The scenario is generally the same. I receive a call from a taxpayer who has just been informed by the New York State Department of Taxation and Finance (the “Department”) that they have been selected to undergo a personal income tax audit. The individual is commonly a non-resident of New York State (“NYS”), or in some cases is a resident of the state, but not of New York City (“NYC”). As the conversation progresses and I dig deeper into the facts, it becomes apparent that the unfortunate audit target has a residence located within NYS, and sometimes in NYC. Further, they usually acknowledge that they spend a significant amount of time in NYS or NYC, often in connection with their employment. For the most part, they don’t understand what the potential risks are, since they have already sourced any W-2 income earned in NYS to the state when they filed their non-resident return.
After listening to their story, I let them know that the primary issue they will be confronted with during the course of the audit is that of “statutory residency.” Many taxpayers have no idea what it means to be deemed a statutory resident, as well as no inkling of the risks associated with that status. Unlike the question of domicile, becoming a statutory resident of a state (or city) requires no subjective intent on the part of a taxpayer to make that jurisdiction his or her permanent home. As a statutory resident, an individual who is not domiciled in NYS is considered to be subject to tax in the state on his or her worldwide income, not merely that portion that is NYS sourced, just as if they were domiciled in the state. As a result, income that would normally only be subject to tax by one state (the domicile state), such as interest, dividends and capital gains, may be subject to tax in two states. In addition, if a non-resident of NYC is found to be a statutory resident of the City, he would be subject to NYC personal income tax on all of his income. This would apply to his W-2 wages, even if he had already paid NYS income tax on them.
What is a “Statutory Resident”?
Many states have some provision for statutory residency in their tax laws. Taxpayers need to be aware of the measures various jurisdictions use in determining who is a statutory resident. Under NYS Tax law (the “Law”), a statutory resident is considered a person who is not domiciled in NYS, but maintains a “permanent place of abode” in the state, and who spends more than 183 days of the taxable year in the state. NYC’s statutory resident provisions are the same as those of the state, the only difference being the geographical limitations of its boundaries. The Law defines a “permanent place of abode” (“PPA”) as a dwelling place of a permanent nature. A taxpayer does not have to own or lease the dwelling for it to be considered a PPA. A PPA owned or leased by a taxpayer’s spouse is usually considered to be the taxpayer’s PPA also.
For a dwelling place to be deemed a PPA, it must be suitable for year-round use. A cottage whose physical construction limits its potential use to merely the summer months is not considered a PPA. Actual usage is not a determining factor. Rather, in assessing the situation, the Department considers whether the dwelling could be used for year-round living, not whether it actually was.
In general, a PPA must contain kitchen, sleeping and toileting facilities. Further, the taxpayer must have unfettered access to a dwelling for it to be considered a PPA. Accordingly, a house owned by a taxpayer and then rented to a third-party individual will not be considered a PPA of the taxpayer during the rental period since the taxpayer does not have free access to the premises during the term of the lease.
Under a policy adopted by the Department, a taxpayer is only considered to be maintaining a PPA within NYS for the taxable year if the dwelling is maintained by the taxpayer for a period exceeding eleven months of the year. Thus, a non-resident who purchases a home in July of a particular year will not be considered to have maintained a PPA in NYS for that year since she did not maintain the home in the state for more than eleven months of the taxable year.
For purposes of the greater than 183 day count portion of the statutory residency rule, any part of a day spent in NYS is considered a “New York” day. Consequently, a non-resident taxpayer who is physically located in the state on Day One, and who drives over the George Washington Bridge to New Jersey at 12:01 a.m. in the morning on Day Two is considered to be present in NYS on both days with respect to his New York day count. There are certain exceptions to the day count general rule, but they are very limited in nature (such as a medical day and armed services personnel exceptions), and are scrutinized closely by the Department’s auditors. A taxpayer carries the burden of proving the days he or she was not in NYS.
What to Do?
A non-resident of NYS who owns or leases a dwelling in the state can anticipate that statutory residency is likely to be an issue that will arise on any personal income tax audit conducted by the Department. In anticipation of that, the taxpayer should keep complete files of their telephone, charge card, E-Z Pass, ATM and travel records. Also, a detailed contemporaneous calendar should be kept on a daily basis regarding the taxpayer’s physical location. In this case, a good offense is better than a strong defense. Once the Department establishes that you have maintained a PPA in the state during the taxable period, if you cannot carry the burden of proving you were at out-of-state location for a sufficient number of days, there will likely be “blood in the water.”
If you have any questions with respect to the topic of statutory residency, please contact Tom Corrie at (212) 842-7019, or if you prefer via e-mail at firstname.lastname@example.org.