Thus Spoke the Governor
Last Friday, New York’s Governor Hochul[i] delivered the following remarks at the annual meeting of the Business Council of New York State:[ii]
“Someone asked me today, are we going to raise income taxes? I said, ‘I’m not raising income taxes.’ I said I’m not. I stopped a huge income tax increase last year. I don’t think it’s a good strategy for economic development to find more reasons for businesses to leave the State of New York. . . . And maybe they didn’t hear that for a long time with Occupy Wall Street and all this other socialism that was going on, but you need to be reassured that the people who are actually in elected office in the highest positions right here don’t support that.”[iii]
The Budget Gap Beckons
The Governor’s comments were made in the context of discussions regarding New York’s next budget,[iv] including a report on the current 2024-2025 financial plan, released a few weeks ago by Comptroller DiNapoli, that the state “continues to have a structural budget deficit, with a cumulative three-year budget gap of $13.9 billion.”[v] According to DiNapoli, this gap could widen if state spending increases beyond projections or if economic conditions weaken. A slowdown in the economy, the Comptroller stated, would “likely lead to an increase in demand for government services, putting further pressure upon” the estimated budget gap.[vi]
In the event such circumstances materialize – and let’s face it, we’re not out of the woods yet[vii] – we can expect New York’s Democrat-controlled and veto-proof Legislature to reintroduce the tax increases referenced in the Governor’s statement, above.[viii]
Bottom of the Barrell
As a result, how much worse would the state become for businesses and their owners? I guess that depends upon your point of comparison. According to the Tax Foundation’s 2024 State Business Tax Climate Index, New York’s tax system ranks 49th in the country.[ix] Would tax increases on businesses and their owners drive more of them out of the state, a risk acknowledged by the Governor?
Even if one were to set aside, for the moment, the outlook for the state’s legislative agenda with respect to taxes, one cannot overlook a tax collection tool that the state has wielded with great effect in recent years; specifically, its army of tax examiners.
Increased Audit Activity[x]
It has been reported that, between 2013 and 2017, New York conducted about 15,000 audits and collected approximately $1 billion.
By contrast, in the fiscal year 2022 to 2023, the state conducted about 826,000 audits, which generated over $2 billion of tax revenue. The next fiscal year saw about 756,000 audits and collections in excess of $3.2 billion.[xi]
These figures are impressive by almost any measure. What they don’t tell you, however, is that New York has for many years employed an army of auditors[xii] – some of whom are based outside the state – that is dedicated to aggressively pursuing certain individuals who claim to no longer be domiciled in the state. Thus, they examine the nonresident income tax returns filed by individuals who were formerly domiciled in the state, as well as the returns filed by individuals who are not domiciled in the state but who maintain a permanent place of abode therein, or have New York sourced income. Indeed, New York conducts a few thousand such audits every year,[xiii] and in the majority of cases it usually succeeds in collecting a significant amount of tax (together with interest and penalties).[xiv]
With the pandemic in the rearview mirror, New York has determined to chase down and collect the income taxes it believes are owed by those nonresident taxpayers who worked from home during the pandemic and who have continued to work remotely after it became “safe” to return to the workplace.[xv]
The Exam of a Nonresident Taxpayer
The Division of Tax Appeals recently considered the New York income tax liability[xvi] of an individual who had previously worked for a business located in New York City but who worked remotely from his New Jersey home starting in 2020.[xvii]
Taxpayer filed his New York personal income tax return for the tax year 2020 (the “2020 Return”) as a nonresident of New York,[xviii] on which he reported: (i) his New York adjusted gross income; (ii) an income allocation of 11.59% to New York;[xix] (iii) the New York tax withheld on his wages; and (iv) his total New York income taxes due.
The Division of Taxation (the “Division”) selected Taxpayer’s nonresident return for audit. It began the exam by asking for copies of various federal tax forms, and requesting that Taxpayer complete an income allocation questionnaire, which included the following:
“If you are a nonresident or part-year resident whose assigned primary work location is in New York, days you worked at a location outside New York may be considered New York workdays. In particular, days you telecommuted from a location outside New York are considered days worked in the state, unless your employer has established a bona fide employer office at your telecommuting location.”
The questionnaire also stated that a nonresident taxpayer “must be prepared to provide documentation substantiating [their] day counts upon request.” Furthermore, if the nonresident telecommuted from a location outside New York, the questionnaire asked that the individual specify “whether any such location constituted a bona fide employer office, and provide proof of actions taken by the employer, if any, to establish a bona fide employer office at that location.”
Taxpayer submitted a partially completed questionnaire, together with the following statement: “OFFICE LOCATION IN NYC WAS CLOSED[,] I WAS ORDERED NOT TO COME IN TO NYC[.]”
On the questionnaire, Taxpayer’s responses indicated that he was employed in 2020 by Employer and listed Wilmington, Delaware as his employer’s address. For the “[a]ssigned primary work location,” Taxpayer indicated “None.”
Taxpayer completed the day count table as follows:
| Number of days in the employment period | 365 |
| Total number of non-working days[xx] | 115 |
| Total number of working days | 250 |
| Total days worked at home | 208 |
The answers did not disclose either the type of the duties that Taxpayer performed, where he was or what he did for 42 unaccounted workdays.
The Adjustment Notice
The Division subsequently issued an adjustment notice, the “explanation” section of which stated the Division had recalculated Taxpayer’s tax liability and adjusted the New York column of his return to include all the wages from Employer.
The Division recomputed Taxpayer’s tax liability by allocating all of Taxpayer’s income from Employer to New York, which subjected that amount to the state’s personal income tax.
Taxpayer responded to the proposed adjustment by resubmitting certain documents, including another questionnaire. This new submission indicated that Taxpayer was employed in 2020, for the full year, by “Employer,” the offices of which were in New York City.
For the “[a]ssigned primary work location,” Taxpayer indicated his home address in New Jersey. On this questionnaire, Taxpayer provided the following day count table for his work:
| Number of days in the employment period | 366 |
| Total number of non-working days | 138 |
| Total number of working days | 228 |
| Total days worked at home | 188 |
On the newly submitted questionnaire, Taxpayer explained that during the days worked in New York he attended in-person business meetings and visited clients. During the days worked at home, he conducted investment activities.
Along with the foregoing, Taxpayer provided the following statement: “My company closed their NY office during 2020, they provided a full home office equipment setup for full time remote work. I have not been into New York City since March [2020].”
Notice of Disallowance
Shortly thereafter, the Division issued a notice of disallowance (the “notice”), which included the following statement:
“We reviewed the information you sent in response to our letter. Your information does not establish your assigned primary work location outside of New York State or show you have met the factors to prove your employer had established a bona fide employer office at your telecommuting location. Therefore, you owe New York State income tax on income earned while telecommuting.”
The notice further stated that the Division had reviewed Taxpayer’s responses and determined that Taxpayer “failed to properly allocate the correct amount of income to New York in tax year 2020 for the days worked in New Jersey as a nonresident employed by a New York employer, assigned to a primary work location in New York, for their convenience rather than necessity of the employer based on the application of the convenience of the employer test” as set forth in the Division’s regulations.[xxi]
Further, the Division determined that Taxpayer failed to show he met the factors set forth in the Division’s memorandum explaining its position concerning the application of the convenience of the employer test,[xxii] to prove their employer set up a bona fide employer office at their telecommuting location in New Jersey at their home.
The ALJ Hearing
Taxpayer petitioned the Division of Tax Appeals for redetermination of the income tax deficiency asserted by New York. A hearing was held before an Administrative Law Judge (“ALJ”), at which Taxpayer testified that Employer was an international investment fund, based in Luxembourg, and elaborated on Taxpayer’s “investing” work.
Taxpayer stated that, during the first few months of 2020, he worked in Employer’s New York City office. He explained that employees stopped reporting to this office during 2020. Taxpayer and his staff packed up their equipment and worked from remote locations, in his case, his home in New Jersey. Taxpayer testified that apart from a holiday party later that year, the staff “never went back.”
He testified that the closure was due in part to the pandemic but also due to the fact that Employer no longer wanted to directly manage its own investments.[xxiii]
Essential Business
At the hearing, the Division requested that judicial notice[xxiv] be taken that mandatory workforce reductions, in response to the pandemic, did not apply to Employer because it was exempt as an essential business.
The Division submitted a document issued by the New York State Department of Economic Development and entitled “Guidance for Determining Whether a Business Enterprise is Subject to a Workforce Reduction under Recent Executive Orders” (the “Guidance”). This Guidance expounded on then-Governor Cuomo’s 2020 Executive Order,[xxv] which provided, in part, that “any essential business or entity providing essential services or functions shall not be” required to work from home. “This includes… banks and related financial institutions,” such as lending institutions, insurance, payroll, accounting, and services related to financial markets.”
No Office
At the hearing, Taxpayer argued that the amounts reported on his 2020 return reflected the reality that Employer’s New York City office was closed (i.e., not conducting business). Taxpayer also argued that Employer was required to be closed as a result of the pandemic.
Taxpayer, therefore, argued that the reported allocation percentage was correct.
Taxpayer’s Burden
The Division argued that it properly applied the convenience of the employer test.[xxvi] It also contended that notwithstanding the extraordinary nature of the pandemic, Taxpayer still had to establish the elements necessary to meet the convenience of the employer test. The Division argued that Taxpayer did not establish either that Taxpayer worked at his New Jersey home due to Employer’s necessity or that Employer established a bona fide office at that location.
Accordingly, the stated requested that the notice be sustained, and Taxpayer’s petition denied.
ALJ’s Decision
Based on the foregoing, the ALJ agreed with the Division that the mandatory workforce reductions did not apply to Employer because it constituted an essential business.
The remaining issue before the ALJ was whether Taxpayer established that the Division improperly allocated all of Taxpayer’s income derived from his employment with Employer to New York.
Allocation of Income
New York imposes a tax on “income which is derived from sources in this state of every nonresident.”[xxvii] The “New York source income of a nonresident individual” is defined as including “[t]he net amount of items of income, gain, loss and deduction entering into his federal adjusted gross income, as defined in the laws of the United States for the taxable year, derived from or connected with New York sources.”[xxviii] The statute provides further that “[i]tems of income, gain, loss and deduction derived from or connected with New York sources shall be those items attributable to: . . . (B) a business, trade, profession or occupation carried on in this state.”[xxix]
The statute goes on to state, “[i]f a business, trade, profession or occupation is carried on partly within and partly without this state, as determined under regulations of the [Commissioner], the items of income, gain, loss and deduction derived from or connected with New York sources shall be determined by apportionment and allocation under such regulations”[xxx]
According to the Division’s regulations for the apportionment and allocation of nonresident income:
“If a nonresident employee (including corporate officers, . . . ) performs services for his employer both within and without New York State, his income derived from New York State sources includes that proportion of his total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number of working days employed both within and without New York State . . .
Convenience Test
Unfortunately for many nonresident employees, the regulations then go on to provide:
“However, 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.”[xxxi]
The ALJ observed that the convenience of the employer test would “more aptly be called the necessity of the employer test.” The regulation provides that any allowance claimed for days worked outside New York State must be based on performance of services that necessarily obligate the employee to out-of-state duties in service of his employer.[xxxii] “[T]he burden,” the ALJ added, “remains upon the taxpayer to establish that the work being done by him at his home was also for his employer’s necessity.”
According to the ALJ, the regulation does not apply, and a nonresident employed by a New York employer is not subject to the convenience of the employer test, when the nonresident employee (i) works outside of New York, (ii) performs no work within New York, and (iii) has no office or place of business in New York (i.e., where suitable facilities to carry out employee’s duties are not maintained for, or available to, the employee in New York).
Therefore, a nonresident employee must prove each of the forgoing factors to establish that income from a New York employer is not subject to the convenience of the employer test.
The ALJ found that Taxpayer failed to establish any of these factors because he worked in New York City during the beginning of 2020. Accordingly, the convenience of the employer test applied to Taxpayer’s income.[xxxiii]
Accordingly, the ALJ concluded that Taxpayer failed to establish that the Division improperly allocated all of his income from Employer to New York State. [xxxiv]
Should the Rule Apply?
Under New York’s convenience of the employer rule, a nonresident employee (say, a resident of New Jersey) whose assigned or primary office is in New York, but who spends a “normal workday” at their home office outside New York (in New Jersey), will nevertheless be treated as having worked in New York on that day; that is, unless the nonresident employee can demonstrate that their home office is a bona fide employer office.
What does that mean for the state’s fiscal situation?
According to a survey[xxxv] conducted earlier this year by The Partnership for New York City, 56% of Manhattan office workers are at their workplace on an average weekday, which is not significantly different from the Partnership’s 2023 survey findings, which found 58% of employees were in the office on the average weekday. Thus, it appears some form of hybrid schedule is here to stay.[xxxvi]
The study breaks this down further as follows:
- 11% of Manhattan office workers are currently in the office full time (five days a week)
- 17% are in four days per week
- 38% are in three days per week
- 17% are in two days per week
- 9% are in one day per week
- 7% of Manhattan office workers are fully remote
A fair number of these individuals reside outside New York State.
Rest assured, if New York has not yet contacted these nonresident employees about the allocation of their compensation income to the state, it will in the near future, especially given the expected budget gap described earlier.[xxxvii]
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[i] A Democrat.
[ii] In beautiful Bolton Landing, on Lake George. It truly is. https://www.boltonchamber.com/.
[iii] https://www.governor.ny.gov/news/video-audio-photos-rush-transcript-governor-hochul-delivers-remarks-business-council-nys.
[iv] For the FY April 1, 2025 to March 31, 2026.
[v] https://www.osc.ny.gov/press/releases/2024/07/dinapoli-releases-report-sfy-2024-25-financial-plan.
[vi] DiNapoli added that “spending in recent years has been driven by school aid and Medicaid; the two are forecasted to account for over 50% of all General Fund disbursements.”
[vii] Especially when we consider the size of the federal debt (over $35 trillion), the uncertainty surrounding the November elections, and the state of the world generally.
[viii] You don’t seriously believe they would cut spending instead?
[ix] At least we beat New Jersey! https://taxfoundation.org/research/all/state/2024-state-business-tax-climate-index/.
“New York has a graduated state individual income tax, with rates ranging from 4.00 percent to 10.90 percent. There are also jurisdictions that collect local income taxes. New York has a graduated corporate income tax, with rates ranging from 6.5 percent to 7.25 percent. New York also has a 4.00 percent state sales tax rate and an average combined state and local sales tax rate of 8.53 percent. New York has a 1.54 percent effective property tax rate on owner-occupied housing value.
“New York has an estate tax. New York has a 25.68 cents per gallon gas tax rate and a $5.35 cigarette excise tax rate. The State of New York collects $10,380 in state and local tax collections per capita. New York has $19,407 in state and local debt per capita and has a 92 percent funded ratio of public pension plans.”
[x] I used to argue – and to some degree, still do – that tax increases aren’t a panacea for what ails government. Instead, the focus should be on enforcing the tax laws already in place. Upon further reflection, I realized that the full-bore adoption of such a policy would inexorably lead to the creation of a self-sustaining army of bureaucrats dedicated to wringing as much out of taxpayers as was practicable – as distinguished from legally – possible. It would also lead to an expansion of the whistleblower program.
[xi] https://nypost.com/2024/04/19/business/new-york-auditors-crack-down-on-out-of-state-residents-avoiding-tax/#:~:text=Between%202013%20and%202017%2C%20New,Department%20of%20Taxation%20and%20Finance
[xii] https://www.fa-mag.com/news/new-york-s-rich-get-creative-to-flee-state-taxes–auditors-are-on-to-them-77759.html.
[xiii] https://www.cnbc.com/2019/03/08/tax-collectors-chase-rich-new-yorkers-moving-to-low-tax-states.html
[xiv] https://news.bloombergtax.com/daily-tax-report-state/the-tax-auditors-are-coming-for-ex-new-yorkers.
[xv] Don’t get me started.
[xvi] Tax Law, Art. 22.
[xvii] State of New York Division of Tax Appeals
In the Matter of the Petition of Scott and Elizabeth Bryant DETERMINATION DTA NO. 830818.
[xviii] Form IT-203, New York State Nonresident And Part-Year Resident Income Tax Return.
[xix] Based upon the ratio of the number of working days he was in New York to the total number of working days.
[xx] Weekends, holidays, vacation, sick leave, etc.
[xxi] 20 NYCRR 132.18(a).
[xxii] TSB-M-06(5)I – New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others.
Employees are instructed to use the factors provided in the memorandum to assist them in determining if their home office constitutes a bona fide employer office. The factors are divided into three categories: the primary factor, secondary factors, and other factors. In order for an office to be considered a bona fide employer office, the office must meet either: a) the primary factor, or b) at least 4 of the secondary factors and 3 of the other factors.
[xxiii] Taxpayer explained that this office was permanently closed in December 2022 because the parent company sold Employer to Goldman Sachs.
[xxiv] Judicial notice may only be taken of particular facts, if the items are of common knowledge or are determinable by referring to a source of indisputable accuracy.
[xxv] Executive Order 202.6.
[xxvi] The Division also noted that the New York courts have repeatedly upheld the validity of the convenience of the employer test and rejected constitutional challenges.
[xxvii] Tax Law Sec. 601 (e)(1).
[xxviii] Tax Law Sec. 631(a)(1).
[xxix] Tax Law Sec. 631(b)(1)
[xxx] Tax Law Sec. 631[c]
[xxxi] 20 NYCRR 132.18(a). This regulation has become known as the “convenience of the employer test.”
[xxxii] The ALJ explained, “The policy justification . . . [is] that since a New York State resident would not be entitled to special tax benefits for work done at home, neither should a nonresident who performs services or maintains an office in New York State.”
[xxxiii] Employer was under no legal mandate to close Taxpayer’s New York office during the pandemic. That said, it could have ordered its employees to report from specific locations for Employer’s own necessity. Despite Taxpayer’s testimony that such an order was given, the record contained no proof supporting these assertions.
[xxxiv] Taxpayer did not carry the burden of proof. Tax Law Sec. 689[e].
[xxxv] https://pfnyc.org/research/return-to-office-survey-results-may-2024/
[xxxvi] Like I said earlier, don’t get me started.
[xxxvii] These employees may be entitled to a credit against the tax owing to their state of domicile for the income tax paid to New York – thereby avoiding double taxation of such wages. Such a credit has the effect, however, of removing tax dollars from the employee’s state of domicile and moving them to New York.