The new popularity of remote working puts the spotlight on the income taxes New York and five other states impose on workers living elsewhere.
My last column across the country looked at how states tax or not tax distant workers who have taken refuge there due to the pandemic. This will focus on a single controversial rule that is likely to affect thousands of New Yorkers and others whose offices were closed this year due to the pandemic. The importance of the rule will increase as telework becomes more prevalent outside of the state, especially as more states adopt it.
It’s known as the “convenience” rule. In short, if a person has a job in one state but lives and works in another state for convenience rather than because the employer requests it, then that person owes income tax to the state in which the job is based.
States with a “convenience” rule for non-state workers
- new York
Source: American Institute of CPAs
In other words, someone with a New York-based job who lives and teleworks in another state still owes New York full income tax on that compensation. If the other state also taxes that income and does not credit New York City tax – as some states do not – the worker is likely to be double taxed.
Here is a real-life example: Prof. Edward Zelinsky, who teaches tax law at Yeshiva University’s Cardozo Law School in Manhattan, lives in New Haven, Connecticut. He usually spends about 50% of his work days in New York City and the rest in Connecticut.
The US Supreme Court ruled that states can only tax non-residents on their state income, often determined by the number of days they are physically present. Mr. Zelinsky says he should only owe New York income tax 50% of his Cardozo income because he is in New York on that percentage of the working day.
New York disagrees. In 2003, the New York Court of Appeals, the highest in the state, ruled that Mr. Zelinsky owed New York income tax on all of his Cardozo salary. He says that cost him about $ 6,000 in New York tax for each of the two years in question. Other New York cases on the same subject have come to the same conclusion.
Mr. Zelinsky asked the Supreme Court to review his case, but in 2004 he refused. Federal law stipulates that state tax cases must be challenged in state courts.
Meanwhile, Mr. Zelinsky also owed Connecticut state tax on all his income because he is a resident there. Beginning in 2020, Connecticut has changed its rules to provide it and others in similar situations with credit for New York taxes paid. But he says he owed state income taxes on his Cardozo compensation twice for decades with no credit being backed by any state.
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New York isn’t the only one to enforce the convenience rule. Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania have it, too, according to Eileen Sherr, who tracks state taxes at the American Institute of CPAs.
But New York has by far the most aggressive enforcement, tax specialists say. Unlike other states, New York employers have a worker’s entire compensation reported on a special box on the W-2 form, not just the amount on which New York tax is withheld. This allows state accountants to compare total taxpayers’ compensation to just the portion earned in New York to identify those they want to investigate further.
“When employers report all compensation, it is like a neon sign highlighting the best exam prospects,” said Mary Hevener, a lawyer who is a compensation specialist at Morgan, Lewis & Bockius.
This year’s wrinkle in the convenience rule is that many people are working remotely not because they want to, but because their offices have been closed.
Will this change the application of the rule in 2020, especially in New York? Mark Klein, attorney and chairman of Hodgson Russ, a law firm that has fought New York on many tax cases, has doubts. The treasury is already burdened by the decline in tax revenues due to pandemic standstills.
“It would be fair for New York to take a break from the convenience rule for 2020. But I don’t think that will be the case given the history of this problem and the current budget crisis,” says Klein.
A spokesman for the New York Department of Taxation and Finance declined to comment on the matter.
For more than a decade, the American Institute of CPAs, the Council on State Taxation, and other groups have campaigned for federal laws to simplify state taxation of foreigners. The effort has widespread support from both parties, and a version was passed by the House of Representatives in 2017 before stalling in the Senate. Another invoice would remove the convenience rule. On June 4, Senator John Thune (RS. D.) urged the Senate to make changes in the face of the pandemic.
Mr. Zelinsky says, “I get calls a lot about the convenience rule and all I can tell people is to call their members of Congress.”
Write to Laura Saunders at [email protected]
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