September 10, 2020
Arkansas issues legal opinion on state income taxation of teleworkers
The Arkansas Department of Finance and Administration's Revenue Legal Counsel issued an opinion to a taxpayer concerning the applicability of Arkansas state income tax on wages paid to an out-of- state teleworker.
Under the facts of the case, a computer programmer changed her physical work location from a business within Arkansas to the state of Washington. The Department held that despite the employee's physical location within the state of Washington, her work for an Arkansas business meets the definition of "carrying on an occupation within the state" thereby subjecting her wages to Arkansas state income tax.
This legal opinion is not specific to COVID-19 because it was requested by the taxpayer based on a 2017 change in her physical work location.
While this legal opinion applies only to the taxpayer requesting it and cannot be cited as precedent, it provides insights into how the Department might rule on audit.
In reaching its conclusion, the Department cites ACA Section 26-51-202, which imposes an Arkansas income tax on the income received by a nonresident from an occupation carried on within the state. The Department asserts that the teleworker is carrying on a computer programming occupation within Arkansas, albeit from an out-of-state location, because those activities impact computer systems and computer users within the state.
The Department states that this legal opinion is distinguishable from the Arkansas Supreme Court decision in Cook v. Ayers, et al., 214 Ark. 308, 215 S.W.2d 57 (1976).
In the Ayers case, a Tennessee corporation operated several ice manufacturing plants in Arkansas. In
the performance of her duties, the secretary-treasurer performed 100% of her work in Tennessee and her salary from the company was her only income. The president spent on average six days each month within Arkansas supervising operations.
The Court held in Ayers that the secretary-treasurer's duties were not sufficiently connected to Arkansas and the president's duties were incidental to his Tennessee employment. Accordingly, the Court held that the presence of doubt regarding whether the General Assembly intended the income tax to extend to the income of these individuals must be resolved against the tax levy.
The Department explains that the facts are different in the case of this computer programmer. Specifically, the programmer is employed by an Arkansas employer rather than an out-of-state employer that conducts a portion of its business within the state. Further, the programmer's
day-to-day work duties are directly tied to the maintenance and manipulation of computer systems at the employer's Arkansas location. Accordingly, the activities of the computer programmer directly impact the ability of business to carry out its mission and purpose within Arkansas.
Ernst & Young LLP observations
Although not expressly set forth in Arkansas income tax law, the result of this legal opinion if applied to Arkansas income tax and/or withholding audits is similar to the "convenience of the employer rule" established by New York and several other states.
Arkansas businesses with out-of-state teleworker arrangements should consult their tax advisors to determine if Arkansas may assert that income tax and withholding apply to those wages.
EY Payroll News Flash