As taxpayers continue to wrestle with the challenges brought about by the COVID-19 pandemic, one important question remains, how will working from home affect them from a state and local tax perspective? Their concern generally centers around the possibility of being taxed on the same income by more than one state, or possibly paying tax to the wrong state.
Avoiding Double Taxation and Accessing State and Local Tax Credits
In reality, taxpayers encounter the possibility of the same income being taxed by multiple states all the time. The situation generally occurs when an individual lives in one state, but works in another. A taxpayer is normally subject to tax on all of their income by the state in which he or she is domiciled, which is usually their state of residence. In situations where an individual is employed in a state other than their state of residence, they can expect that their state of employment will also seek to tax the income they earned in that state. In order to avoid the possibility of both the resident state and the employment state taxing the same income, the resident state allows a state and local tax credit for those taxes paid to the employment state regarding the income earned in that state.
NYS’s “convenience of the employer rule” throws a real monkey wrench into the usual methods used by the states to avoid the double taxation problem. Under that rule, income earned by NYS-based employees for services performed outside of the state is sourced to NYS unless those services are performed for the benefit of the employer, rather than that of the employee.
Accordingly, an employee who resides in Rhode Island, but works in NYS, and chooses to work from home one day a week for his or her convenience can expect that NYS will seek to tax any income attributable to the days they work from home. Since Rhode Island will also seek to tax the income earned by the taxpayer for services performed within the state, and not allow any credit for the taxes paid to NYS regarding that income, the employee will be caught in the double taxation trap.
NYS and the Convenience of the Employer Rule
But how should the current situation be treated, when the Governor of NYS has mandated that businesses close their doors, and employees work from their homes? Frankly, to hold that income earned during the period when employees were under government orders to abandon their places of business and work from home should be subject to the convenience of the employer rule seems to be a non sequitur. In other words, it defies logic. Yet the NYS Department of Taxation and Finance has issued no guidance that can be relied on by taxpayers. Why not?
While NYS has been less than forthcoming with respect to how it intends to apply the convenience of the employer rule under the present circumstances, it remains difficult to understand how the state could apply the rule without regard to such circumstances. However, NYS is facing a very significant money crunch, as evidenced by the state’s much diminished sales tax collections during the pandemic. Accordingly, taxpayers must stay alert concerning the potential problem presented by the convenience of the employer rule, as must their tax advisors. Unfortunately, we are all facing the unknown.
If you have any questions concerning the subject of this article, please contact the Tom Corrie or your Friedman LLP tax advisor.