Dr. Mark Lee Levine, Professor
With COVID-19, Which State(s) Can Tax Your Income?
The issue of paying income tax is an important point to most individuals earning a living, especially via earned income from salaries, commissions, bonuses and similar payments.
This is not a new issue. Many individuals, especially wealthy individuals paying a good deal of taxes, are especially concerned with this enigma of multiple states attempting to tax their income.
There is no question that the issue of paying income taxes is normally a much more important concern when considering the obligation to pay Federal income taxes. However, since Federal income taxes do not change when a taxpayer relocates within the United States, this matter, on the Federal level, is generally not of concern to the taxpayer. However, the taxpayer has become more and more concerned with the state income tax issue in those states that are aggressive in collecting the income tax.
This is especially the case when the state income tax rate is a higher rate, such as the case in California (13.3% on the higher side), Oregon (9.9% on the higher side), Minnesota (9.85% on the higher side), Washington, DC (8.95% on the higher side), and New York (8.82% on the higher side). There is no concern with state income taxes in Florida, Nevada and Texas; they have no such tax. Many states have very low state income taxes, even at their highest level. For example, North Dakota has a top rate of 2.9% and Colorado is currently at 4.5%.
What is very problematic for many taxpayers that cross in to various states is to determine the amount of tax owing to a given state, if any is owing to the state. Each state, clearly, would like to tax the income of anyone earning in connection with the given state.
This is not a new issue. Many taxpayers live in one state and work in more than one state. Many taxpayers live in more than one state. In these instances, there are technical and sophisticated arguments made by taxpayers and taxing authorities as to whether any tax is owing and to which state(s) such taxes may be owing.
This issue is a fortiori of concern, today, since, with COVID 19 (C-19), many taxpayers are working from a home in one state, yet the employing office of the given employee may often be in another state. The issue of the state having jurisdiction to tax the earnings of the given employee has also arisen in this C-19 era when an employee moves to another state, but continues working for the same company. As an example, this taxation issue can be raised when a worker, working in NYC, moves to Florida, where the employee has another home. Although the employee might have reported all income on the employee’s NY state tax return for prior years, the employee might now assert that no taxes are owing to NY, if the taxpayer now “resides” and is “domiciled” in Florida. (These terms of “residence” and “domicile” have been considered legal “words of art” that have been construed by courts; such terms can be very impactful on the decision as to which state(s) has jurisdiction to tax the income of the employee.)
Many issues must be examined, say the courts, to determine the state or states that can properly tax the income of the employee. Residence, domicile, intent, amount of income earned, days present in various states, presence of indicia of intent as to residence and domicile—such as voting, registration of the auto, family location, ownership of property, prior filings of returns, etc.-- are only a few of the items the courts often consider when attempting to resolve this enigma of the proper taxing authority.
Now, with C-19, this issue is all the more important, since it is arising in many more cases, given the “work--at--home” setting created by the virus. When does the old residence cease and when does the new residence (new state) commence? These are important but difficult issues to resolve. Billions of dollars can be at risk for the winner of this taxing position! (Yes, a pun was intended!) Income tax is not the only tax at issue. Consider, for example, that NYC has a separate and additional tax, an income tax, for those earning income in the City of NY. There are additional taxes, not only income taxes that are impacted by a resolution of this issue of jurisdiction to tax. There are, for example, head taxes and other charges assessed in some cities for those working in a given city.
Yes, there are often offsets to some taxes. This might be by a credit, where one state gives a credit for what is paid by the taxpayer for taxes paid in another state. However, not always are credits available. Some states, as noted, have no tax; other states have high taxes, to wit: Florida has no income tax; NY has a high income tax. Some states have reciprocity agreements, where two states are taxing the income of one individual. However, not all states have such agreements; and, as noted, rates vary from state to state.
Although C-19 did not create this issue of multiple states taxing the income of a given taxpayer, it has exacerbated the issue. We are learning that the C-19 issue has tentacles impacting many areas. This topic of multiple states taxing the income of a given taxpayer is only one example of the many issues that have arisen in connection with C-19. Obviously, this issue is not as important as the life and death issues related to C-19; nevertheless, it is a significant legal issue. It will continue to arise, especially with the “work--from—home” scenario that has arisen on a regular basis because of C-19.
Mark Lee Levine,
Professor, University of Denver