is an example of what Walczak’s talking about. In March, the Commonwealth enacted a temporary sourcing rule, which basically says that someone who’s job was based in Massachusetts at the start of the pandemic still owes income taxes to the state for that job even if they’re now working from home out of state. The law is largely targeted to residents of New Hampshire, which doesn’t tax income, who have Massachusetts-based jobs. It expires at the end of this year but the Bay State is considering extending it.

In the pre-pandemic economy and traditional work structure, things were more clear-cut. In the above example, Massachusetts was clearly within its rights to tax income earned in the state. Now, however, the quick adoption of remote work and the large questions about what companies owning downtown real estate will do, make the issue of necessity and convenience much cloudier. When someone’s office becomes their Nashua, N.H. home, asks Walczak, “what is Massachusetts’ ongoing claim? Just that their employer owns a vacant office building in Boston?”

Congress could come up with a remedy. The proposed Multi-State Worker Tax Fairness Act, which has been introduced repeatedly since 2016, limits the ability of states to tax nonresident telecommuters. Alternatively, Senate Republicans’ HEALS Act includes a temporary provision that partially restricts such double taxation through 2024. However, both proposals don’t appear to have traction at the moment.

States themselves have remedies if they choose to adopt them. For example, Maryland, Virginia and Washington, D.C. have long had reciprocity agreements that tax people based on where they live, regardless of where they work.

New York and other states haven’t said yet how they’ll approach this challenge to their convenience rule. But telecommuting for many is here to stay and it’s sure to be an issue in the coming year.

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Sean McClay
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STM Asset Management
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