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NY Says Out-Of-State Telecommuters May Still Owe Income Tax

By James Nani · October 22, 2020, 7:15 PM EDT

New York nonresidents working outside the state during the pandemic, but for a New York business, may still owe income tax to the state on income earned while telecommuting, the state's tax department said in long-anticipated guidance.

In an FAQ page released Monday, the state Department of Taxation and Finance clarified its position that for nonresidents whose primary office is in New York, days telecommuting during the COVID-19 pandemic are still considered days worked in the state unless their employer has established a bona fide employer office at the nonresident's telecommuting location.

The department pointed to its 2006 guidance that interpreted regulations governing the "convenience of the employer test" for telecommuters to help understand whether an employer has set up a bona fide office at a telecommuting location. That notice also lays out factors to test whether the office counts as a bona fide employer office.

"In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe New York state income tax on income earned while telecommuting," the FAQ said.

The informal guidance comes as the department has been publicly quiet for months over its position on the policy, even as thousands of workers in the state have shifted to working remotely during the coronavirus pandemic and the issue has grown in prominence. New York has been criticized by some as aggressively imposing tax obligations on remote workers.

James Gazzale, a spokesman for the New York tax department, said the guidance speaks for itself. A spokesman for the Connecticut Department of Revenue Services said it was reviewing New York's guidance and keeping the lines of communication open with neighboring states.

E.J. McMahon, research director for the fiscally conservative Empire Center for Public Policy, told Law360 the policy illustrates one element leading to New York's fragile tax base. While the state hasn't changed its tax treatment of nonresidents and part-year residents regarding application of the convenience of the employer test for telecommuters and others, McMahon said challenges to the doctrine are a major risk factor for the state in the future.

"A related challenge is the possibility that some sizable minority of the NJ and CT residents involved will in the future continue working from home, and that their employers will reduce their NYC office footprints and set up satellite offices in NJ and CT suburbs to accommodate workers who formerly commuted," McMahon said.

The guidance comes as states like Massachusetts have released more formal guidance on the issue laying out a similar stance as New York, leading Massachusetts to be challenged in the U.S. Supreme Court over its policies.

On Thursday, a New Jersey Senate panel advanced a bill that will require its treasurer to study New York's taxation of New Jersey residents' income, and consider participating in a New Hampshire suit against Massachusetts over taxation of its residents. A spokeswoman for the New Jersey Treasurer's office said it has been having internal discussions regarding the tax implications for New Jersey residents who traditionally worked out of state before COVID-19.

James Wetzler, former commissioner of the New York State Department of Taxation and Finance, told Law360 he felt New York's treatment of telecommuting was reasonable. He noted employees based in New York, but who are living in New Jersey or Connecticut, have had to telecommute during the pandemic, as employers have generally continued to withhold New York tax from their paychecks. If that income is treated as New York-sourced income, he said, the employees' tax liability will align with their withholding, and the taxpayers should get credit in their state of residence for most or all of the New York tax.

"Any other policy would lead to big refunds from NY and big liabilities to the home state (along with associated interest and penalties)," Wetzler said.

Nonetheless, Wetzler said he wouldn't be surprised if some taxpayers challenged New York's proposed treatment. He noted that the guidance includes a description of the state's rules on residency, which may indicate the state is worried about misinformation circulating about whether a taxpayer can avoid taxation as a New York resident by merely temporarily relocating out of state during the pandemic.

Jeffrey S. Reed of Kilpatrick Townsend & Stockton LLP said New York's approach was the same as many states. He said it allows New York to preserve its tax base and is easier to enforce in an audit of a nonresident individual or in a nonresident withholding tax audit. Nonetheless, Reed said eventually such policies could become unreasonable, especially if nonresidents only worked in New York for a few months before the pandemic started and telecommuting last beyond 2021. 

--Editing by Joyce Laskowski.

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