Conceptually, state income taxes imposed on nonresidents is straightforward. Under the Due Process and Commerce Clauses of the U.S. Constitution, states may levy taxes on nonresidents’ income earned within the state boundaries. Said differently, if one works, carries on business, or engages in professional activities within a state, he is liable for the state’s tax regime on income earned from those activities. This ensures that each state only taxes a fair portion of income earned based on the in-state sourcing. Both New York and New Jersey follow this approach and tax nonresident income derived or connected to sources within the respective state.
This is a particularly relevant matter during the COVID-19 pandemic as employees are working from atypical locations, often in a different state than where they are employed. While New York and New Jersey’s taxation of nonresidents is seemingly practical, over the years New York has also taken a divergent path, one with a significant impact on those telecommuting from outside the state in the COVID-19 lockdown.
New York’s Convenience of the Employer Rule
New York’s assertive taxation of nonresidents is centered around the state’s “convenience of the employer rule.” According to the state’s regulations, New York imposes income tax on nonresident income earned when an employee is telecommuting for his or her own convenience. In other words, if a Connecticut resident, whose primary place of business is in New York, works from home on a Friday in July, that day is considered a New York work day for state income tax purposes. Yes, the rule is difficult to conceptualize and at odds with general apportionment notions, even its name has nothing to do with it because employers do not factor into the rule at all, yet nonresidents working in New York have contended with this for years.
Unfortunately, the COVID-19 pandemic has only compounded the issue presented by the convenience sourcing rule. The tri-state area, New York, New Jersey and Connecticut, are under stay-at-home orders. No one but essential workers can commute to their places of work. Instead, all those who can are, well, working from home. Enter the convenience of the employer rule. All those employees from Connecticut or New Jersey, who normally commute to Manhattan and are now sheltering in place, are facing the reality that their wages earned while sheltering in place will still be subject to taxes by the Empire State. So while non-New Yorkers are saving the world by just staying home, they are also adding to Albany’s bottom line. Only in America, or rather New York!
New Jersey’s Approach
Unlike New York’s aggressive rules, New Jersey has recently published guidance reflecting a functional approach in the face of this crisis. As posted on its website, the Division of Taxation stated that income is sourced based on where the service or employment is performed using the general practice of a day’s worked allocation methodology. However, during the temporary period of the COVID-19 pandemic, “wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.” That means if a New Jersey resident telecommutes for an out-of-state employer and the employer’s state taxes the telecommuter’s salary, New Jersey will waive its right to tax that salary for the duration of the health crisis. Accordingly, a New Jersey resident sheltering at home and telecommuting for her New York-based job will continue to have taxes withheld to New York, not New Jersey.
How other states will address the taxing of telecommuters is yet to be seen, but without formal guidance suspending New York’s convenience of the employer rule nonresidents maintaining New York employment may be left holding the state’s tax bag. A strong argument can be made that those working from home under these pandemic conditions are not doing so out of their own volition, and therefore the convenience rule should not apply. But with New York, and many other states for that matter, having such dire financial constraints, Governor Cuomo might not be so generous. He did mandate that out-of-state medical personal providing critical assistance in area hospitals are subject to the state’s income tax after all.
If you have questions regarding the applicability of state income taxes on telecommuters in the COVID-19 pandemic, please contact your Friedman tax advisor or Alan Goldenberg, Principal, State and Local Taxation and Tax Controversy, at 212-897-6421 or via email at email@example.com.