Making it prohibitively difficult for Alabama-based companies to employ remote workers makes it much harder for companies to operate in the state. Even if not every job is located in Alabama, many will be, and Alabamians benefit when more businesses believe the state can work for them. While states might prefer that all employees of local businesses be drawn from the resident population, the ability of a business to hire from across the country, particularly for certain specialized positions, makes it easier for a business to locate in a wider range of jurisdictions. Furthermore, this action undercuts one of the underappreciated implications of remote work: it allows companies to consider more locations than they might have under conditions where all their employees must be drawn from an existing local workforce. Accordingly, companies that prioritize remote work may either shift some of their functions out of state (providing an out-of-state office to which they can assign out-of-state workers) or even move their operations outright. If working remotely from another state means double taxation, a remote work benefit is not much of a benefit. These policies are innately unfair, but as a more practical bottom-line concern, such a rule will force businesses to make some decisions that may hurt Alabama if those firms want to offer remote and flexible work opportunities to their employees post-pandemic, and it may discourage some businesses from considering Alabama altogether. To the taxpayer’s detriment, their home state may not offer them a credit for taxes paid to Alabama (since, according to their own income-sourcing rules, the income was not actually earned in another state), yielding true double taxation. The ruling in Alabama appears to go a step further, not requiring any physical presence in the state during the tax year.
Under convenience rules, however, remote employees can be taxed in their employer’s state (provided they have at least minimal contacts with the state, like spending a day there) even if they perform the work elsewhere. Every state with an income tax also provides a credit for taxes paid to other states to avoid double taxation. Ordinarily, states can tax their residents’ income from all sources, and the income of nonresidents when that income is earned in the state.
#DO I PAY STATE TAXES IF I WORK REMOTELY PLUS#
Only five states levy convenience rules-Delaware, Nebraska, New York, and Pennsylvania, plus Connecticut, which only applies the rule retaliatorily against other states with similar rules-so Alabama joins a very short and unenviable list, without the legislature ever taking a vote. The tax tribunal’s decision essentially creates a more aggressive “ convenience of the employer” rule in Alabama, which stipulates that an individual’s income is subject to tax if their office is located in the state, even if they both lived, and performed the work, elsewhere. This change sets Alabama up as an extreme outlier among states, as it adopts the aggressive New York model of remote work taxation but with even weaker nexus requirements. The recent tribunal decision acknowledged that the taxpayer in question had no physical presence in the state but insisted that this was irrelevant in determining whether his income was taxable in Alabama. Lawmakers did not make this change, but they can and should fix it.Įarly in March, the Alabama Tax Tribunal ruled that a former Alabama resident who moved to Idaho was still required to pay Alabama income taxes, reasoning that his employment with an Alabama company constituted “transacting business in Alabama.” This is a surprising ruling that changes taxability in Alabama in a meaningful way, and while its intent is to generate additional tax revenue, such an aggressive approach could easily backfire on the state.Īlthough the existing statutory language is vague in application to the taxation of remote workers, the tribunal’s decision to tax employees of Alabama businesses regardless of their physical location is a departure from previous Alabama policy, in which residents who moved out of state were no longer liable for state income tax. An administrative decision that likely escaped the notice of most lawmakers has quietly transformed Alabama’s taxation of nonresidents, raising constitutional questions and putting Alabama employers at a distinct disadvantage.
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