Nearly two years into the COVID-19 pandemic, New York’s “convenience of the employer rule” presents challenges for today’s remote workplace, according to tax practitioners.
Speaking January 19 during the New York State Bar Association’s 2022 annual meeting, Alysse B. McLoughlin of Jones Walker LLP said that although remote work has always been an issue in New York because of the convenience rule, the changes caused by COVID-19 and people working from home have accelerated the issue.
“This has exploded since the pandemic began,” McLoughlin said. “This is an issue that practitioners have seen for years, but now this is impacting many, many more people because of people working from home.”
McLoughlin noted that the rule — which generally says that a state has the right to tax all of an employee’s earnings if the employee works outside the state for his or her own convenience — has been in place in New York a long time. She noted that Pennsylvania, Delaware, Nebraska, and Connecticut also implemented the rule before the pandemic, and Massachusetts and Arkansas started to use the rule during the pandemic.
McLoughlin explained that New York’s rule is that New York tax is withheld if your office is based the state, regardless of where the work is performed.
“I think this rule is really, to some extent, antiquated,” McLoughlin said. She explained that the rule “seemed to have more relevance in the time period where people really did work from one office all of the time.” She said that many people think the rule needs to be updated in some way, adding, “The tax law really does have to catch up to what has happened in the world."
“This test doesn’t look at the modern economy and how people work,” McLoughlin continued, noting that someone “might be reporting to someone in California, who’s reporting to someone in Pennsylvania. The lines are really blurred as to where people are working, and where they’re assigned to.”
McLoughlin noted that New York had issued guidance on the issue during the pandemic, establishing that the state's position is that the rule still applies. “Can New York even do that?” McLoughlin wondered. “My guess is that this will be challenged at some point.”
Jack Trachtenberg of Deloitte Tax LLP noted that the relevant pre-pandemic case law turns on the nature of the work and whether the remote employee’s work could have been performed in the New York office, even with a little “ingenuity” on the part of the employer. He pointed out that the rule of convenience has been construed broadly in New York, and against the employee, and wondered whether the rationale of the existing case law would continue to apply in a pandemic world.
Trachtenberg also noted that he is seeing a downsizing phenomenon with his clients: “It’s either significantly downsizing space, going to a hoteling regime, or getting rid of the office entirely.” As for the clients who are asking what would happen if they went completely remote, with no office anywhere, Trachtenberg admitted that he didn’t know. He explained that the New York State Department of Taxation and Finance takes the view “that you have to be assigned somewhere; you can’t NOT have an office.”
Trachtenberg pointed out that, under the existing case law, an employee would still be subject to the convenience rule even if an employer needed to reduce overhead and downsize office space as a business necessity. He wondered how that would compare to an employer that downsizes because of COVID-19: “Are we telling employers that they have to maintain a real estate footprint in order to avoid the convenience rule?”
McLoughlin said she doubted the feasibility of a hypothetical plan that would entail an employer opening a small satellite office in the same state where some of its employees live and work from home, such as a three-person office for 150 people. “That’s not really something that I think is going to work,” she said.
“It has to be a real office, with people you’re reporting to — people have to go into that office,” McLoughlin continued. “How do you know where a person is primarily assigned to? You can assign them anywhere, and if this is forever, how do you know when someone really has really properly changed their office?” she wondered.
“These are open questions — really good questions — that nobody knows how they’re going to work out,” McLoughlin added.
Deborah R. Liebman, deputy counsel for the New York State Department of Taxation and Finance, was also on the panel but stayed mum.