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New York’s Ill-Advised Taxation of Nonresidents During COVID-19

Posted on May 25, 2020
Edward A. Zelinsky
Edward A. Zelinsky

Edward A. Zelinsky is the Annie and Morris Trachman Professor of Law at Yeshiva University’s Benjamin N. Cardozo School of Law in New York City.

In this article, Zelinsky discusses New York’s policies for taxing nonresidents during the COVID-19 pandemic.

Like many Americans, I am a fan of Democratic Gov. Andrew Cuomo’s daily briefings on the COVID-19 crisis. In an unprecedented situation, Cuomo has been a reassuring voice for thoughtful, data-driven public policy. Particularly encouraging has been the governor’s willingness to admit the limits of our knowledge in this unique situation and to highlight the ongoing need to adapt policies in light of new information and unanticipated considerations.

There is, however, one important area in which the governor continues to embrace policies ill-advised during the current pandemic: New York’s income taxation of nonresidents. The issue arises today in two contexts. First, New York taxes the incomes earned by nonresident telecommuters on the days when they work at their out-of-state homes and never enter the Empire State. Second, New York is apparently determined to impose its income taxes on the medical professionals who came from across the country to help New York through the pandemic crisis.

Regarding the income taxation of these nonresidents, Cuomo should demonstrate his commendable willingness to change course upon reflection and receipt of new information. Retroactive to January 1 and for the remainder of 2020, New York should suspend its taxation of nonresident telecommuters on the days they work at their out-of-state homes. The state should also renounce any effort to tax out-of-state volunteers who came to New York to help it cope with the COVID-19 crisis.

A month ago,1 I criticized New York for taxing during the pandemic nonresident telecommuters on the days they work at their out-of-state homes. Now, unfortunately, it appears that New York is not only continuing its taxation of nonresident telecommuters, but also insisting on taxing the incomes of nonresidents who came there to help combat the pandemic. The same spirit of thoughtfulness and innovation Cuomo has brought to the public health aspects of the COVID-19 crisis should also be deployed in the arena of state tax policy. For 2020, New York should tax neither the incomes of nonresident telecommuters nor those of the volunteers who came from across the country to help New York confront the COVID-19 emergency.

If New York will not act in this sensible fashion, Congress should. In the next round of coronavirus legislation, Congress can prohibit the states from taxing, for the duration of the coronavirus emergency, the incomes of nonresident telecommuters and out-of-state medical volunteers.

The Legal Background

For this discussion, the legal background starts with the due process clause of the 14th Amendment to the U.S. Constitution.2 The U.S. Supreme Court has long held that due process limits a state’s jurisdiction to impose income taxation on nonresidents regarding the income such nonresidents earn within that state:

As to nonresidents, the jurisdiction extends only to their property owned within the State and their business, trade, or profession carried on therein, and the tax is only on such income as is derived from those sources.3

The commerce clause of the Constitution4 reinforces the states’ limited, source-based jurisdiction to tax nonresidents’ incomes. Under the dormant commerce clause, the income arising from interstate commerce must, inter alia, be apportioned by the different states in which the income is earned so that each state taxes only its fair portion of the total.5

New York, like other states imposing personal income taxes, implements these constitutional limitations on its taxing authority by taxing nonresidents only “on the taxable income which is derived from sources in” New York.6 Among the forms of income “derived from or connected with New York sources” is income “attributable to” “a business, trade, profession or occupation carried on in” New York.7

In the case of a nonresident employee who performs services both within and without the Empire State, the part of the employee’s salary attributable to activity in New York is determined by multiplying that salary by a fraction.8 The numerator of this fraction is the employee’s “total number of working days employed within New York State” while the denominator of the fraction is the employee’s “total number of working days both within and without New York State.”9 However, for purposes of this numerator, New York deems out-of-state days to be New York days if the employee on those days works out-of-state for the employer’s “convenience,” as opposed to the employer’s “necessity.”10

If a nonresident works in New York for 14 or fewer days in any year, the nonresident’s employer is excused from withholding New York income taxes from the nonresident’s salary.11 However, even though his employer is relieved of withholding obligations, “a nonresident who works 14 days or fewer in New York State” is still personally subject to filing a New York nonresident income tax return and paying New York state income taxes.12

New York requires a nonresident to file a New York state income tax return if the nonresident has any “New York source income for the taxable year”13 and has “New York adjusted gross income for the taxable year . . . in excess of the taxpayer’s New York standard deduction.”14 For these purposes, an individual’s New York adjusted gross income is her federal AGI with modifications.15 In 2019 the New York standard deduction for a married couple filing jointly was $16,050,16 while the New York standard deduction for an individual filer was $8,000.17

Telecommuting and the ‘Convenience of the Employer’ Rule

Even before the COVID-19 pandemic, New York’s application of its “convenience of the employer” rule to telecommuters was irrational. Notwithstanding the constitutional requirement that states tax only income earned within their respective borders, New York taxes the income nonresidents earn on the days when they telecommute from their out-of-state homes.18 Citing its regulation, New York asserts that such telecommuting is for the employee’s convenience rather than the employer’s necessity, and therefore can be taxed by the Empire State. Although independent commentators cogently criticize New York’s tax treatment of nonresident telecommuters as unconstitutional and as poor tax policy,19 the state persists in this extraterritorial projection of its taxing authority to reach income earned outside its borders when nonresidents telecommute from their out-of-state homes.

The COVID-19 crisis has compounded the impropriety of New York’s taxation of resident telecommuters on the income they earn at their out-of-state homes. To combat the virus, New York urges — and in many cases effectively mandates — that nonresidents work at home rather than commute into Manhattan and other parts of the state.

However, at the same time that New York urges telecommuting as a matter of public health, it discourages telecommuting by imposing New York state income taxation upon nonresidents for the days when they do not set foot in the state.20 That governments pursue contradictory policies is a reality of modern life. However, this particular contradiction — encouraging telecommuting to combat the coronavirus while simultaneously discouraging telecommuting by extraterritorial taxation — is particularly irrational in the midst of the crisis.

New York’s intransigence on the income taxation of nonresident telecommuters seems to be stimulating the proverbial race to the bottom. Following New York’s lead, other states, such as Massachusetts, replicate its determination to disregard constitutional norms by taxing nonresident telecommuters on the income they earn at their out-of-state homes during the coronavirus emergency.21

Contrast this inflexible response to the problem of nonresident telecommuter taxation with New Jersey’s more sensible behavior in this area.22 New Jersey, reflecting the governing constitutional principles, holds that for state income tax purposes, “income is sourced based on where the service or employment is performed on a day’s method of allocation.”23 However, New Jersey has stated that to facilitate telecommuting “during the temporary period of COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.”24 Thus, 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 constitutional right to tax that salary for the duration of the health crisis.

New York should emulate New Jersey’s pragmatism by declaring that for 2020 it will suspend its convenience of the employer rule and not tax nonresident telecommuters on the days they work from their out-of-state homes. It is not sensible to instruct individuals to telecommute for public health purposes and then impose potentially punitive taxation upon them for following those instructions.

Cuomo has used his emergency powers to suspend many provisions of New York law to combat the conditions created by COVID-19.25 For 2020, he should shelve the regulatory convenience of the employer doctrine, used to tax nonresident telecommuters when they work from home.

Taxing Volunteers

At the height of the crisis, New York was blessed with volunteers who came from across the country to help at considerable inconvenience and risk to themselves. As the old saying has it, no good deed goes unpunished. New York now intends to tax the income these volunteers were paid by their out-of-state employers during the volunteers’ time in New York.26

Consider, for example, a nurse from Tennessee who used his vacation time to help at a New York hospital. New York now indicates that this nurse owes New York state income tax on the income his employer in Tennessee paid him while he spent his vacation serving in the Empire State. There are serious constitutional and statutory arguments against this taxation: Was this nurse, on the unique facts of the COVID-19 crisis, conducting his “business, trade, or profession” in New York? Skilled lawyers can obviously marshal arguments on both sides of this potentially contentious question. On the one hand, nursing is this nurse’s “profession.” On the other hand, he came to New York not to earn income, but to perform public service at great risk to himself.

But it shouldn’t matter. It is more than a little churlish for New York to tax individuals who put themselves at risk to fight the pandemic there. It is also contrary to New York’s long-term interests in combating the virus to tax these individuals. Suppose that, as some suggest, there is a resurgence in the fall. Will some individuals who might otherwise come to help New York be deterred by the “not welcome” sign that is New York’s tax policy toward them? I suspect so. Does Cuomo really want to learn the answer to this question? I hope not.

Cuomo has suspended many laws for the duration of the COVID-19 crisis.27 He should suspend, as well, the operation of New York’s income tax laws regarding all nonresident volunteers who came to the state to help with the crisis.

Some might retort that an out-of-state volunteer may receive from her home state an income tax credit for her New York taxes. For three reasons, this is not an adequate answer. First, the volunteer may reside in a state without a personal income tax — for example, Tennessee. In that case, there is no home state credit offsetting the New York tax because there is no home state tax against which to grant a credit. Second, when there is a credit for the New York tax against the volunteer’s home state income tax, the credit is typically limited to the home state’s tax rate.28 Since New York income tax rates are typically higher than other states’, the credit granted by the volunteer’s home state will often offset only part of the (higher) New York tax.

Third, in addition to the tax are compliance costs, that is, the expense of filing a nonresident New York tax return. Even if no New York tax is due, the volunteer may be legally obligated to file a New York state income tax return.29 The cost of filing that return is a de facto tax punishing this individual for having come to the state in its time of need.

In response to these considerations, Cuomo suggests that New York cannot afford to suspend the operation of its income tax regarding volunteers who came to help combat COVID-19.30 Revenue is typically the proffered justification for bad tax policy. It is heartwarming to bang on pots and pans to thank the healthcare professionals who came to New York in its hour of need. A nicer “thank you” would be assuring them that they need not pay New York income tax or file New York state income tax returns because of their honorable sacrifice. Cuomo should suspend the operation of New York state income taxes regarding volunteers who came to help the state during the COVID-19 crisis.

Conclusion

The same thoughtfulness and creativity Cuomo has brought to the health aspects of the COVID-19 emergency should also be brought to state tax policy. For 2020, New York should tax neither the incomes of nonresident telecommuters nor those of the volunteers who helped it confront the COVID-19 emergency.

If New York will not act in this sensible fashion, Congress should.31 In the next round of pandemic legislation, Congress can bar the states from taxing, for the duration of the coronavirus emergency, the incomes of nonresident telecommuters and of out-of-state medical volunteers.

FOOTNOTES

1 Edward A. Zelinsky, “Coronavirus, Telecommuting, and the ‘Employer Convenience’ Rule,” Tax Notes State, Mar. 30, 2020, p. 1101. See also Walter Hellerstein, “Nonresident NY Employees Are Not Currently Working at Home for Their ‘Convenience,’Tax Notes State, Apr. 6, 2020, p. 83.

2 U.S. Constitution, 14th Amendment, section 1 (“nor shall any State deprive any person of life, liberty, or property without due process of law”).

3 Shaffer v. Carter, 252 U.S. 37, 57 (1920). See also Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450, 463 n. 11 (1995) (“For nonresidents, in contrast, jurisdictions may tax only income earned within the jurisdiction.”).

4 U.S. Constitution, Article I, section 8, clause 8 (Congress shall have the power “to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”).

5 South Dakota v. Wayfair Inc., 138 S. Ct. 2080, 2091 (2018) (a state tax on interstate activity must be “fairly apportioned”).

6 N.Y. Tax Law section 601(e).

7 N.Y. Tax Law section 631(b)(1)(B).

8 20 New York Codes, Rules and Regulations section 132.18(a).

9 Id.

10 Id.

11 New York State Department of Taxation and Finance, TSB-M-12(5)(I) (July 5, 2012).

12 Id.

13 N.Y. Tax Law section 651(a)(3).

14 Id.

15 N.Y. Tax Law section 612(a).

16 N.Y. Department of Taxation and Finance, 2019 standard deductions.

17 Id. If an individual taxpayer could be claimed as a dependent by another taxpayer, her New York standard deduction in 2019 was reduced to $3,100.

18 Zelinsky v. Tax Appeals Tribunal, 1 N.Y. 3d 85 (2003), cert. denied, 541 U.S. 1009 (2004); Huckaby v. New York State Division of Tax Appeals, 4 N.Y. 3d 427 (2005), cert. denied, 546 U.S. 976 (2005); In the Matter of the Petition of Manohar and Asha Kakar, State of New York, Division of Tax Appeals, Small Claims Determination, DTA No. 820440 (Feb. 16, 2006); In the Matter of the Petition of R. Michael Holt, State of New York, Tax Appeals Tribunal, DTA No. 821018 (July 17, 2008); and N.Y. Department of Taxation and Finance, “New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others,” TSB-M-06(5)(I) (May 15, 2006). The taxpayer in Zelinsky was me.

19 Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, State Taxation, para. 20.05[4][e][i] at 25-33 (3d. 2015); Hellerstein et al., State and Local Taxation: Cases and Materials (11th ed. 2020) 391-402; Morgan L. Holcomb, “Tax My Ride: Taxing Commuters in Our National Economy,” 8 Fla. Tax. Rev. 885 (2008); and William V. Vetter, “New York’s Convenience of the Employer Rule Conveniently Collects Cash From Nonresidents, Part 2,” State Tax Notes, Oct. 23, 2006, p. 229.

20 Zelinsky, supra note 1.

21 830 CMR 62.5A.3: Massachusetts Source Income of Non-Residents Telecommuting Due to COVID-19 (Emergency Regulation).

22 N.J. Treasury Division of Taxation, Telecommuter COVID-19 Employer and Employee FAQ.

23 Id.

24 Id.

26 Corey Crockett and James Ford, “Health Workers That Volunteered to Come to NY During Pandemic Have to Pay State Income Tax: Cuomo,” PIX11 (May 6, 2020); Michael Ruiz, “Samaritan’s Purse, Other Workers Who Came to NY for Coronavirus Fight Must Pay State Income Tax, Cuomo Says,” Fox News (May 6, 2020); and Steve Malanga, “Cuomo to Coronavirus Volunteers: Pay Up,” The Wall Street Journal (May 8, 2020), A13.

27 Cuomo, supra note 25.

28 See, e.g., N.J. Stat. Ann. section 54A:4-1(b) (limiting credit based on the resident’s New Jersey tax liability); Conn. Gen. Stat. Ann. section 12-704(a)(2) (limiting credit based on the resident’s Connecticut tax liability). See also Zelinsky, “Apportioning State Personal Income Taxes to Eliminate the Double Taxation of Dual Residents: Thoughts Provoked by the Proposed Minnesota Snowbird Tax,” 15 Fla. Tax Rev. 533, 546-550 (2014) (describing state tax credits for residents’ payments of out-of-state taxes); and Hellerstein et al., supra note 19, at 433-434 (discussing how such credits are typically limited to “the tax imposed on such income by the state granting the credit”).

29 On the filing obligations on New York nonresidents, see N.Y. Tax Law sections 612(a) and 651(a)(3), and N.Y. Department of Taxation and Finance, supra note 16.

30 Crockett and Ford, supra note 26 (“‘We’re not in a position to provide any subsidies right now because we have a $13 billion deficit,’ Gov. Andrew Cuomo said.”); Ruiz, supra note 26; and Malanga, supra note 26.

31 A good model for federal legislation would be the Multi-State Worker Tax Fairness Act of 2016 introduced in the 114th Congress as S. 2813 and H.R. 4962.

END FOOTNOTES

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