Only 6% of American workers worked remotely before the pandemic. As of January 2023, 40.9% were remote. Unfortunately, Alabama is falling behind when it comes to the treatment of remote workers, and a recent decision by the Alabama Tax Tribunal could make the state even less enticing to remote workers and the businesses that employ them.
The tribunal’s decision involves a former employee of the digital bank BBVA, Mark Bollinger, whose position was made fully remote in 2020. Moving to Idaho to be closer to family, Bollinger continued to work for BBVA until October 2021. Despite living thousands of miles away, the tribunal ruled that Bollinger was liable for Alabama income taxes because he worked for an Alabama business.
In addition to negatively affecting individual workers, the tribunal’s decision also puts “Alabama employers at a distinct disadvantage,” the Tax Foundation wrote last week. “This change sets Alabama up as an extreme outlier among states, as it adopts the aggressive New York model of remote work taxation but with even weaker nexus requirements,” they added. There are only five other states that have such strict rules for remote employees.
This ruling puts Alabama at a competitive disadvantage, the Tax Foundation explains, as it may preclude businesses from offering remote work opportunities, thus discouraging businesses from locating or staying in Alabama.
Before the decision to force a non-resident to pay Alabama income taxes, Alabama was already lagging behind much of the country in terms of the remote work environment. The state ranked 43rd in the Remote Obligations and Mobility Index (ROAM) from the National Taxpayers Union Foundation (NTUF).
There are several reasons for the low ranking.
First, Alabama effectively taxes any income earned in the state. There are no exemptions. If someone works in Alabama or for an Alabama-based company for one day, they are required to pay state income taxes on those earnings. Second, the state does not engage in any reciprocity agreements with neighboring states. That means a utility worker from Georgia or Florida who comes to Alabama to help restore power after a severe weather event will be taxed by the state.
Compared to other states in the region, Alabama is at a definite disadvantage. Because Florida and Tennessee do not levy a state income tax, remote workers employed by companies in those states are not liable for any tax. The two states were tied for first place on the ROAM index.
Georgia is also more favorable to remote workers than Alabama, ranking 19th on the index. Georgia ranks much higher than Alabama because of its tax withholding threshold. Instead of taxing the first dollar earned in the state, Georgia begins taxing remote or temporary workers only after they have worked at least 23 days in the state, earned $5,000 in wages, or earned 5% of their total wages from a Georgia company, whichever is less.
The only Southeast states ranking lower on the ROAM index are Arkansas and Mississippi, and those rankings were published before the Alabama Tax Tribunal’s March ruling.
Although this was an administrative decision made by the Alabama Tax Tribunal and not something the legislature had control over, the legislature does have the power to enact policy changes making Alabama more friendly toward remote workers.
The first step is to consider raising the tax withholding threshold to at least 30 days. Alabama is one of 29 states that essentially have no threshold for time worked in the state before income taxes are levied. There are five states that have a threshold of 30 days or more and 10 states that do not collect taxes from remote workers at all.
The next step is to enter into reciprocity agreements with neighboring states. It does not make sense for someone living in Georgia or Mississippi who occasionally comes to Alabama as part of their work duties to have to pay state income tax. Someone who works for an Alabama company but lives thousands of miles away should certainly not have to pay the state income tax.
Aside from the issue of fairness, making Alabama more attractive for remote workers could give the state an advantage in attracting and retaining businesses. It’s a win-win for the state and the legislature has the power to make it a reality.
Justin Bogie serves as Fiscal and Budget Reporter for 1819 News. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to: Commentary@1819News.com.
