Back to the Office
You are probably aware that many employers are discarding the fully flexible, remote work policies that were forced upon them – as “nonessential” businesses – during the COVID-19 pandemic[i] and which they retained as an accommodation to employees after the pandemic ended. Indeed, there is now a steadily increasing percentage of employers that are requiring their employees to return to the office or place of business.
Some employers are mandating that employees work in the office full-time.[ii] Many other businesses expect employees to be physically present at least three days per week.[iii] Often, employers are “taking attendance” to ensure compliance with their in-office policies.
Whatever the justification for the uptick in return-to-office policies – for example, firm culture, collaboration, mentoring – it appears that the fully flexible model is fading away.
The Great Lockdown
Unfortunately for some employees who telecommuted during the pandemic, the legacy of the “great lockdown” continues to haunt them as certain states assess additional income taxes against nonresident employees who started working remotely in March 2020.
Specifically, a telecommuting employee who resided in, and worked from, a state (their “State of Residence”) other than the state in which their primary office or place of business was located (their “State of Business”), may be facing the prospect of owing additional income tax to their State of Business in respect of the days worked remotely from their State of Residence.[iv]
A recent decision out of New York’s Division of Tax Appeals illustrated the plight of one such employee (“Taxpayer”).
The Office is Closed
Taxpayer was a longtime Pennsylvania resident who never resided in New York. During the 2020 tax year, Taxpayer was employed by Bank, which was part of a financial group of companies operating in Canada and the U.S. From January 1 through March 13, 2020, Taxpayer worked in Bank’s office in New York City, where he was responsible for managing traders within one of Bank’s divisions.
On January 30, 2020, the WHO designated the COVID-19 outbreak as a Public Health Emergency, and on January 31, 2020, the U.S. Dept. of Health and Human Services declared a public health emergency for the entire U.S. Thereafter, travel-related and community contact transmission cases of COVID-19 were documented in New York State, and more expected to occur. In response, then-Governor Cuomo declared a state of emergency for the entire State of New York.
Executive Order
Effective March 20, 2020, the Governor mandated (the “New York State on PAUSE” order) that:
“[a]ll businesses . . . in the state shall utilize, to the maximum extent possible, any telecommuting or work from home procedures that they can safely utilize . . . Any essential business . . . providing essential services or functions shall not be subject to the in-person restrictions. This includes . . . banks and related financial institutions . . . Empire State Development Corporation shall issue guidance as to which businesses are determined to be essential.”[v]
Essential Business
In response to the Pause Act, the Empire State Development Corporation[vi] issued “Guidance for Determining Whether a Business Enterprise is Subject to a Workforce Reduction Under Recent Executive Orders,”[vii] which provided: “ESSENTIAL BUSINESSES OR ENTITIES . . . are not subject to the in-person restriction [imposed under the Executive Order quoted from above],” and identified essential businesses as including “Financial [i]nstitutions including banks or lending institution[s], insurance, payroll, accounting, [and] services related to financial markets, except debt collection[.]”
Bank was an essential business not subject to the in-person restrictions imposed by the Governor’s Executive Order as it was a bank and/or related financial institution. However, commencing on March 16, 2020[viii] – prior to the order but on the same day the Canadian government called on its citizens to restrict their movements[ix] – Bank temporarily closed its New York City office.
Alternative Arrangements
Bank required Taxpayer to find alternative working arrangements – it did not offer Taxpayer an alternative office location in New York for conducting his work after the New York office temporarily closed. However, Bank established a “disaster recovery site” in New Jersey that was provided with the equipment necessary to work remotely.
Taxpayer worked at Bank’s New Jersey site on March 16 and March 17, 2020, though it does not appear that this location became Taxpayer’s assigned or primary office. Indeed, from March 18 through December 31, 2020, Taxpayer worked for Bank exclusively from Taxpayer’s home in Pennsylvania and never physically came into New York to work.[x]
Taxpayer had 242 total workdays for Bank during the 2020 tax year: 49 workdays from January 1 through March 15, 2020 (20.25% of his 2020 workdays), plus 193 workdays from March 16 through December 31, 2020 (79.75% of his 2020 workdays).
New York Audit
Taxpayer timely filed a New York State form IT-203, Nonresident and Part-Year Resident Income Tax Return, for the 2020 tax year with the Division, on which Taxpayer reported wages of $1,378,389.00 in the federal amount column and $285,664.00 in the New York State amount column. Taxpayer claimed a refund of $104,182.00 on the return which arose solely with respect to Taxpayer’s income from employment.
The Division of Taxation selected Taxpayer’s return for audit and sent Taxpayer a request for information (RFI)[xi] to verify the income allocation reported on the return. Taxpayer responded to the RFI, and included a completed income allocation questionnaire.[xii]
The Adjustment
The Division increased the total New York State taxes owed by Taxpayer from $19,347.00 to $93,372.60, based on a recalculation of the return whereby the Division allocated $1,378,389.00 in wages from Bank to New York State for tax year 2020 based on the application of the “convenience of the employer test,”[xiii] whereby all of Taxpayer’s workdays in 2020 were considered New York workdays.
After applying Taxpayer’s total payments and refundable credits of $123,529.00 against the increased amount of income tax owed, the Division computed an overpayment of $30,156.40, which was paid to Taxpayer, and disallowed the remainder of the refund originally requested.
In response to the Division’s proposed adjustments and notice of disallowance, Taxpayer petitioned the Division of Tax Appeals for a redetermination of the deficiency for, and of the refund of, New York State personal income tax for the year 2020.[xiv]
Division of Tax Appeals
The issue before the ALJ was whether Taxpayer had established that the Division improperly applied the convenience of the employer test to allocate to New York all of Taxpayer’s wages from Bank in 2020.
Taxpayer’s “Concession”
After some preliminary adjustments to Taxpayer’s income,[xv] Taxpayer asserted (i) that the New York State column of his state tax return should have reflected $636,917.00, and (ii) that he was entitled to a refund of $80,385.00 (of which $30,156.00 had already been paid), based on 193 days worked in New Jersey and Pennsylvania for Bank during tax year 2020.[xvi]
The Divisions Holds Fast
The Division asserted that Taxpayer was not entitled to an additional refund beyond the $30,156.00 calculated in the adjustment notice and already paid, because Taxpayer should have allocated to New York State the entire amount of wages, in the amount of $1,378,389.00, paid by Bank to Taxpayer in tax year 2020, including the days worked in New Jersey and Pennsylvania as a nonresident employed by a New York employer, assigned to a primary work location in New York, for Taxpayer’s convenience rather than necessity of the employer based on the application of the convenience of the employer test.[xvii]
The ALJ’s Analysis
The ALJ explained that the Tax Law imposes tax on a nonresident individual based on their income from New York sources.[xviii] The tax imposed on the nonresident is equal to the tax imposed on a New York resident for the full year, reduced by certain credits, and then multiplied by the New York source fraction.[xix]
The New York source fraction, in turn, is equal to the nonresident individual’s New York source income divided by the individual’s New York adjusted gross income from all sources for the entire year.[xx] A nonresident individual’s New York source income consists of the sum of the items of income, gain, loss and deduction entering into Federal adjusted gross income derived from or connected with New York sources.[xxi] The tax is determined by applying the appropriate graduated rate[xxii] to the nonresident’s total income from all sources less any statutory deductions, exemptions or credits.[xxiii] The taxpayer’s total income is derived from “New York adjusted gross income,”[xxiv] which is determined by reference to the taxpayer’s “federal adjusted gross income as defined in the laws of the United States for the taxable year.”[xxv]
In the case of a nonresident individual who works partly within and partly without New York, the ALJ stated, New York’s Tax Law provides that “[i]f a business, trade, profession or occupation is carried on partly within and partly without this state, as determined under regulations of the tax commission, 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.”[xxvi]
Convenience of the Employer
The Division’s applicable regulation[xxvii] provides that:
“[i]f a nonresident employee . . . 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. The items of gain, loss and deduction . . . of the employee attributable to his employment, derived from or connected with New York State sources, are similarly determined. 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.”
The last sentence of the above-quoted provision is commonly referred to as the “convenience of the employer test,” the application of which was at the center of the Taxpayer’s dispute with the Division.
According to the ALJ, “the convenience of the employer test provides that any allowance claimed for days worked outside New York must be based on the performance of services that, “of necessity, as distinguished from convenience, obligates the employee to out-of-state duties in the service of the employer.”[xxviii] If work performed at the nonresident employee’s out-of-State home, the ALJ continued, could just as easily have been performed at the employer’s New York office, the work is performed for the employee’s convenience and not for the employer’s necessity.
It was the Division’s position that because Bank was exempt from the Pause Act, the convenience of the employer test applied to Taxpayer because the nature of his employment was such that it could have been performed at the employer’s New York office if such accommodations had been made available.
The Division alleged that it was irrelevant that Bank temporarily closed its New York office and required Taxpayer to find alternative working arrangements because that requirement did not constitute necessity on Bank’s part. Specifically, the Division asserted that although Bank temporarily chose to close its office and did not provide a New York sitused accommodation for Taxpayer, that did not constitute necessity on Bank’s part because Bank, in its status as a bank and/or financial institution, was exempt from the Pause Act.
Conversely, Taxpayer asserted that working from Bank’s New York City office was an impossibility, therefore, Taxpayer was required to work from home in Pennsylvania[xxix] absent any other suitable location.
The ALJ’s Decision
As noted, the Pause Act, required that all “non-essential” businesses in New York reduced their in-person workforce at all work locations by 100% by March 22, 2020. However, as a financial institution, Bank was exempt from the Pause Act. Thus, Bank was not legally mandated to close its New York office and the record provided no evidence or explanation from Bank as to why it closed its offices. Contrary to Taxpayer’s argument, although it may have been necessary for Taxpayer to find alternative working arrangements, what was lacking is evidence as to why it was necessary for Bank to close its offices. When an employer deems telecommuting a necessity, it means the job cannot be effectively performed from the employer’s New York office due to factors such as specialized equipment needs or the nature of the work itself. The record was “utterly silent” as to Bank’s necessity in this matter.
The ALJ explained that “[i]t is well settled that a nonresident employed by a New York employer is not subject to the convenience of the employer test . . . when [he] works outside of New York, performs no work within New York, and has no office or place of business in New York (i.e., where suitable facilities to carry out [his] employment duties are not maintained for or available to [him] in New York).”
Taxpayer “physically worked in New York until March 16, 2020 and there [was] no evidence to suggest that the nature of his job changed, only where it was performed.” Based on this failure of proof, the ALJ concluded, Taxpayer did not sustain “their burden of proving that the Division improperly allocated [Taxpayer’s] wages from Bank to New York State in 2020 pursuant to the convenience of the employer test.”
The Taxpayer’s petition was denied, and the notice of disallowance was sustained.
Parting Thoughts
The ALJ seems to have focused on the fact that Bank, as an essential business, was not legally ordered to close its New York office. That the business nonetheless closed the office, thereby forcing Taxpayer to work elsewhere, was of no import in the absence of any evidence as to why Bank closed the office.[xxx]
In other words, Taxpayer failed to demonstrate (i) that it was necessary for Bank to close its New York location, and (ii) that Bank had determined telecommuting was necessary.
Talk about a move only a contortionist can perform.
I will assume that, if Bank’s New York office had been available, Taxpayer would have continued to work there and not from elsewhere.
Because Bank closed its New York office and, presumably, did not allow its employees to work from there, Taxpayer had to work from elsewhere.
Although Bank provided a location in New Jersey, there was no indication in the ALJ’s opinion that this site became Taxpayer’s assigned or primary office. If it had been, the fact that Taxpayer chose to work from Pennsylvania instead should have had no bearing upon his status vis-à-vis New York.[xxxi]
After all, days worked at home are considered New York workdays only if the employee’s assigned or primary work location is at an established office or other bona fide place of business of the employer in New York State. If the employee’s assigned or primary work location is at an established office or other bona fide place of business of the employer outside New York State, then any normal workday worked at home would be treated as a day worked outside New York State.[xxxii]
What’s Next?
The foregoing decision considered the extraordinary circumstances in which businesses and their employees unexpectedly found themselves during the pandemic and the resulting lockdown. Hopefully, we will not be revisiting the issue of remote work in that context ever again.
Moreover, the pendulum on remote work appears to swinging toward less flexible arrangements, at least for now.
The fact remains, however, that many New York businesses will continue to employ individuals from other states, and among these employees will be several who are allowed to work remotely from their homes.
We can only hope that, one day, the Supreme Court will accept a challenge to the convenience of the employer rule and will be receptive to the taxpayer’s position.
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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] On the advice of various experts, to prevent the spread of the virus. Thankfully, many of these businesses were able to continue operations with relatively little interruption as their employees continued to work remotely from home; i.e., telecommuting.
[ii] On January 20, Pres. Trump signed an executive order requiring all federal employees to come back to the office five days a week.
[iii] Several large law firms have introduced a four days per week minimum.
[iv] Inn October 2020, New Hampshire requested that the U.S. Supreme Court enjoin enforcement of the imposition of Massachusetts income tax on those residents of the Granite State who were forced to work remotely during the pandemic while their employer’s place of business in Massachusetts was closed. The Supreme Court denied the request in June 2021. See https://www.taxslaw.com/2023/02/new-yorks-convenience-of-the-employer-rule-new-jersey-and-connecticut-respond/.
[v] (Executive Order [A. Cuomo] No. 202.6 [9 NYCRR 202.6]; see also Executive Order [A. Cuomo] No. 202.8 [9 NYCRR 202.8] [amending Executive Order No. 202.6 to provide that, “[e]ach employer shall reduce the in-person workforce at any work location by 100% no later than March 22 at 8 p.m.”]; Public Health Law § 12 [1] [prescribing a penalty for violating public health orders]) (Pause Act).
[vi] The New York State Department of Economic Development.
[vii] https://esd.ny.gov/guidance-executive-order-2026 (last updated October 23, 2020).
[viii] Before the Executive Order was issued.
[ix] “Bank” was the Bank of Montreal.
[x] Bank re-opened the New York City office in September of 2021.
[xi] Form DTF-948.
[xii] Form AU-262.55. https://www.tax.ny.gov/pdf/questionnaires/au-262.55.pdf.
[xiii] As set forth in the Division’s regulations at 20 NYCRR 132.18 (a).
[xiv] In the Matter of the Petition of Richard S. Myers and Erin Langan, Determination DTA NO. 850197.
[xv] During the course of this proceeding, Taxpayer asserted that the original reporting of the New York State amount on the return was understated because it did not properly reflect that, in 2020, Taxpayer received a deferred bonus in the amount of $442,191.00 that was based on work performed or deemed performed in New York prior to 2020 and should have been completely allocated to New York in 2020.
In addition, Taxpayer asserted that the return should have reported Taxpayer’s wages of $1,378,389.00 in the federal amount column and $636,917.00 in the New York State amount column.
Taxpayer further asserted that, consequently, the total New York State taxes due should have been increased from $19,347.00 to $43,144.00. After a recalculation based on the above-described increase in the New York State amount, the New York State tax increased from $19,347.00 to $43,144.00, and Taxpayer asserted that the amount of overpayment claimed for 2020 should have been reported as $80,385.00 instead of the original $104,182.00 claimed by Taxpayer on the return as a refund.
[xvi] When the Division issues a notice of disallowance, the petitioner bears the burden of proof in a case before the Division of Tax Appeals, except where that burden has been specifically allocated to the Division (see NY Tax Law Sec. 689 [e]; 20 NYCRR 3000.15 [d] [5]). The burden of proof is on the taxpayer to show by clear and convincing evidence that the notice of disallowance was erroneous (see Matter of Leogrande v Tax Appeals Trib., 187 AD2d 768, 769 [3d Dept 1992], lv denied 81 NY2d 704 [1993]).
[xvii] If Taxpayer prevailed on his assertion that Taxpayer was not required to allocate wages to New York during the 193 days that Taxpayer worked in New Jersey and Pennsylvania, the Division agreed that the amount of the refund that would have been due was $50,229.00, plus applicable interest.
[xviii] NY Tax Law Sec. 601 (e) (1).
[xix] NY Tax Law Sec. 601 [e] [2], [3].
[xx] NY Tax Law Sec. 601 [e] [3].
[xxi] Defined by NY Tax Law Sec. 631 (a) (1) and (2).
[xxii] NY Tax Law Sec. 601 (a) through (c).
[xxiii] NY Tax Law Sec. 606; Sec. 611 [a].
[xxiv] NY Tax Law Sec. 611 [a].
[xxv] NY Tax Law Sec. 612 [a].
[xxvi] NY Tax Law Sec. 631 (c).
[xxvii] 20 NYCRR 132.18 (a).
[xxviii] One policy justification for the convenience of the employee test, the ALJ stated, “lies in the fact 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.”
[xxix] Interestingly, PA has its own version of the convenience of the employer rule.
[xxx] This line of “reasoning” should sound familiar. It’s almost the same language the ALJ used in In the Matter of the Petition of Zelinsky, Determination DTA NOS. 830517 and 830681 (Nov. 30, 2023).
“The fact that petitioner’s employer did not provide accommodations but instead allowed petitioner to work out-of-state at home does not constitute necessity or requirement by Cardozo . . . Petitioner has failed to meet his burden that he worked out-of-state due to his employer’s necessity.”
[xxxi] At that point, New York would not have been the location to which Bank had assigned Taxpayer.
[xxxii] TSB-M-06(5)I.