COVID-19 Lockdown Not Enough for Nonresident to Avoid New York Income Tax

At a glance 

• The main takeaway: The New York Division of Tax Appeals found no room for leniency under its “convenience of the employer” rule when it determined that a nonresident was subject to income tax on wages earned while working from home during the COVID-19 pandemic. 
• Assess the impact: New York nonresidents who work for a New York-based employer at the company’s office location for a portion of the year need to be aware of New York’s strict application of the “convenience of the employer” rule, even during extraordinary circumstances.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help individuals and businesses determine their nonresident income tax obligations.

Schedule a free consultation today to learn more!

The full story

The Division of New York Tax Appeals (DTA) recently published a decision on the Struckle case, concluding that a nonresident was subject to New York income tax on wages earned from his New York-based employer while working from his Pennsylvania home during the COVID-19 pandemic.[1] The decision is possibly the state’s most staunch application of its infamous “convenience of the employer” rule, especially given the extraordinary circumstances thrust upon workers during the pandemic.

While the decision is arguably consistent with the state’s published guidance on the interpretation of the rule, the conclusion that a deadly pandemic did not make working from home a “necessity” strikes as an overly strict application of the rule.

New York’s “convenience of the employer” rule

Similar to most state individual income taxes, nonresident individuals are subject to New York income tax on income “derived from or connected with New York sources,” which includes income from an occupation (i.e., W-2 wages) “carried on in the state.”[2] This means that the wages of a nonresident employee (e.g., an employee that commutes from a neighboring state) are subject to the state’s income tax based on the portion of the time (i.e., days) that employee works in the state.   

While New York’s income tax regulations generally apply that proration by allowing nonresidents to determine income from New York sources based on the ratio of “working days employed within New York State bears to the total number of working days employed both within and without New York State.”[3] However, when a nonresident works for a New York-based employer and works at least some of the time within New York, the regulation provides that a taxpayer’s claim for “days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to [work out-of-state.]”[4] In other words, if the out-of-state workdays are only for “convenience,” then those days are still counted as being New York workdays. 

The ruling explained

The decision in the Struckle case is the most recent in a long line of cases addressing the “convenience of the employer” rule, most of which have not been favorable to taxpayers. In Struckle, it’s somewhat unclear from the decision whether the DTA was simply of the opinion that the COVID-19 pandemic did not create a situation where it was a “necessity” for employees to work from home, or whether the decision turned on a poorly worded employer letter produced by the taxpayer.  

Pursuant to the state’s published interpretive guidance, in order for days working out-of-state at a remote location (often the home office) to count as out-of-state days, a taxpayer must prove that the home office in the other state is a “bona fide office location” of the employer.[5] The guidance requires several factors to be met for a “bona fide office location” to be established, one of which is that the “employer requires the employee to work from his or her home office as a condition of employment.” 

In Struckle, the taxpayer’s provided a letter from his human resources director stating that the company’s “employees were granted permission to work from their home offices from March 2020-December 2020.” Despite the letter also indicating the company’s New York office was closed, the DTA interpreted this letter as only “permitting” the employee to work “remotely” and not making it “obligatory.” As such, the DTA concluded that because there was nothing presented in the record that established that the taxpayer’s employer needed him to work remotely, the taxpayer’s home was not a “bona fide office location” of the employer and his workdays at home were not out of the employer’s necessity. Thus, such days were concluded to be New York working days, and the income earned those days was subject to New York income tax. 

The bottom line

New York nonresidents that work for a New York employer at their employer’s office location for a portion of the year need to be aware of New York’s hard line with respect to its application of the “convenience of the employer” rule. Granted, the Struckle case may not represent a departure from the state’s prior interpretation of the rule, however, it does confirm that not even extraordinary circumstances, such as the COVID-19 pandemic, can sway New York’s strict application of the rule.

Aprio’s SALT team has experience advising individuals of their nonresident income tax obligations as well as assisting employers with their nonresident income tax withholding obligations. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

 

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[1] In the Matter of the Petition of Donald T. Struckle, Jr, New York DTA No. 830731, August 8, 2024.

[2] N.Y. Tax Laws §§ 601 and 631.

[3] N.Y. Comp. Code R. & Regs. Tit. 20 § 132.18(a).

[4] Id.

[5] New York TSB-M-06(5)(I), May 15, 2006.