St. Louis is changing the rules for taxing telecommuters, a move tax experts say could make the city’s earnings tax vulnerable to legal challenges.
Noncity residents working away from their St. Louis offices because of the coronavirus outbreak must continue to pay the city’s earnings tax, according to city officials.
The change aims to protect one of the city’s largest sources of revenue: a 1% income tax for people who live or work in the city. Last year, St. Louis collected more than $230 million from the tax, about a third of the city’s total revenue. The money is used to pay for street repairs, city employee salaries and general city services.
In past years, workers could fill out an E-1R earnings tax refund form for days worked outside of the city. But providing refunds to thousands of noncity residents suddenly forced to work remotely for their St. Louis offices could result in significant losses for the city. More than 200,000 workers commute to the city for work, according to U.S. Census data from a 2018 American Community Survey.
Someone who lives outside the city limits, makes $50,000 a year at a job in St. Louis and works 60 days remotely would have been eligible for a $115 refund.
Noncity residents working remotely because of the pandemic are not eligible for refunds, said Tom Vollmer, a deputy collector for the city’s revenue department.
“They are still working from home, accessing a city-based business,” Vollmer said. “They are accessing the databases and using their computers and stuff from home.”
The city’s legal counsel turned to state tax statutes for guidance because the city’s ordinance doesn’t address telecommuting, Vollmer said.
“This is all new and uncharted territory; we’ve never been through a situation like this before,” he said.
Legal challenges ahead?
The decision could land the city in court, said Henry Ordower, a professor who teaches tax law at St. Louis University School of Law. He said the city has no authority to tax people who both live and work outside its borders.
“The city’s jurisdiction to tax me is only because I am working in the city,” he said.
Ordower said he expects the issue of whether St. Louis can collect earnings taxes from telecommuters to be decided in court.
St. Louis is one of 29 cities in the U.S. that has some form of an earnings tax. In Missouri, that includes Kansas City, which has not said if it will deny refunds to telecommuters.
Some states, such as New York, already have rules in place for taxing remote employees. There, employees working from home as a convenience are required to report income as if it were earned at the company’s office, said Rick Najjar, a tax consultant for accounting firm BKD, which operates in 18 states, including New York and Missouri.
As telecommuting becomes a more accepted practice long term, Najjar said local tax ordinances will need to change.
“It’s really going to be a problem for income taxes all over the country,” he said.
Leaders of a businesses association representing some of the state’s largest employers, including Ford Motor Co. and Enterprise Holdings, also were baffled by the city’s decision. Associated Industries of Missouri CEO Ray McCarty said the business group asked the 200 accountants on its tax committee about the rule.
“Not a single one of them thought that the city’s decision was correct or that it would hold up under legal review,” McCarty said.
Predictions aside, any potential court challenge will have to wait for the city to deny a refund next tax season and a taxpayer to challenge it.
“As they say in the legal profession,” McCarty said, “it’s probably not ripe yet.”
Correction: A worker who lives outside St. Louis, makes $50,000 a year at a job in the city and works 60 days remotely would have been eligible in prior years for a refund of about $115. A previous version of this story miscalculated the earnings tax refund estimate.
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