Arkansas Taxation of Remote Nonresident Employees
The Arkansas Department of Finance and Administration (“Arkansas” or “State”) recently issued Legal Opinion 20200203 regarding the individual income taxation of a remote nonresident employee. The Revenue Legal Counsel (Counsel) received a request for a legal opinion regarding the State’s ability to impose individual income tax on an Arkansas institution’s employee working remotely from the state of Washington. The State was unable to issue a binding legal opinion on the issue because the taxpayer was not named in the request for an opinion. Counsel did, however, issue a nonbinding legal opinion.
The taxpayer worked in Arkansas for a state institution as a systems analyst before moving to Washington in 2017. The taxpayer continued to work for the state institution after moving, and the work performed in Washington is identical to the work performed while the taxpayer resided in Arkansas.
In issuing the opinion, Counsel recognized the U.S. Supreme Court ruling asserting states can tax residents of the taxing sovereignty and that domicile affords a basis for taxation (New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S. Ct. 466 (1937)). Counsel also cited the U.S. Supreme Court ruling that states may impose a levy on nonresidents who derive income from their property or business within the state or their occupations carried on within the state. The levy imposed by the state cannot be more onerous than that imposed on residents of the state (Shaffer v. Carter, 252 U.S. 37, 40 S. Ct. 221 (1920)).
Counsel subsequently cited additional U.S. Supreme Court cases granting states the ability to impose tax based on the opportunities given, protections provided or benefits conferred to an individual by the fact of the state being an orderly, civilized society (Wisconsin v. JC Penney Co., 311 U.S 435, 61 S. Ct. 246 (1940); International Harvester Co. v. Wisconsin Department of Taxation, 322 U.S. 435, 64 S. Ct. 1060 (1944)).
The opinion provided must fall within the purview of Ark. Code Ann. Section 26-51-202, as noted by Counsel. It was determined the state’s ability to tax must be based on a determination of whether the taxpayer’s “income results from a business, trade, or occupation carried on in this state.” Counsel stated the determination must further be based on whether the state “provided opportunities, protections, or benefits for which it can ask a return” within the limits of the U.S. Constitution.
Also, Counsel recognized the limits of taxing nonresidents performing services within Arkansas as determined by the Arkansas Supreme Court (Cook v. Ayers et al., 214 Ark. 308, 215 S.W.2d 57 (1976)). The Court held that two officers of a Tennessee company with several locations in Arkansas were not subject to Arkansas income tax on their employment compensation. The secretary-treasurer performed 100 percent of her work in Tennessee, and the activities were not sufficiently connected to Arkansas. The president of the company averaged six days per month in Arkansas supervising activities at the company’s in-state locations. However, the Court held the in-state activity was incidental to his Tennessee employment and there was doubt as to the General Assembly’s intent to impose an individual income tax in such a situation.
Counsel determined that while the taxpayer’s work can be performed in any location, their daily work duties are directly tied to computer systems located in Arkansas at the employer’s location. As a result, it was determined that the employee is carrying on an occupation in Arkansas. In addition, the taxpayer is provided with various protections and benefits as an employee of Arkansas, including job protections, unemployment compensation, employee rights and other benefits as a public employee. Therefore, Counsel determined the state can tax the income earned by the employee from their Arkansas occupation.
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