September 15, 2023
New York is in the midst of a significant tax appeals process that could have widespread implications for both employers and employees in the state. Edward Zelinsky, a well-known tax law professor at New York-based Yeshiva University’s Cardozo School of Law, has reignited his two-decade-old dispute with New York over its “convenience of the employer” rule. This appeal revolves around how income earned while working remotely for a New York-based employer should be sourced for tax purposes, both during mandatory office shutdowns and in today’s modern work environment. The outcome of this case could profoundly impact the tax liability and wage withholding for non-New York resident employees who work remotely or on a hybrid basis, as well as their New York employers.
Arkansas, Delaware, Nebraska, Pennsylvania, and both Connecticut and New Jersey to a limited extent, currently employ the convenience of the employer rule to determine the portion of wages subject to state personal income tax. The application of this rule has led to legislative and legal battles in other jurisdictions. For example, New Hampshire and Massachusetts recently sought U.S. Supreme Court intervention in their dispute over Massachusetts’ temporary sourcing policy for remote workers during the pandemic, while New Jersey’s recently enacted legislation incentivizes residents to challenge New York’s convenience of the employer rule. Many states are closely watching this challenge to New York’s rule, as it could set a precedent for the imposition of extraterritorial taxation. Thus, although this litigation primarily concerns New York, its repercussions will be felt nationwide.
Background:
New York State imposes personal income tax on all income earned by residents but only taxes nonresidents on their New York source income, determined by the ratio of days worked in New York to total workdays.
The New York State Department of Taxation and Finance has long maintained that, for employees with their primary office in New York, a home office will be considered a day worked outside the state only if it qualifies as a “bona fide employer office,” a threshold that’s exceedingly challenging to meet. Despite the COVID-19 pandemic’s impact, the Department reaffirmed its commitment to the convenience of the employer test in October 2020.
Professor Zelinsky, a nonresident of New York, has previously challenged the state’s application of this rule without success. His recent petitions to the New York State Division of Tax Appeals raise issues regarding income sourcing for his work at the Cardozo School of Law in 2019 and 2020, as well as a broader challenge to the rule’s applicability in the modern work landscape and mandatory, pandemic-related work orders. A virtual hearing on this matter was held on April 24, 2023, during which Professor Zelinsky waived his right to privacy.
Impact:
The convenience of the employer rule, in existence for over two decades, has had an increasing impact for both employers and employees in recent years. Application of the rule is challenging with the multifactor test having outdated references to federal deductions that were eliminated in 2018. Additionally, technological advances have blurred the concept of a “primary office,” making it difficult to determine when remote work is for the convenience of the employee and not an employer recruitment tool or a cost-controlling means.
Employers have found difficulties in the hiring and retention of employees, especially for smaller companies, when there is not a regional office to designate as a primary office location. Employees that maintain administrative associations with New York despite moving out of the region during the pandemic are discovering their own tax headaches. The rule also complicates claims for unemployment insurance.
Employers across the nation should monitor this litigation, as it may impact their withholding obligations in states with a convenience of the employer rule. If Professor Zelinsky’s challenge is successful, individuals who have paid income tax in both New York and another jurisdiction on the same income should consider filing refund claims to protect their rights within the typical three-year deadline from the original return filing.
The article in its original form, which was published prior to the substantive legislative developments in New Jersey regarding New York’s use of the convenience of the employer rule, can be found here.
Georgios I. Tsoflias (LAW ’16) is a senior associate in Reed Smith’s State Tax Group. His practice is focused on tax controversy (including federal and state tax audits, appeals, and judicial litigation) and unclaimed property (including advising clients through unclaimed property audit defense, voluntary disclosure, compliance matters, and litigation).
Jennifer White is a partner in Reed Smith’s New York office where she works with companies and individuals to assist in reducing state tax liabilities and to eliminate risk of audit exposure.
Andrew Wagner is an associate in Reed Smith’s New York office working in the SALT Practice Group.