Action Needed to Prevent Double Taxation of Remote Workers
Lawmakers must make a decision in the coming weeks about the state’s tax policy for residents that telecommute to an out-of-state employer—or risk forcing thousands of their constituents to be double taxed.
The issue centers around the “convenience of the employer rule,” a law in place in seven states, including Connecticut, that imposes income taxes on employees based on where they work rather than where they live.
In other words, Connecticut residents that work in Massachusetts would typically pay Massachusetts income taxes, and receive a corresponding credit from their home state.
However, the pandemic upended this situation, with many that formerly commuted to another state working from home.
Once that employee is no longer physically crossing state lines to get to their job, constitutional questions arise about whether that state still has the right to tax that non-resident employee.
Connecticut has, with limited success, attempted to address the issue and prevent certain residents from being double taxed.
Connecticut filed an amicus brief in support of a suit brought by the state of New Hampshire that would have resolved the issue in the long term.
In that legal action, New Hampshire challenged a Massachusetts measure that continues to tax nonresidents that formerly commuted to work in the Bay State, but now work from home because of the pandemic.
However, the U.S. Supreme Court opted not to hear the case—obviously a significant setback that could result in the issue remaining unresolved for many years.
In the short term, Connecticut lawmakers enacted a temporary fix to the issue during the 2021 legislative session.
The state Senate approved HB 6516 March 1 on a bipartisan 28-7 vote after the bill earlier cleared the state House 125-24. It was quickly signed in to law by Gov. Ned Lamont.
HB 6516 allows those commuters turned telecommuters to continue to pay income tax in the state of their employer for the 2020 tax year and receive a corresponding deduction on their Connecticut tax liability.
However, the fix only was applicable to the 2020 tax year.
With only a few months remaining in the 2021 tax year, CBIA and Connecticut’s accountants and tax practitioners are sounding the alarm on behalf of their clients, hoping lawmakers will provide a solution in any impending special legislative session.
What course of action should they take?
Lawmakers could repeal the “convenience of the employer” rule and simply impose taxes based upon where the individual resides.
The folly of this course of action is that other states will likely not follow suit—again resulting in double taxation of those that live in one state and commute to another for work.
Further, taxpayers finding themselves in this situation will likely find their way out of Connecticut before the end of the 2022 tax year—harming our economy in the process.
A more reasonable course of action would be to extend the temporary fix for the 2020 tax year to 2021. In the meantime, hopefully court actions the state has joined or taxpayers have initiated on their own behalf will result in some longer term solutions.
Regardless, the holiday season is quickly approaching and lawmakers need to take decisive action on this issue.
For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede.
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