What began as a tax squabble between New York and neighboring states today threatens to deter telework across the country and compromise key aspects of the Bush administration's national agenda. At issue are conflicting states rules governing how teleworkers pay personal income tax.

In most cases, when teleworkers reside in a different state from their employer, they split the taxes paid on their personal income between their employer's state and their home state, given that they work part time at the employer's office and part time at home. If they work 60% of the time at company headquarters and 40% in a home office, they are expected to pay tax on 60% of their income to the employer's state, and 40% to the home state.

However, New York state tax law also requires employees of New York state-based companies to pay tax on 100% of income earned to New York, regardless of where they perform the work. New York will give non-resident teleworkers a tax credit for the time they spend working in their home state, but only - and this is the issue - when the teleworking is done for the "convenience of the employer." This means New York gives a credit only when the employee worked out of state because of the employer's necessity.

But what constitutes necessity?

"Very, very little," says Nicole Belson Goluboff, an attorney specializing in telework and author of The Law of Telecommuting.

New York state says that unless the nature of your work is such that it couldn't be done in a New York office, then you must pay tax on 100% of your income to New York state. But you must also pay tax on the portion of the income you earned teleworking to your home state. Even if the New York employer eliminates your office space, even if you're a salesperson always on the road, if the work possibly could be done in New York, the state makes you pay tax to New York.

Another problem is that New York state defines part-time teleworker broadly. In many instances, employees who relocate to far-off states and visit the company office only once or twice a year will receive a bill from New York state for the full year's income tax.

"You must allocate days everyone agrees you worked outside New York as days you worked inside New York. It's a fiction that's designed to enrich the coffers of New York," Goluboff says. "The rule also imposes onerous payroll obligations on employers. There are withholding requirements in multiple states when you're multiple-taxed."