In our article posted on March 31, 2020, we noted that working from home could open a Pandora’s box of tax problems when multiple states are involved. The Oregon/Washington border clash was apparent, with Oregon issuing a warning to Washington businesses with employees working at home in Oregon. The outcome could be an unexpected tax bill if state income taxes were not withheld from the Oregon employees.
The problem is also very apparent on the east coast, where crossing the New York/New Jersey border for work is very common. New York has had a long-standing position that income received by a nonresident is taxable to the extent income is “derived from or connected with New York sources.”1 A nonresident who visits the state for work even for one day can be liable for New York individual income tax.2 Typically, income is allocated to New York based on the allocation factor of total days worked in state to total days worked everywhere.
To prepare this analysis, “workdays” would include fractions of days working in the state as well as travel days. Nonresidents working for non-New York employers would allocate entire travel days to non-New York workdays, unless they performed services that day upon arriving in New York.
New York complicates this allocation calculation when it applies its “convenience of the employer rule.” For purposes of determining whether a day is a New York workday, you look to where the taxpayer was physically present. The convenience of the employer doctrine generally requires nonresidents who work for a New York employer to treat days worked outside the state as New York workdays if the taxpayer worked outside New York for his or her convenience, not for the necessity of the employer. The classic example is the employee who works from home outside New York for a New York employer. In that case, the department would treat days worked at the out-of-state home as if they were New York workdays for allocation purposes.
This overaggressive taxation of nonresident telecommuters has never been as egregious as it is now, with state-mandated work at home policies instituted across the country. New York, in particular, as an epicenter of the virus activity, has required all nonessential employees to work from home. Is this interpreted as for the convenience of the employee or required by the employer?
This treatment poses a problem for the employee who may also be subject to tax in their resident state on this same income. Receiving a credit for taxes paid to other states doesn’t always offset the impact, as New York has a higher tax rate than its neighbor, New Jersey, for instance.
As a final note on the pandemic impact, the Tax Executives Institute reached out to the Federation of Tax Administrators, National Conference of State Legislatures, and the Multistate Tax Commission in requesting a temporary reprieve to this unfortunate tax situation by allowing businesses the option to use the employer’s work location for purposes of payroll withholding, nexus, and apportionment. New Jersey has already taken steps towards a resolution by announcing that it will suspend nexus thresholds for employees working from home as a result of the coronavirus pandemic. The state’s website notes that the state will temporarily waive the impact of the threshold imposed by N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a), which establishes nexus for out-of-state employers with employees working from home in New Jersey. Mississippi has also announced that it will not assert nexus based on telecommuters. With other states offering no guidance at this point as to whether a telecommuter will result in payroll withholding requirements or nexus considerations, taxpayers need to consider the possible effects on their tax obligations.
120 NYCRR section 132.2.