A Stitch in Haste

ITEM: Apparently the word “virtual” doesn’t appear anywhere in the New York State Tax Code --

A telecommuter who lives out of state while working by computer for a New York employer must pay New York tax on his full income, the state's highest court ruled Tuesday in a case that could have wide implications in the growing practice. [Huckaby v. New York State Division of Tax Appeals, PDF – 33 pages]

The Court of Appeals said that computer programmer Thomas Huckaby who lives in Nashville, Tenn., owed New York income tax for his full salary, not just the time he spent working at his employer's New York offices.

"New York has the right to tax 100 percent of a nonresident employee's income derived from New York sources," according to the 4-3 decision by Court of Appeals. The court relied on a fairness rule called the "convenience of the employer" under law that says a worker's income is taxable if he chooses to live outside the state, as opposed to if he or she was transferred there.

In a strong dissent, Judge Robert Smith argued that the basis of the majority's decision that all income is taxable is "that the commissioner says it is ... The majority cites no authority at all, and offers no persuasive reason, in support of this new interpretation."

MY TAKE: Telecommuting – and “teletaxation” – are the wave of the future. This nonsensical ruling is just Twenty-First Century “Penny in Your Pocket” jurisprudence. Unfortunately, New York is a highly persuasive jurisdiction in financial litigation – expect many other states to invoke this ruling. This could be the Poletown of the next centrury. Hit & Run chimes in, as does Out of Control.

---

ITEM: The tax cheat cometh --

Americans' unpaid taxes are now topping $300 billion a year, with people who underreport their income the biggest culprits.
...
The IRS estimated the tax gap, the difference between taxes owed and taxes due, after auditing 46,000 people and combining those findings with older estimates of unpaid corporate, payroll and unemployment taxes. The report Tuesday estimated the gap at $312 billion to $353 billion for 2001, about 15 percent of the total taxes owed. Taxpayers were slightly less likely to comply with tax laws than they had been at the time of the latest previous study, completed in 1988.
...
The audits found frequent mistakes reporting alimony income, unemployment compensation and state income tax refunds.

Everson said the tax agency will probably never collect every dollar owed. "No one should think we can totally eliminate the gap," he said. "That would take draconian measures and make the government too intrusive."

MY TAKE: The more oppressive taxes become (see the first item of this post), the more likely people are to try both to avoid (legal) and to evade (illegal) paying income taxes. Meanwhile, the more complicated taxes become, the more likely that people will make mistakes. In other words, is anybody really surprised by a story like this?

So the worst-governed state in the Union took a few tip-toe steps back from the budgetary precipice:

Under intense pressure from the public to fix New York's much-maligned government, the State Legislature moved with striking speed and coordination today to pass Albany's first on-time budget in 21 years.

Lawmakers in the Republican-led State Senate and the Democrat-controlled Assembly came together to pass their plan over several objections voiced in recent days by Gov. George E. Pataki, who warned that their spending was too high and would lead to multibillion-dollar deficits.
...
The mood in the State Capitol was positively self-congratulatory as lawmakers, in the hallways and during floor debates, praised each other for passing a plan before sundown that they said would help them shed their notoriety as a secretive, do-nothing legislature rated the most dysfunctional in the nation last year by the Brennan Center for Justice at New York University School of Law.

Funny, when I and my co-workers at my greedy Swiss bank employer show up each morning, we don’t bother “congratulating” each other for being on time. I can’t remember any of my law school professors taking the time to congratulate the students for not being tardy (although I did have a professor in college who locked the classroom door five minutes after each class started – if you were late, you were screwed).

Oh, and by the way, that miraculous on-time state budget includes an estimated $5 billion deficit.

Congratulations.