June 11, 2024 Utah Tax Commission rules out-of-state remote worker's wages are subject to Utah state income tax The Appeals Division of the Utah State Tax Commission (Commission) held in 2024 that the 2019 wages of an employee working outside of the state for a Utah employer was Utah-source income and subject to the state's personal income tax (Utah State Tax Commission Initial Hearing Order Appeal #22-2043). The Commission issued a similar ruling in 2022 under comparable facts and circumstances (Utah State Tax Commission Initial Hearing Order Appeal #21-1302). Facts of the case The taxpayer, an information technology specialist, was employed by a multinational employer with an office in almost every state and worked remotely from his home office within Utah servicing global customers. During tax year 2019, the taxpayer moved to another state but continued to work remotely for the Utah division of the same employer. The taxpayer notified his employer of his change in work location but did not change his address for state income tax withholding purposes. Having not been advised of the taxpayer's change of state for income tax withholding purposes, the taxpayer's employer withheld Utah income tax from all wages paid to the taxpayer in 2019. The taxpayer's 2019 Utah Form W-2 reflected his earnings for the entire tax year as well as the amount of Utah income tax withheld. The taxpayer requested his employer issue a corrected 2019 Utah Form W-2 showing only the wages he was paid while a resident of Utah but his employer did not honor his request. When the taxpayer filed his Utah part-year resident income tax return, he reported only those wages he earned while a resident of Utah and requested a refund for the portion of the Utah state income tax withheld while he was not a resident. Because the income reported on the taxpayer's 2019 Utah income tax return did not match the wages reported on his Utah Form W-2, the Commission proceeded with an audit. As part of the audit, the Commission issued a request to the taxpayer's employer to provide a corrected 2019 Form W-2 or a letter explaining why the Form W-2 was incorrect. The employer declined to issue the requested letter or provide a corrected Form W-2. Findings For tax year 2019, Utah Code Subsection 59-10-117(1)(b) provided that "state taxable income" was income derived from Utah sources including "the carrying on of a business, trade, profession, or occupation in this state … " For taxable wage purposes, Subsection 59-10-117(2)(c) clarifies that "a salary, wage, commission, or compensation for personal services rendered outside this state may not be considered to be derived from Utah sources … " Utah Admin. Rule R865-9I-14A.1 requires employers to withhold Utah state income tax from wages paid "to a nonresident employee for services performed within Utah." The Commission concluded that all wages paid by the employer in 2019 were sourced to Utah for state income tax purposes because the taxpayer's employer had: (1) sourced all of his 2019 wages to Utah, (2) withheld Utah state income tax from those wages, (3) paid that withholding to Utah, and (4) not submitted a letter explaining why the income should not be sourced to Utah. The Commission stated that its findings were consistent with Utah State Tax Commission Initial Hearing Order Appeal No. 21-1302 (7/19/2022), where it had determined that the taxpayer's income should be sourced to Utah, even though the taxpayer was not physically in Utah and was working remotely from another state during the entire audit period. The Commission in that case stated that the taxpayer "may be performing services within Utah where the employer's physical location is in Utah, for example they could be rendering personal services for Utah customers or working on accounts assigned to that Utah location. This would be performing services in Utah, regardless of where the employee was physically located at the time they were performing the services." Further, the employer did not issue a corrected Utah Form W-2 or provide a letter explaining why the wages should not be sourced to Utah. Ernst & Young LLP insights The Commission's decision in this case hinged on the employee's continued connection to his Utah employer while working remotely from outside the state, disregarding the physical location from where services were performed. Although this interpretation is not expressly set forth in Utah law or administrative guidance, the result is akin to the "convenience of the employer rule" imposed by several states (e.g., New York) and localities (e.g., Philadelphia). However, like Alabama, which also imposes nonresident income tax without regard to physical presence in the state, there is no provision, by law or regulation, that a nonresident is exempt from income tax if services are provided outside of the state for the employer's business needs rather than the convenience of the employee. (For more information about Alabama's tax treatment of remote worker's wages, see Tax Alert 2023-0609.) It is important to note that in both the 2022 and 2024 cases discussed above, the out-of-state remote workers did not notify their employers of their change in work location, and once their Forms W-2 were issued, their employers would not issue corrected Forms W-2. For instance, the Commission held in a another similar 2022 case that a remote out-of-state worker was entitled to the refund of state income tax withholding because the Utah employer provided a letter stating why the Form W-2 was incorrect and that the employee's income should not have been sourced to Utah. (Utah State Tax Commission Initial Hearing Order Appeal No. 22-339 (11/8/2022).) State and local laws and administrative interpretation of those laws vary by jurisdiction. That is why multistate employers with remote workers should seek competent employment tax advice concerning the appropriate sourcing rules that apply and promptly correct state and local Forms W-2 when made aware of reporting errors. Employers should also be aware that effective January 1, 2023, they should not withhold Utah state personal income tax or report wages on the Utah Form W-2 of nonresident employees who:
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