A reader forwarded me a link to an item of interest on the website of RSM, a national tax, auditing and consulting firm, that discusses a potentially controversial interpretation of income tax law by the Arkansas Department of Finance and Administration.
In short, it says that someone who worked entirely from a home in Washington (maintaining a computer system of a business in Arkansas) would have to pay income taxes on pay received from the Arkansas-based enterprise.
Says a tax alert RSM published April 15:
The department’s opinion hinged upon a novel interpretation of Arkansas Code section 26-51-202, which imposes an income tax on the entire net income from all property owned and every business, trade or occupation carried on in Arkansas, including income received by a nonresident from an occupation carried on within the state. Factually, the department found that the employee’s day-to-day computer programming responsibilities were tied directly to the maintenance and manipulation of computer systems at the employer’s Arkansas location, and directly impacted the employer’s ability to carry out its mission and purpose. Accordingly, the department concluded that the programmer was carrying on an occupation in Arkansas within the meaning of the statute, and was subject to Arkansas personal income tax on 100% of the compensation paid to her by her Arkansas employer.
This legal opinion is uncommon because the vast majority of states do not subject nonresident telecommuting employees to personal income tax. While a handful of states will subject a nonresident employee of an in-state employer to tax if certain requirements are met, most nonresident telecommuters pay personal income tax on their wages only to the states where the Ify live. The department’s legal opinion may prove controversial as it seems to contradict Arkansas Supreme Court precedent in Cook v. Ayers, 214 Ark. 308 (1976), in which the court refused the state’s attempt to tax salaries of nonresidents.
Additionally, while states can constitutionally tax nonresidents, there are limitations. For example, states can tax nonresidents who derive income from owning a business or property in the state. They can also tax nonresidents who physically work in the state. However, there must be a connection between the nonresident and the taxing state. The legal opinion at issue concluded that merely being an employee of an Arkansas company created the necessary connection.
RSM notes the opinion came at the time of a virus pandemic that has driven people into home work. If other states adopt this thinking, it could be significant. The article notes this isn’t law, but an agency’s interpretation of law and not binding because the state didn’t have full facts on the identity of the worker. But ……
Maybe the Senate wants to get on this.