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My husband works from our home in AZ for a company that has three corporate locations; 1 in NY, 1 in NC and 1 in CO. When he was hired, he was hired through the NC location, worked for 1 week in the CO location in 2010 and has worked from home ever since. He has not gone to any of the locations for over a year. His employer pays his state income tax to NC and refuses to change it to AZ which is our state of residence.
We have tried several times to change the allocation of the state taxes. The employer states they will only pay the state income tax to one of the three locations in which they are based; thereby forcing us to file additional returns and pay more in taxes than we should be paying.
I am confused as to the legality of this. How can an employer do this and what can an employee do about it? I see this becoming more and more prevalent as companies move to alternate work stations but fail to understand why the employee should be in this situation. Can anyone enlighten me?

Since you do not live in NC, the income is not taxable in NC. Your employer should not withhold NC taxes.
Your income is taxable in AZ. Your U.S. Tax Return: Working or Living in Two or More states (http://taxipay.blogspot.com/2008/06/working-in-two-or-more-states.html)

We have spoken to HR at length and they will not change it. They do not have an state tax id number for the state we live in and that is that. I simply don't understand how this can possibly be legal and/or how they can do this.

It is perfectly legal. Your State of residence is not necessarily where you are obligated to pay State income taxes. The State where your employer is located is the State you are obligated to pay. For example, I live in TN but my employer is in NJ and I am still attached to the NJ office, so I pay NJ State income taxes.