Without notice or fanfare, the New York Department of Taxation updated guidance on its website to address the application of its “convenience of the employer” rule to COVID-19 telecommuters. The question of whether New York would consider employees who are working remotely due to the pandemic as doing so for “convenience” or “necessity,” has been vexing employers and employees since April. New York’s latest update, which is disappointing but not surprising, has come down on the side of convenience. As a result, an employee whose principal office is in New York State but who is working outside of the state during the pandemic will generally remain subject to New York State income tax, and the employer should generally continue to withhold New York State tax from the employee’s compensation.
Most states source compensation from the performance of services based on the location where the services are performed. Under this approach, an employee’s income earned by working from home outside of the state in which the employee normally works would not be subject to income tax in the work state because the services are no longer performed there. Under New York’s rule, the income of an employee who works remotely for the employee’s convenience rather than the employer’s necessity remains sourced to the state where the employer is located. Although the rule is most well-developed in New York, other states, including Arkansas (which recently adopted the rule in a legal opinion), Connecticut, Delaware, Nebraska, and Pennsylvania, also apply the rule.
The Convenience of the Employer Rule
The New York guidance, which comes in the form of an FAQ on the Department’s website, includes a reference to TSB-M-06(5)I, a technical bulletin issued by the Department in 2006 explaining how New York applies the rule. The approach spelled out in the bulletin is unlikely to apply to many employees who are telecommuting. For the compensation of a nonresident employee whose principal office is in New York to be sourced to their home state, the employee’s home office must either satisfy a primary factor test or satisfy at least four of six secondary factors and three of ten other factors. The primary factor test requires that the employee’s duties require the use of special facilities that cannot be made available at the employer’s place of business, but those facilities are available at or near the employee’s home. The secondary factors, include:
- The home office is a requirement or condition of employment.
- The employer has a bona fide business purpose of the employee’s home office location.
- The employee performs some of the core duties of his or her employment at the home office.
- The employee meets or deals with clients, patients or customers on a regular and continuous basis at the home office.
- The employer does not provide the employee with designated office space or other regular work accommodations at one of its regular places of business.
- The employer reimburses substantially all of the expenses for the home office.
The other factors (many of which are outdated in 2020) specified in TSB-M-06(5)I are:
- The employer maintains a separate telephone line and listing for the home office.
- The employee’s home office address and phone number is listed on the business letterhead and/or business cards of the employer.
- The employee uses a specific area of the home exclusively to conduct the business of the employer that is separate from the living area. The home office will not meet this factor if the area is used for both business and personal purposes.
- The employer’s business is selling products at wholesale or retail and the employee keeps an inventory of the products or product samples in the home office for use in the employer’s business.
- Business records of the employer are stored at the employee’s home office.
- The home office location has a sign indicating a place of business of the employer.
- Advertising for the employer shows the employee’s home office as one of the employer’s places of business.
- The home office is covered by a business insurance policy or by a business rider to the employee’s homeowner insurance policy.
- The employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes.
- The employee is not an officer of the company.
For most employees working remotely during the pandemic, it is unlikely that four of the six secondary factors will be satisfied. Indeed, given the outdated nature of many of the other factors, three of the ten other factors may also be difficult to satisfy.
Potential Double Taxation
The New York guidance increases the likelihood of New York nonresident employees facing double taxation on income earned while working remotely during the pandemic. States generally apply their own sourcing rules in determining whether an individual is entitled to a credit for tax paid to another state. As a result, a New York nonresident employee who is working remotely during the pandemic might not be entitled to a credit for taxed paid to New York for compensation earned outside the state. It is somewhat whether New York would allow a credit for state income tax paid to the work state by a New York resident employee whose income would be sourced to New York under the convenience of the employer rule.
Potential Court Challenge
Challenges to the convenience of the employer rule that have been filed in New York state courts have failed. However, New York nonresidents might find hope in New Hampshire’s suit filed against Massachusetts earlier this week in the Supreme Court of the United States. (See earlier coverage.) Massachusetts has adopted a regulation that has an effect similar to the convenience of the employer rule for employees who normally work within Massachusetts but who are working remotely from outside the state due to the pandemic. New Hampshire has asserted that the rule violates its sovereignty by taxing New Hampshire residents who are working within New Hampshire.
On Thursday, October 22, the New Jersey Senate Budget and Appropriates Committee approved a bill that would direct the state treasurer to prepare a report looking at New York’s taxation of New Jersey residents. According to one New Jersey State Senator, the issue is worth hundreds of millions or even billions of dollars each year. Unlike Connecticut, which waged a long battle with New York before capitulating in 2019, New Jersey has historically acquiesced to New York’s taxation of telecommuters. With COVID-19 squeezing state budgets, that tolerance may be waning. Also on Thursday, another New Jersey State Senator urged the state’s governor to file an amicus brief supporting New Hampshire’s suit against Massachusetts.