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Many unprecedented scenarios have arisen out of the coronavirus pandemic, and New York’s tax department may soon be faced with another: Who is entitled to state employees’ tax revenues if they are working from home in another state?
“There’s an interesting legal issue,” Timothy Noonan, state and local tax expert and partner at Hodgson Russ, told FOX Business. “If you work at home in Connecticut for a business located in New York, that’s a New York day – New York would treat that as taxable. How [does] that change with these stay-at-home orders?”
New York imposes a tax on income derived from New York sources – i.e., a New York business. It has provisions to address working from home as a “convenience,” but individuals have been working from home for extended periods of time as a requirement under lockdown guidelines.
“[The convenience of employer rule] basically provides that if you're a New York employee working from a remote location then you still allocate the wage income to New York on those days because the worker is presumed to be working from home for his or her own convenience,” Geoffrey Weinstein, special counsel in the Tax, Trusts & Estates Department of Cole Schotz, told FOX Business.
Typically, in order for income to be exempt, a worker must be working from home out of necessity – not convenience. It generally needs to be proven that the work could not have been performed in the office.
“Here, with many taxpayers working from home (required under state shelter orders) New York and New Jersey employers and employees working in each other’s respective states are not sure which state to withhold and how employees should allocate those wages,” Weinstein added.
Other states that operate on the convenience-of-employer test include New Jersey, Pennsylvania, Nebraska and Arkansas.
For taxpayers themselves, there isn’t much of a concern. Workers typically receive a credit on their resident returns for taxes paid on income in other jurisdictions.
However, problems could arise if allocations are not respected by state tax authorities, Weinstein said.
The stakes for New York City are high – it has been estimated that more than half of the city’s daytime population consists of individuals who do not live there but commute there for work (though some of those individuals still live in New York state).
Weinstein said he expects that New York employers are treating the income as sourced to New York – but other jurisdictions, like New Jersey or Connecticut, could challenge those allocations.
As previously reported by FOX Business, New York is notoriously aggressive when it comes to tax collections. Individuals have pushed back against the rule in the past – to no avail. And given the state’s current fiscal challenges, it is unlikely to back down without a fight.
The coronavirus pandemic has blown holes in many state budgets – including New York’s. The New York City Independent Budget Office estimates the Big Apple’s budget shortfall for fiscal 2020 and 2021 will come in at $9.7 billion as the city sheds 475,000 jobs over the course of 12 months.
But New Jersey and Pennsylvania have also been hit hard by the domestic outbreak, with the former recording the second-largest number of confirmed cases in the U.S.