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New Jersey Regresses on Remote Work Taxes With Retaliatory “Convenience” Rule

New Jersey has every right to be upset about New York’s “convenience of the employer” rule, which unfairly forces New Jerseyans who live and work in New Jersey to pay New York taxes. But legislation that has passed the New Jersey legislature would fight fire with fire — leaving taxpayers in both states to get burned.

New York’s “convenience of the employer rule” requires taxpayers who switch from working in person for a New York employer to working remotely in another state for the same employer to continue paying New York taxes. This confusing rule, which only a few other states enforce, is a fairly naked revenue grab by a state known for its aggressive tax nexus policies. (The states with a “convenience of the employer” rule are New York, Pennsylvania, Delaware, Nebraska, and most recently Alabama. Oregon enforces a similar rule only for managerial staff, while Connecticut enforces a retaliatory version only against residents of states that enforce their own “convenience” rules). 

For New Jersey policymakers, this represents a threat to its coffers, as it loses out on income tax revenue that should rightfully be going to New Jersey. Consequently, the state recently passed legislation that would, among other things, enforce a retaliatory version of this “convenience” rule only against residents of states that also enforce such rules (most notably New York and Delaware, as Pennsylvania and New Jersey have a reciprocity agreement that prevents the “convenience” rule from coming into effect).

But perhaps the more important issue is how “convenience” rules affect taxpayers themselves. Not only are they confusing and often result in tax increases, but they are difficult to justify. In theory, taxpayers owe taxes to a state when they benefit from that state’s institutions. A taxpayer physically traveling into and working in a state benefits from that state’s roads, police, and other infrastructure that generally makes it possible for them to work and earn an income in that state.

A taxpayer who lives and works in an entirely different state benefits in no way from these services. Certainly, their employer and in-person colleagues benefit, but this is already covered by the employer’s corporate income tax liability and their coworkers’ personal income taxes. There is little justification to tax a remote employee who lives and works in an entirely different state.

What’s more, “convenience” rules create the worrisome potential for double taxation. Under normal circumstances, a taxpayer commuting across state lines pays income tax to their state of work, then claims a credit for those tax payments against their income tax liability in their state of residence. But in the case of “convenience” rules, an employee’s state of residence may be unwilling to provide a credit to a taxpayer who lived and worked in their state all year, leaving the taxpayer caught in the middle of a tug of war between two state revenue departments.

New Jersey’s retaliatory convenience rule does little but subject New York taxpayers to the same injustice that New Jersey taxpayers already face. It does not in the least protect New Jersey taxpayers from New York’s convenience rule, only extends the rule to more taxpayers. 

In the long run, the more states that have convenience rules, retaliatory or no, the more taxpayers are subjected to counterintuitive and unfair rules about what state they owe taxes to. 

New Jersey’s new rule will only make the state more inhospitable to remote workers. In the 2023 ROAM Index, New Jersey ranked an unimpressive 36th out of 50 states. But with a retaliatory convenience rule in place, New Jersey would fall into the bottom 10 states, coming in at 41st out of 50.

States seeking relief from other states’ “convenience of the employer” rules should resist the urge to respond in kind. Instead, they should seek to enter into reciprocity agreements, advocate for judicial relief, and encourage Congress to create a national solution. New Jersey’s unfortunate approach creates only more confusion for taxpayers.