Taxation of nonresident workers in coronavirus-hit states becomes 'a million dollar question'

It’s a given that widespread coronavirus lockdowns are costing cities and states billions in tax revenues, but experts say that areas that rely heavily on nonresident workers to balloon their coffers are particularly vulnerable to growing fiscal stress.

For key states and cities, COVID-19 orders keeping non-essential workers at home, are also likely to keep a good portion of taxable income out of reach. Yet in places like New York — which imposes a tax on workers from other states and has a large number of people who came to the state to help relief efforts — it’s unclear how authorities will treat income earned by people now doing their jobs across borders.

“That is the million dollar question,” said Katie Quinn, a partner who specializes in state and local tax law at McDermott Will & Emory.

According to Quinn, taxpayers normally required to fork over taxes to a state or locality other than where they reside may be able to shift a portion of their income earned during the COVID-19 crisis to the state where they actually performed the work.

She added that guidance from city and state tax authorities would go a long way to help taxpayers and businesses adjust withholding.

Nathan Rigney, lead tax research analyst for H&R Block’s Tax Institute told Yahoo Finance that for a large number of people working from home, “the income that they're earning while working from home isn't going to be taxed by that nonresident state, and it’s not going to be taxed by that city.”

For states and cities that usually attract a large percentage of nonresident workers — especially those with high wage jobs and high taxes — the loss of income is going to “hurt, for sure,” Rigney added. These areas are already in for a revenue hit, as lockdowns undermine both retail activity, as well as performance-based income taxes usually imposed on professional athletes and entertainers.

This week, S&P Global Ratings issued a report forecasting a “sizable” downturn in state revenues, absent further federal stimulus. Already, “states are beginning to report declining revenue collections for April and tax receipts are generally below current year budget estimates,” the report stated.

The next round of proposed fiscal stimulus from Congress includes a financial lifeline to states and municipalities, but that bill is bogged down in the Senate, not certain to pass.

“We believe this sets the stage for the onset of a difficult budget year across states despite various federal stimulus efforts...to lessen the blow of an abrupt economic shutdown,” the report added.

‘Very unfriendly’

According to Mobile Workforce Coalition (MWC), 24 U.S. states currently require nonresident workers to pay income tax on as little as a single day’s work. The organization characterizes such states as “very unfriendly” to out-of-state residents, and was formed to lobby against state income taxes on less than 30-days of work within a state’s borders.

Among the “very unfriendly” states, New York may be the most vulnerable to coronavirus-driven outflows, especially considering additional shortfalls from rising unemployment and protracted delays in returning work. The loss in revenue could deal a devastating blow.

Meanwhile, workers who reside in states where rates are lower — and would normally receive a credit in their home state for taxes paid to a nonresident state — could see a windfall.

The Empire State has one of the most aggressive income taxing regimes in the country. With one of the highest income tax rates, approximately 14% of all income tax is derived from nonresidents. In 2017, the most recent year for which data is available, nonresident personal tax liabilities totaled $7.1 billion of the state’s $49.5 billion in total personal income tax liability.

“More than half of it comes from New Jersey,” David J. Friedfel, director of state studies for the non-partisan Citizens Budget Commission, told Yahoo Finance.

In all, Garden State residents accounted for $3.65 billion of New York’s income tax liabilities in 2017, according to New York’s tax assessor data. Connecticut taxpayers for the same year were liable for $1.3 billion, followed by Florida taxpayers who were liable for $358 million.

Maureen Riehl, MWC’s executive director, told Yahoo Finance that she’s particularly concerned for coronavirus first responders and healthcare workers who traveled to COVID-wracked states that impose high tax rates on nonresidents.

Riehl said New York’s past treatment of nonresident Hurricane Sandy first responders is not a good sign for nonresidents who traveled to the state to assist with COVID-19. Back in 2012, the state suspended tax withholding until December 31, even as workers stayed around until early 2013.

And New York Gov. Andrew Cuomo has suggested coronavirus workers are unlikely to get a break. In early May, Cuomo described the idea of an income tax suspension as a “subsidy” he couldn’t afford, given the looming state budget deficit.

“So there's a lot of good things I'd like to do,” Cuomo said, “and if we get federal funding, we can do, but it would be irresponsible for me to sit here looking at a $13 billion deficit and say I'm gonna spend more money, when I can't even pay the essential services."

Nonresident taxes are ‘up in the air’

Each state has its own method for determining whether work was performed within the state and therefore subject to its income tax. Generally, according to H&R Block, states either use the domicile or physical presence factors to determine which state employees pay taxes.

But under NY law, even nonresidents who perform work outside the state for a New York-based company must pay the Empire State’s income tax if the worker, and not the employer, made the choice to perform the work outside the state.

How New York and other states will ultimately treat nonresident income is still up in the air. However, Quinn thinks a proper interpretation of the state’s laws should keep that income out of the clutches of nonresident states.

“I think that if you are working outside of the office because you're not permitted by the governor's orders — to me, that sounds like you're then working outside because it's a requirement of your employer,” she explained, “because they can't have you working in the office anymore.”

Still, H&R Block’s Rigney is skeptical that nonresident states and cities facing shortfalls will voluntarily suggest to taxpayers and employers that they should report income elsewhere. Moreover, he said, it would be tricky for a worker’s resident state to determine if they somehow paid the wrong government.

“There's not a good way for a resident state to do some significant audit to say you shouldn’t have paid all those taxes to that nonresident state,” he said, “even though that would be a big deal for resident states that could see a little bit of a boost.”

Reynold P. Cicalese, CPA and managing Shareholder for New Jersey accounting firm Alloy Silverstein said his employer clients are increasingly seeking advice about whether entities are required to file in the additional states where their employees are now working.

For the most part, he said, employers have made the decision to continue filing as normal — and leave it up to employees to request a refund from their local authorities.

Alexis Keenan is a reporter for Yahoo Finance and former litigation attorney. Follow Alexis Keenan on Twitter @alexiskweed.

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