Many taxpayers that live outside of New York but work for an employer in New York have faced similar frustration in how New York determines how payroll tax is withheld at the state level. Due to the “convenience of the employer” rule in New York, if a taxpayer works for their own “convenience” out of New York, they still have to source the payroll back to New York. One particular taxpayer in Connecticut has decided to challenge this determination and was denied in the latest court determination.
The case involves a nonresident couple seeking a refund of New York State individual income taxes related to income earned by Mr. Zelinsky while working remotely in Connecticut for a New York employer both before and during the COVID-19 pandemic, an administrative law judge (“ALJ”) at the New York State Division of Tax Appeals denied the refund claim. The ALJ held that, even considering the unprecedented circumstances of the COVID-19 pandemic, the taxpayer failed to demonstrate that he worked out-of-state due to his employer’s necessity rather than personal convenience.
The ALJ clarified that, although the nature of the services required an office, the unavailability of the taxpayer’s New York campus office during the pandemic did not establish that the out-of-state services were performed out of necessity for the employer. Furthermore, the individual did not sufficiently prove that the work performed at his out-of-state home was so specialized that it necessitated being conducted away from New York. The ALJ emphasized that the taxpayer’s employer allowed him to work remotely out-of-state but did not mandate it as a requirement or out of necessity.
Additionally, the ALJ reasoned that executive orders mandating remote work due to a global pandemic should not result in special tax benefits for individuals not residing in New York but working for a New York employer and benefiting from that arrangement.
The ALJ also noted that despite the taxpayer not being physically present in New York during a specified period, his virtual presence through activities like hosting Zoom classes and meetings constituted a form of presence in the state, citing modern internet technology. Lastly, the ALJ rejected the taxpayer’s argument that the New York Division of Taxation’s allocation of all his 2020 income earned from his New York employer to New York violated constitutional clauses, concluding that such allocation was reasonably apportioned and fairly attributable to economic activity within New York.
It has been reported that the taxpayer intends to appeal this ruling to the New York State Tax Appeals Tribunal.
Many other taxpayers and tax practitioners are following this case closely as this has cause a lot of frustration in the way this rule has been implemented. If you have any questions regarding your payroll withholding, feel free to reach out to our team and have a discussion