Ok…you guys have convinced me.
The general rule—income is taxable in its state of origin. In the case of earned income, this means where the labor is performed. Example: If you live in New Jersey, but your office is located within New York, you’ll need to file a NY nonresident return and pay NY taxes on your salary or wages.
The exception—some states have reciprocal agreements (tax treaties of a sort) that allow earned income to be taxed by the worker’s state of residence, not by the state where the person works. Example: Virginia has a reciprocal agreement with every state with which it shares a border; as a resident of Virginia, I can work in Maryland (or West Virginia or Kentucky…), be taxed by Virginia, and not worry about filing a nonresident return.
The rub—reciprocal agreements apply only to earned income. Example: If you own rental properties in another state, or if you invest in business activities with income sourced elsewhere (e.g. an S corporation, limited partnership, or limited liability company), be prepared for multi-state, nonresident tax concerns.
The bigger rub—companies often hire telecommuters but don’t consider the consequences of placing an employee in a foreign state. A long-distance employee is a physical presence in another state; the employer absorbs that state into its multi-state income tax apportionment formula, and it needs to worry about sales and use tax, personal property tax, unemployment compensation tax, payroll withholding tax, etc. nexus in that far-away place.
A lovely, but often overlooked, general rule—investment income is sourced to the taxpayer’s home state. Example: A Massachusetts resident and taxpayer has interest income from a Minnesota bank account; that income “belongs” to MA, not to MN.