The Empire State has long asserted the right to tax nonresidents commuting to work in New York—even when their work is done at home. The payoff for Albany is huge: as of 2018, newly released state data show, nonresidents generated $7.4 billion in New York State personal income taxes, 15 percent of the total. Most of that came from people who were regular commuters before COVID-19 hit.
Under pandemic restrictions first imposed in March, most commuters to “non-essential” jobs in New York were effectively required by state and local officials to work at home if possible. In early fall, the New York State Department of Taxation and Finance got around to posting this relevant update to its online “Frequently Asked Questions” page:
My primary office is inside New York State, but I am telecommuting from outside of the state due to the COVID-19 pandemic. Do I owe New York taxes on the income I earn while telecommuting?
If you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.
And as clarified in a commentary by the law firm of McDermott Will & Emery, “for the most part, a home office will not qualify as a bona fide employer office unless the employer takes specific actions to establish the location as a company office.”
New York’s taxation of nonresident telecommuters is grounded in a legal doctrine known as the “convenience of the employer” rule. But that ground seems likely to shift in the wake of the pandemic. Once the all-clear is sounded on COVID-19 restrictions, some employers may choose to save money on costly Manhattan office space by permanently allowing their workers to telecommute. Some firms may also establish a “bona fide employer office” closer to where many of their employees live. It remains unclear how long New Jersey and Connecticut tax officials will continue to allow their remote-working residents a full state tax credit for taxes paid to New York after the pandemic restrictions have been lifted.
In addition, the U.S. Supreme Court has been asked to take up a lawsuit, originating in New England, that could eliminate New York’s ability to tax out-of-state telecommuters at a time when work-at-home arrangements seem poised to expand.
More than half of New York’s total nonresident state income tax receipts in 2018 came from 434,179 tax filers living in New Jersey, according to the most recent income tax statistics, and U.S. Census data indicate most of them commuted to jobs in Manhattan. Garden State residents alone sent $3.7 billion to Albany in 2018—more than the combined income taxes paid by 1 million households filing from the 21 counties of the Western New York, Finger Lakes and Southern Tier regions combined.
Another $1.35 billion in New York taxes was collected from 86,606 taxable filers living in Connecticut. The other 48 states and District of Columbia combined accounted for about $2 billion, with slightly more than half that amount coming from residents of Florida ($406 million), California ($318 million), Pennsylvania ($256 million) and Massachusetts ($183 million). Rounding off the nonresident total, nearly $400 million came from residents of other countries, of which the United Kingdom (about $69 million) was the largest source.
New Jersey and Connecticut residents generate outsized New York tax bills because they have high incomes from New York sources: an average of $138,653 a year for New Jersey filers and $221,809 for Connecticut filers as of 2018. While the available data don’t break down income sources at the state level for nonresidents, wages and salaries account for 77 percent of the total nonresident income taxed by New York. Most of the rest is classified as “rent, royalties, partnerships, estates and trusts” income attributed to New York sources, which flows mainly to business-owning nonresident filers in the highest tax brackets.
Questions for the future
During their prolonged period of working at home following the broad shutdown of many businesses in March, many previous New Jersey and Connecticut commuters to New York no doubt have been surprised to learn the Empire State still has its hand in their pockets. Thanks to the “convenience” rule, New York employers are required to continue withholding New York taxes from the paychecks of their out-of-state telecommuters. These workers will still need to file 2020 tax returns with both New York and their home states next year.
As explained in a new Tax Foundation report:
Under so-called convenience rules, an employee is treated as if they work in their employer’s state if their work is performed elsewhere for what is termed the “convenience of the employer”—but convenience is defined very broadly, and the exceptions tend to be quite narrow. States have not always done a good job of spelling out what is meant by “convenience,” but generally the only exceptions are for when an employee’s work legitimately could not be carried out in the employer’s state.
For example, a technician servicing a New York company’s products in Vermont could not, by definition, do her job in New York, so that is not for the convenience of the employer. But a financial advisory firm’s work theoretically could be performed in the employer’s state, no matter how inconvenient or even impossible that might be for a given employee. New York and other states with convenience rules claim that income even if the employee never sets foot in the state.
Of course, the widespread shift to remote work required by the pandemic was initiated as a necessity rather than a matter of convenience for employers or employees. Some New Jersey state lawmakers recently began questioning the arrangement, noting that their state voluntarily takes a pass on nearly $4 billion a year in revenue by allowing its residents to subtract a full credit for the (usually higher) income taxes paid to New York.
For now, New Jersey will continue to treat its remote working residents as if they were still physically working in New York, fully crediting taxes they pay to the Empire State. But, short of threatening to double-tax their own constituents, Jersey pols have no option for changing it. Any political threat would have to come at the federal level, where some have introduced bills that would end taxation of telecommuters. As noted in a recent Tax Notes article by Professor Edward A. Zelinsky of Cardozo Law School (who was himself the plaintiff in a landmark early 2000s lawsuit unsuccessfully challenging the convenience rule): “If the governor does not act (to end the state’s taxation of nonresidents’ remote work), Congress has the constitutional authority to prevent New York from imposing its income tax on out-of-state telecommuters on the days they work at home.” Indeed, that’s the goal of the Remote and Mobile Workforce Act introduced in the U.S. Senate by Sen. John Thune, R-SD, in June.
Of course, if they want to avoid New York taxation of their employees, New York firms have always had the option of simply moving all or part of their operations to other states—as highlighted recently when a major Manhattan-based hedge fund announced it was moving its headquarters to West Palm Beach, FL, and also opening a new office in lower-taxed Greenwich, CT. This week came the report that Goldman Sachs also “may move at least some parts of a major division to Florida, with costs and the pandemic in mind.”
Waiting on the Supremes
In a case that could have huge ramifications for New York, in particular, the U.S. Supreme Court will consider whether to hear a lawsuit in which the state of New Hampshire is challenging the right of neighboring Massachusetts to continue imposing its income tax on New Hampshire residents forced by the COVID crisis to telecommute to their jobs in the Bay State.
With the case now in its preliminary phases, it won’t be surprising to see the Cuomo administration file an amicus brief seeking to have New Hampshire’s suit dismissed. After all, if just 10 percent of former New Jersey and Connecticut commuter earnings are permanently shifted to remote working arrangements, and if the convenience rule is overturned or narrowed by the Supreme Court, the potential loss to New York State coffers would come to more than $500 million a year.