A telecommuter who lives out of state while working by computer for a New York employer must pay New York tax on his full income, the state’s highest court ruled Tuesday in a case that could have wide implications in the growing practice.

The Court of Appeals ruled that computer programmer Thomas Huckaby – who lives in Nashville, Tenn. – owed New York income tax for his full salary, not just the time he spent working at the New York offices of the union that employed him.

Mr. Huckaby paid tax on about 25% of his income over two years for the time he spent working in New York state. But the court upheld a state tax department ruling that all his income should be taxed. The tax amounts to $4,387 plus interest. However, the ruling could lead to much greater income for the state as it is applied to the growing field of telecommuting.

The Census Bureau’s latest statistics show that nearly 4.2 million people worked at home in 2000, up from 3.4 million in 1990. The bureau also reported that the International Telework Association and Council found that 8.8 million people telecommuted daily in 2003, and 12.4 million in 2004 – a nearly 200% in crease over the 2000 Census figure.

“The way the workforce is evolving and that companies are evolving, you are going to see more people working for companies from different states even across the country,” said Bob Smith of the International Telework Association and Council, based in Silver Spring, Md.

Mr. Smith said the issue of which state gets their income tax is a growing debate “It can be a damper on telework,” said Mr. Smith. “What’s important in our country overall is to make sure laws keep up with technology developments and the needs of both the employee and the employer, because there are benefits for both.”

In February, President Bush proposed several new tax changes, including one to encourage telecommuting.

“New York provides the job, New York provides the professional opportunity, and New York should be able to tax that income, even if the employee for his own convenience was working outside of New York State,” said Marc Violette, spokesman for state Assistant Solicitor General Julie Mereson, who won the case.

The issue split the court, and the majority acknowledged the decision could discourage telecommuting.

“New York has the right to tax 100% of a nonresident employee’s income derived from New York sources,” according to the 4-3 decision by Court of Appeals. The court relied on a fairness rule called the “convenience of the employer” under law that says a worker’s income is taxable if he chooses to live outside the state, as opposed to if he or she were transferred there.

Mr. Huckaby “criticizes the convenience test as unfair and unsound as a matter of tax policy and a discouragement to telecommuting. Maybe so,” the decision stated. “We do not view it as our role, however, to upset the Legislature’s and the [tax] Commissioner’s considered judgments.”

In a strong dissent, Judge Robert Smith argued that the basis of the majority’s decision that all income is taxable is “that the commissioner says it is.”

“But the commissioner’s rule is still supposed to make sense,” Mr. Smith wrote. “The majority cites no authority at all, and offers no persuasive reason, in support of this new interpretation.”

“To say a person’s taxability depends on where his employer is wrong,” said Mr. Huckaby’s attorney, Peter Faber of New York City. “I think this is an issue of national significance.”

He said the case is the first of its kind involving the income tax liability of a telecommuter. He said he may appeal the case to the U.S. Supreme Court because most states base income tax liability on the residence of the taxpayer.

The Telework Association’s Bob Smith is no relation to the New York judge.