State DOR claims remote state employee owes tax. [Department of Revenue]

[Nutmeg]

The DOR of the remote state sent an Assessment of Unpaid Tax for 2021 that includes penalties and interest.

The employee owes no tax and is not even required to file a return because he had no state source income by that state’s own definition (which requires the work to have been performed in the state). He was hired by another division of the state to be a remote employee and did not do any work in the state.

The DOR twice sent an inquiry form to the employee asking why he didn’t file a return, and he explained that he was not required to do so because he had no state source income and had not even set foot in the state since employment began. Apparently the employee’s response was ignored.

The state is threatening tax liens, collection actions, and interception of the employee’s federal tax refund.

The state allows a protest to be filed along with any documents the employee would like to have considered. Of course, the employee plans to file a protest. However, the fact that the state ignored his response to its official inquiry makes him wonder:

Should he hire an attorney in the state?
Should he hire a CPA?
What documentation could he possibly provide to prove a negative? (The DOR knows his state of residence, as that is where the certified letter was sent).

[MarkNYC]

Two questions:

1. Did the employee's W-2 list state wages for the "remote state"? If so, was there any state tax w/h?

2. Different states have different laws and procedures for income tax compliance. Is there a reason you chose not to identify the remote state?

[Nutmeg]

Two questions:

1. Did the employee's W-2 list state wages for the "remote state"? If so, was there any state tax w/h?

2. Different states have different laws and procedures for income tax compliance. Is there a reason you chose not to identify the remote state?

Answers:
1. Good question. The employee’s 2021 W-2 didn’t list any state wages, either for the remote state or the state of residence. The employer didn’t withhold any state tax, so the employee made quarterly estimated payments to his state of residence. The employer started withholding tax for the state of residence in 2023, and the W-2s for 2023 and 2024 reflect that and list the state of residence.

2. I agree and understand (I am a retired attorney but never practiced law in the remote state). I didn’t mention the remote state because I have posted a lot of personal information about myself and relatives, while at the same time encouraging family members to read Bogleheads, and I wouldn’t want anyone to identify the personal information of other relatives. I remember your user name from other posts and can tell you it isn’t NY or NJ.

[MarkNYC]

Since the employee lived and worked in the resident state, and the W-2 did not show any state wages for the remote/nonresident state, I don't understand the remote/nonresident state's basis for their claim that tax is owed. But your description of the W-2 bothers me - showing no state wages or state tax w/h for either the remote state or the resident state. That is not normal, or proper, and I suspect it is a factor in the remote/nonresident state's claim.

That said, and without knowing the state involved, I would be inclined to submit a protest that includes a copy of the W-2 showing no remote/nonresident state wages, plus whatever documents are available showing the employee was hired to perform remote work, and a reference to the provision in the remote/nonresident state's law that does not tax remote work performed out-of-state.

I think a competent tax-oriented CPA could handle this, although as a retired attorney you might have a preference toward a tax attorney, depending on the amount of dollars involved.

[Itsmeagain1]

For those like me who do not know, what is a DOR?

[Nutmeg]

For those like me who do not know, what is a DOR?

Sorry - I used DOR as a shorthand for Department of Revenue.

[MarkNYC]

For those like me who do not know, what is a DOR?

It's a state's Department Of Revenue. Some states have other names for their revenue collection departments: Franchise Tax Board (CA); Dept of Taxation & Finance (NY); etc.

[Itsmeagain1]

For those like me who do not know, what is a DOR?

It's a state's Department Of Revenue. Some states have other names for their revenue collection departments: Franchise Tax Board (CA); Dept of Taxation & Finance (NY); etc.

Thanks! Then Ohio’s is the DOT.

[RetiredAL]

This may be a case where that person's SS was incorrectly used (Accidentally or Nefariously) by someone employed in that state.

[Nutmeg]

But your description of the W-2 bothers me - showing no state wages or state tax w/h for either the remote state or the resident state. That is not normal, or proper, and I suspect it is a factor in the remote/nonresident state's claim.

Good point; you must be right.

The employee was hired before the pandemic and was perhaps the only remote employee at the time he was hired. I am confident that he was and is still the only remote employee of this division who lives in his resident state. If not for the pandemic, the resulting increase in remote work, and the need of the employer to withhold taxes for a variety of states, it is possible that his W-2s would still have blanks for the state!

He could perhaps ask his payroll department for an amended W-2, but it is a large organization and I don’t know how likely it is that he would be successful.

[SnowBog]

As others have noted, different states treat these situations differently. Some states aggressively go after remote workers who work for businesses in their state...

Since we don't know the state, we can't help give opinions on if they are justified or not...

However, let's say the state wins, and expects their pound of flesh - I mean taxes... It's important to note that other states can't might not double tax the same income. Some states have to give an offset for taxes paid to other states on the same income.

ETA: apparently this may also vary by state, see later post.

If their state of residence has the higher tax rate, other than more complicated filing (with two states), they won't pay anything more in taxes. Let's say their home state expects $10k, and the remote state wants $8k. Their home state return should reflect the $8k paid to another state (on the same income), and thus they only owe the difference of $2k to the home state.

If the remote state has a higher tax, they'll unfortunately pay more, but should owe nothing in their home state.

Unfortunately, I've seen situations where the home state in these cases doesn't agree, and thinks that the money should have paid to them instead... Again, states deal with these things differently, and they often disagree...

One last item to watch for is if the states have a joint tax agreement between them. More common for neighboring states. Usually in these cases, they figure this stuff out between them... Doesn't sound like that's the case here...

[MarkNYC]

But your description of the W-2 bothers me - showing no state wages or state tax w/h for either the remote state or the resident state. That is not normal, or proper, and I suspect it is a factor in the remote/nonresident state's claim.

Good point; you must be right.

The employee was hired before the pandemic and was perhaps the only remote employee at the time he was hired. I am confident that he was and is still the only remote employee of this division who lives in his resident state. If not for the pandemic, the resulting increase in remote work, and the need of the employer to withhold taxes for a variety of states, it is possible that his W-2s would still have blanks for the state!

When a nonresident state is involved, sometimes the W-2 will show only federal wages on page 1, but there could be a page 2 showing state wages which is easy to overlook or unintentionally discard. Not saying that applies in this case but it would explain the remote/nonresident state's claim so it's a possibility that should be ruled out before protesting the assessment.

[123]

Are the taxes, penalties, and interest greater than the potential attorney/legal fees ?

[AnEngineer]

It's important to note that other states can't double tax the same income. States have to give an offset for taxes paid to other states on the same income.

Do you have a source on what compels states to have such laws?

[quantAndHold]

NY, AR, NE, DE, PA, CT, MA, and NJ use the “convenience of the employer” rule in deciding whether remote income is taxed. Are we talking about one of those states?

Income that comes from an employer in one of these states is taxed regardless of where the employee lives, unless there’s a reason the employee must reside where they are for business reasons. So, for example with a company based in NY, a salesperson whose sales territory is in Texas could probably get away without paying NY taxes, but a remote software developer for the same company would probably have to pay NY state taxes.

[Yarlonkol12]

NY, AR, NE, DE, PA, CT, MA, and NJ use the “convenience of the employer” rule in deciding whether remote income is taxed. Are we talking about one of those states?

Income that comes from an employer in one of these states is taxed regardless of where the employee lives, unless there’s a reason the employee must reside where they are for business reasons. So, for example with a company based in NY, a salesperson whose sales territory is in Texas could probably get away without paying NY taxes, but a remote software developer for the same company would probably have to pay NY state taxes.

Interesting,

https://smartasset.com/taxes/convenienc ... loyer-rule

Under the convenience of the employer rule, New York may still require them to pay state income tax because the company is based there. That’s in addition to the tax they already pay in New Jersey.

Wow. yikes...

[MarkNYC]

NY, AR, NE, DE, PA, CT, MA, and NJ use the “convenience of the employer” rule in deciding whether remote income is taxed. Are we talking about one of those states?...Income that comes from an employer in one of these states is taxed regardless of where the employee lives, unless there’s a reason the employee must reside where they are for business reasons.

For confidentiality reasons, the OP chose not to identify the state - but did rule out NY and NJ. The OP (a retired attorney) did say that the employee "had no state source income by that state's own definition (which requires the work to have been performed in the state").

[Makefile]

It's important to note that other states can't double tax the same income. States have to give an offset for taxes paid to other states on the same income.

Do you have a source on what compels states to have such laws?

Comptroller of Maryland v. Wynne was in the news here a lot about a decade ago

[MarkNYC]

However, let's say the state wins, and expects their pound of flesh - I mean taxes... It's important to note that other states can't double tax the same income. States have to give an offset for taxes paid to other states on the same income.

If their state of residence has the higher tax rate, other than more complicated filing (with two states), they won't pay anything more in taxes. Let's say their home state expects $10k, and the remote state wants $8k. Their home state return should reflect the $8k paid to another state (on the same income), and thus they only owe the difference of $2k to the home state.

This is an important issue to consider. Assuming the employee timely filed the 2021 resident state tax return (without an extension), and assuming the state has a 3-year statute of limitations, the deadline for filing an amended return to claim a credit for tax paid to other states is about a month away. So if the dispute is resolved in a few months in favor of the remote/nonresident state, it would then be too late to file a resident state amended return for a credit/refund for the nonresident tax.

Considering that, the employee should consider filing with the resident state prior to 4/15/25 a Protective Refund Claim, which is an informal claim for refund of an unspecified amount based on an unresolved issue. The timely-filed Protective Claim preserves the taxpayer's right to file an actual refund claim/amended return in the future and after the issue is resolved even though the normal statute of limitations would have expired.

[SnowBog]

It's important to note that other states can't double tax the same income. States have to give an offset for taxes paid to other states on the same income.

Do you have a source on what compels states to have such laws?

Well, I might have been incorrect... Again, unfortunately the states all set their own rules, and it seems they may not all do this... Luckily, I haven't run into it yet, but given the disparity between states, probably more accurate to say "many" as the article below notes.

https://accountinginsights.org/working- ... uirements/

Many states offer credits to offset taxes paid to other states, reducing the risk of double taxation. However, claiming these credits often requires detailed documentation and familiarity with inter-state tax agreements. Taxpayers may need professional guidance to optimize filings and ensure compliance.

Others have noted https://en.m.wikipedia.org/wiki/Comptro ... d_v._Wynne, which seems like it should apply to all states. But that may not prevent a state from trying and forcing someone to contest via the courts...

[AnEngineer]

Do you have a source on what compels states to have such laws?

Comptroller of Maryland v. Wynne was in the news here a lot about a decade ago

Thanks!

[Nutmeg]

This may be a case where that person's SS was incorrectly used (Accidentally or Nefariously) by someone employed in that state.

I might advise the employee to ask the remote state to show him any W-2 with his SSN that lists that state.

[Nutmeg]

If their state of residence has the higher tax rate, other than more complicated filing (with two states), they won't pay anything more in taxes.

The state of residence in this case has the higher tax rate.

One last item to watch for is if the states have a joint tax agreement between them. More common for neighboring states. Usually in these cases, they figure this stuff out between them... Doesn't sound like that's the case here...

You are correct. The two states aren’t contiguous or even within reasonable driving distance, and they don’t have reciprocity.

[Nutmeg]

NY, AR, NE, DE, PA, CT, MA, and NJ use the “convenience of the employer” rule in deciding whether remote income is taxed. Are we talking about one of those states?

No, the remote state is not a “convenience of the employer” state.

The remote state’s laws say that only work performed in the state is taxed by the state. The employee performed no work in the state because he wasn’t present in that state at all in 2021.

[SnowBog]

Again, not sure this helps, but when I looked into this rabbit hole a few years back, it was insane at the disparity between the states...

What prompted my looking was an acquaintance who was told by their employer they were going to start tracking time spent in a state, and if you crossed the threshold (which varies) for the state, they were going to start withholding for that state.

As it was explained, it didn't even matter if you "worked" there necessarily. One of the examples was literally a layover flight, simply passing through the state even without actual work being performed there. (That's what made me question things...)

Obviously the situation you are dealing with is a bit different, since they weren't ever physically present in the state. But my point is what a wild wild west of different, often conflicting, approaches the states use for these situations, some far more aggressively than others.

There are a few tax people who supposedly deal with this as a bit of a specialization, as arguably it is. .. I think expats might occasionally run into this as well, where their former "home" or "employer" state wants their income tax. So a tax person who deals with expats, especially one that might work across multiple states, might be worth contacting for their opinion/assistance.

[Joey Jo Jo Jr]

NY, AR, NE, DE, PA, CT, MA, and NJ use the “convenience of the employer” rule in deciding whether remote income is taxed. Are we talking about one of those states?

No, the remote state is not a “convenience of the employer” state.

The remote state’s laws say that only work performed in the state is taxed by the state. The employee performed no work in the state because he wasn’t present in that state at all in 2021.

I’m guessing the issue you are running into is that this employee is, as I understood it, actually employed by the state that wants to tax the employee? I.e., “you mean to tell me we can’t even tax our own employees? Providing services to our government is working in our state, and I dare you to find a judge paid by our fine state that says otherwise!”

I’d also be mindful about winning the battle but losing the war, assuming the remote employee wants to remain as such.

[AnEngineer]

NY, AR, NE, DE, PA, CT, MA, and NJ use the “convenience of the employer” rule in deciding whether remote income is taxed. Are we talking about one of those states?

No, the remote state is not a “convenience of the employer” state.

The remote state’s laws say that only work performed in the state is taxed by the state. The employee performed no work in the state because he wasn’t present in that state at all in 2021.

Could there be a covid-era law rule that is now defunct at play? I know some states changed how remote work was taxed temporarily.

[Mr. Rumples]

Under the state's procedures, the taxpayer can file a freedom of information act request - it is called different things in some states; the agency's FOIA officer might be shown on the website. The request should identify the records being looked at with reasonable specificity. Thus the FOIA request could ask for all emails, notes and correspondence related to the emails sent on xxx date. Ask for a cost estimate first. In VA, FOIA requests must be responded to within just a few days. I have needed records more than once and I just called the FOIA officer for the agencies and they gave me the information rather than go through all their paperwork of recording the request and the followup record keeping on their end.

Getting the information under FOIA gives an attorney, accountant or whomever basic information.

[MathWizard]

No, the remote state is not a “convenience of the employer” state.

The remote state’s laws say that only work performed in the state is taxed by the state. The employee performed no work in the state because he wasn’t present in that state at all in 2021.

I’m guessing the issue you are running into is that this employee is, as I understood it, actually employed by the state that wants to tax the employee? I.e., “you mean to tell me we can’t even tax our own employees? Providing services to our government is working in our state, and I dare you to find a judge paid by our fine state that says otherwise!”

I’d also be mindful about winning the battle but losing the war, assuming the remote employee wants to remain as such.

This is a good point.

One requirement for the local state University employees to
WFH is that the reside within the state. I assume that they wanted
the income tax.

[Nutmeg]

Under the state's procedures, the taxpayer can file a freedom of information act request - it is called different things in some states; the agency's FOIA officer might be shown on the website. The request should identify the records being looked at with reasonable specificity. Thus the FOIA request could ask for all emails, notes and correspondence related to the emails sent on xxx date. Ask for a cost estimate first. In VA, FOIA requests must be responded to within just a few days. I have needed records more than once and I just called the FOIA officer for the agencies and they gave me the information rather than go through all their paperwork of recording the request and the followup record keeping on their end.

Getting the information under FOIA gives an attorney, accountant or whomever basic information.

Thank you; this is good to know. In this case, all communication was on paper, and I don’t think there is any of the documents contain public information yet.

[Nutmeg]

[Edited to delete duplicate post.]

[Nutmeg]

However, let's say the state wins, and expects their pound of flesh - I mean taxes... It's important to note that other states can't double tax the same income. States have to give an offset for taxes paid to other states on the same income.

If their state of residence has the higher tax rate, other than more complicated filing (with two states), they won't pay anything more in taxes. Let's say their home state expects $10k, and the remote state wants $8k. Their home state return should reflect the $8k paid to another state (on the same income), and thus they only owe the difference of $2k to the home state.

This is an important issue to consider. Assuming the employee timely filed the 2021 resident state tax return (without an extension), and assuming the state has a 3-year statute of limitations, the deadline for filing an amended return to claim a credit for tax paid to other states is about a month away. So if the dispute is resolved in a few months in favor of the remote/nonresident state, it would then be too late to file a resident state amended return for a credit/refund for the nonresident tax.

Considering that, the employee should consider filing with the resident state prior to 4/15/25 a Protective Refund Claim, which is an informal claim for refund of an unspecified amount based on an unresolved issue. The timely-filed Protective Claim preserves the taxpayer's right to file an actual refund claim/amended return in the future and after the issue is resolved even though the normal statute of limitations would have expired.

Thank you very much. Information such as this is why I recommend that my relatives read Bogleheads. I will recommend this to my relative.

[Nutmeg]

I’m guessing the issue you are running into is that this employee is, as I understood it, actually employed by the state that wants to tax the employee? I.e., “you mean to tell me we can’t even tax our own employees? Providing services to our government is working in our state, and I dare you to find a judge paid by our fine state that says otherwise!”

I’d also be mindful about winning the battle but losing the war, assuming the remote employee wants to remain as such.

This is a good point.

One requirement for the local state University employees to
WFH is that the reside within the state. I assume that they wanted
the income tax.

Interesting! The remote state does not require University employees to reside within the state.

[Mr. Rumples]

Under the state's procedures, the taxpayer can file a freedom of information act request - it is called different things in some states; the agency's FOIA officer might be shown on the website. The request should identify the records being looked at with reasonable specificity. Thus the FOIA request could ask for all emails, notes and correspondence related to the emails sent on xxx date. Ask for a cost estimate first. In VA, FOIA requests must be responded to within just a few days. I have needed records more than once and I just called the FOIA officer for the agencies and they gave me the information rather than go through all their paperwork of recording the request and the followup record keeping on their end.

Getting the information under FOIA gives an attorney, accountant or whomever basic information.

Thank you; this is good to know. In this case, all communication was on paper, and I don’t think there is any of the documents contain public information yet.

As the subject of the inquiry, in VA, you would be entitled to the correspondence (if it was in litigation, is in formal dispute resolution or if the agency's AG had been involved that would be another matter). State laws vary widely of course. I'd make the request and see what happens. In VA, if a FOIA request is denied, they provide the statute's section with the exemption. But VA leans on the side of releasing a lot.

I would request the following: "I am requesting a copy of my tax return [insert year], and all correspondence, email, notes related to it by Tax Dept. personnel from [insert dates]. I am requesting a cost estimate first." Or, put in related to my correspondence of [insert date]. The more specific the better.