Taxation without Representation

In case you missed this little gem from the New York Court of Appeals: Court rules telecommuter must pay taxes. This has widespread and serious implications throughout the technology field. Here are just a few:

First, contrary to popular beliefs, the teleworker Thomas Huckaby was actually an employee of the New York based firm. This means that outsourcing and contracting companies not based in New York are unlikely to be covered due to the simple fact that these arrangements are normally business to business contracts and not paid directly to individuals. Therefore, the concept of “now we'll finally get those outsourcers!” has little weight to it.

Next, the bulk of this judgement hits employees. Other than the fear that the employees may look elsewhere for work and additional accounting for the Payroll Department, the companies can see savings in other areas from telework in the form of less office space, less utilities, lower wages for employees in lower standard of living areas, etc. Therefore, this is not an attack on “mean corporations”, this is a direct attack on individuals.

Next, 1099 contractors are going to suffer even more. A 1099 contractor already pays both halves of FICA – approximately 13%, their State, Federal, and potentially City/Locality. Now they will have to pay an additional State and probably City/Locality tax. If they were paying 32% (FICA: 13 + State: 4 + Federal: 15 + City: 0) before, this could easily add another 4-8% to support a City and State with which they have no association or representation. And this is being conservative with their Federal tax rate…

Finally, CaseySoftware has a variety of clients across states including Virginia, Maryland, New York, and New Jersey with developers who are both local and remote. As a startup company, the time, effort, and cost required to account for the varying taxes of all these states could be crippling. What are the full implications once other states try the same tactic?

Will this be an encouragement for more people to incorporate themselves in order to create business to business arrangements? Or will this be yet another reason to outsource to other countries? My hope is that this is struck down by the Federal Courts because States are not allowed to regulate interstate commerce or atleast they aren't according to the US Constitution's Article I, Section 8, Clause 3.