By Toni Kistner
Network World, 12/24/01

No question about it, your IT staff wants to telework. A recent survey by Techies.com reveals that a whopping 96% of tech professionals want to work at home at least a few hours each week. And it can be good for you, too. Research shows a great telework program bulks up your hiring muscle and improves your bottom line by stemming employee turnover and cutting facilities costs.

But a dirty little secret could undo all of telework's good: state taxes.

When you hire someone to work full time in another state, you create a "nexus" - a tie or link - with that state. Creating a nexus means your company may have to pay corporate income and sales taxes to the state, even if it has no other business there. And teleworkers could be taxed by their home states and by the states of their companies.

A Government Accounting Office report released last summer ranks employee state tax issues high on a list of potential barriers to telework. And while you may feel income taxes aren't a network executive's concern, if you rely on teleworkers, support a telework program or help determine the cost of hiring teleworkers, you need to bone up on the issue before you, your company or the teleworkers get burned. 

Making taxation your business

Many enterprise telework managers - even at companies with enormous telework programs - have adopted a not-my-problem attitude over taxation. "Hiring decisions are left to local managers, as are decisions about telework arrangements for new hires. Any issues surrounding taxation would surface in these local discussions," says Joe Roitz, AT&T's telework director.

This attitude can cause tension between hiring managers and accounting or legal departments. IDG (the parent company of Network World) has found the nexus a huge administrative and cost burden. In the U.S. alone, IDG has 20 subsidiaries in 35 states. The company's distributed nature means the vice president of tax has little say over the hiring of remote workers, regardless of the cost to IDG. Even when remote employees that don't make sales - such as IT workers - live in states such as Wyoming, "IDG has to pay sales tax to Wyoming," says Jane Enos, the tax vice president. "This creates a big headache that the employees aren't aware of."

Worse still, if you hire a teleworker and unwittingly create a nexus in a state with which your company hasn't registered to do business, you've set your company up for a huge tax bill, warns Bill Lundeen, tax consultant at Clifton Gunderson in Chicago.

Nearly everyone agrees that states claiming the right to tax corporations based on the presence of a single teleworker are way out of line. Lundeen says companies need to urge their congressmen to define how far states can go before they violate the Constitution and "impermissibly burden" interstate commerce. If companies have to figure out another set of state laws every time they hire a teleworker, or choose not to hire teleworkers based on existing rules, states burden interstate commerce. 

Another remedy is a reciprocity agreement between states that specifies employees pay state income tax where they live, period, Lundeen says. He suggests that companies tell their state tax commissioners to push for a federal mandate to tax by residence.

Trouble spots

In the meantime, knowledge is your best defense. Whether state taxes will sabotage your telework program from within - by creating disgruntled employees or prompting turnover - depends on where participants live and how you handle the situation.

For lucky teleworkers, it's a nonissue. Many states have voluntary agreements with at least neighboring states to tax employees where they live or where they earn. But others have inconsistent rules that require employees to pay both. Some employees can be reimbursed and may be able to choose a refund from the state with the higher taxes. Others pay twice with no rebate at all.

The trouble spots are New York, Washington D.C., Illinois, California and contiguous states, sometimes depending on the city in which a worker lives. For instance: New Jersey residents teleworking for New York companies will be refunded the New Jersey state taxes. But Connecticut residents teleworking for New York companies, even a few days a week, are stuck paying both.

If your company or teleworker is located in a trouble spot, you should educate both on the problem upfront. Unfortunately, many managers wait until after they've finished the hire to mention the tax issue or drop the burden on the employee.