New York State Issues Personal Income Tax Sourcing Guidance for Nonresident Employees Telecommuting Due to COVID-19 Pandemic

The New York State Department of Taxation and Finance (“Department”) recently published guidance stating that a nonresident’s income will be sourced to New York State unless the nonresident’s remote work location meets the “bona fide employer office” exception to the “convenience of the employer test.”  Specifically, the Department addressed a question in its FAQs regarding how to source income for Personal Income Tax purposes where a nonresident’s primary office is in New York, but the nonresident is working remotely due to the COVID-19 pandemic.  The Department’s FAQs provide minimal reasoning for its position and we expect taxpayers to challenge it.

New York generally imposes its Personal Income Tax on a nonresident’s taxable income that is derived from New York sources.  N.Y. Tax Law § 601(e).  The state applies a “convenience of the employer test” to determine whether income is derived from New York sources.  20 NYCRR 132.18(a); TSB-M-06(5)I (May 15, 2006).  Under this misnamed standard, if an out-of-state employee works remotely for his or her own convenience, and not the employer’s necessity, then that remote employee’s income will be considered derived from New York sources.

The Department’s FAQs state:

“My primary office is inside New York State, but I am telecommuting from outside of the state due to the COVID-19 pandemic. Do I owe New York taxes on the income I earn while telecommuting?

If you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.

There are a number of factors that determine whether your employer has established a bona fide employer office at your telecommuting location.  In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe New York State income tax on income earned while telecommuting.”

The FAQs contain no further reasoning, but they link to the Department’s 2006 Technical Service Bureau Memorandum, TSB-M-06(5)I, regarding the factors that determine whether the nonresident’s employer has established a “bona fide employer office.”  Namely, an employee’s home office will be considered a “bona fide employer office” if it contains or is near a specialized facility of the employer, or at least four of six secondary factors are met and three “other factors” exist.  Secondary factors include: (1) the home office is required or a condition of employment; (2) the employer has a bona fide business purpose for the employee’s home office location; (3) the employee performs some of the core duties of his or her employment at the home office; (4) the employee meets or deals with clients, patients or customers on a regular and continuous basis at the home office; (5) the employer does not provide the employee with designated office space or other regular work accommodations at one of its regular places of business; and (6) employer reimbursement of expenses for the home office.  The list of other factors includes items, such as: the employee uses a specific area of the home exclusively to conduct the business of the employer that is separate from the living area; business records are stored at the home office; the employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes; and the employee is not an officer of the company; among other factors.  TSB-M-06(5)I.

The Department’s position appears to be that nonresident employees will continue to owe New York State income tax on income earned while telecommuting unless the “bona fide employer office” exception applies.  It is worth noting that the “bona fide employer office” standard is not contained in a statute or regulation, and Department FAQs are not precedential or binding on any taxpayer (although it is representative of the Department’s position).

While many employees may not satisfy the “specialized facility” requirement, some may be able to satisfy at least 4 of the 6 “secondary factors” and 3 of the “other factors.”  Even if a nonresident remote employee does not satisfy the Department’s “bona fide employer office” test, the Department’s position in the FAQs is inconsistent with its own regulation and case law addressing this issue.  The regulation states that “any allowance claimed 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 out-of-state duties in the service of his employer.”  20 NYCRR 132.18(a) (emphasis added).  During the COVID-19 pandemic, it would seem that an employee working from home is doing so out of “necessity,” not out of “convenience,” if the New York employer’s offices are closed (i.e., the employee must be working from home out of necessity if they are to work at all).  Even if the New York employer’s office is partially open, but limited to essential staff or otherwise operating at limited capacity, it would still seem that remote employees are doing so out of necessity.  New York case law similarly concluded that an employee is working outside of New York out of necessity, not convenience, if the employee is not permitted to access the employer’s New York office.  See e.g., Matter of Devers, DTA No. 819751 (N.Y. Div. Tax App., ALJ Div. May 5, 2005) (determining that an employee is working from home out of necessity when an the employer reduces its office space and revokes the employee’s access to the New York office).

The Department’s approach is also inconsistent with certain other jurisdictions interpreting the convenience of the employer test.  For example, the Philadelphia Department of Revenue has taken the position that non-resident employees are not subject to Philadelphia Wage Tax during the time that a Philadelphia employer requires them to work outside of the city.  See Philadelphia Dep’t of Revenue, “Wage Tax policy guidance for non-resident employees” (May 4, 2020).  New Jersey senators also took notice of the risks of differing interpretations of the “convenience of the employer” test and recently introduced a bill (S3064) requiring the New Jersey State Treasurer to examine and report on potential legal actions that New Jersey could take to protect its residents’ income from New York’s taxation of telecommuters.

Unless a taxpayer successfully challenges the Department’s position, many employers may choose to continue withholding New York income tax in accordance with the Department’s guidance to avoid potential penalties and interest.  However, this does not necessarily help nonresident individuals determine their tax liability due in each jurisdiction.  Moreover, New York’s application of the “convenience of the employer” test can lead to double taxation in certain instances.  See e.g., Zelinsky v. Tax App. Trib., 1 N.Y.3d 85 (N.Y. 2003), cert. denied 541 U.S. 1009 (2004) (New York’s “convenience of the employer” test upheld as constitutional even though it resulted in double taxation of an individual’s income by Connecticut and New York due to Connecticut’s refusal to credit the individual with all of the nonresident income tax paid to New York).

The Department’s interpretation will likely impact many telecommuting taxpayers, and will require employers to make a determination on how to most appropriately withhold Personal Income Tax.  Although the Department appears clear with respect to their position, based on the inconsistency between their position and New York’s regulation and case law, we would not be surprised to see litigation on this issue in the years to come.