New York Looks to Reach across State Lines to Tax Nonresidents during Covid-19
On October 19, 2020, the New York Department of Taxation issued long awaited insight on its position of the “Convenience of Employer” rule as part of Covid-19 FAQs posted on its website.
The FAQs suggest that if a nonresident’s “primary” office is in New York, the days an employee telecommutes from outside of the state during the Covid-19 pandemic would be considered days worked in New York, unless the telecommuting location is established as a “bona fide employer office”. The FAQ cites a 2006 issued bulletin which lays out the factors in satisfying a bona fide employer office. In the state’s view, unless such exception is satisfied, during the pandemic an employer would still be responsible to continue to withhold New York State income tax and the employee would still be responsible for New York State income tax while telecommuting from outside of the state.
Payroll tax withholding and employee source wages could have significant implications for employees working in a state that is different from the state they had worked in preceding Covid-19. As we wrote about in our March, 25th article, “Revisiting State and Local Payroll and Employment Taxes in Light of COVID-19”; while most states source employee wages for payroll withholding purposes to the state where the employee performs the services, there are certain states with enacted laws that require nonresident wages to be sourced to the office of the state where the employee is assigned or is otherwise considered to be their primary office.
Predating Covid-19, New York has applied what is known as a “Convenience of Employer” rule, which says that wages are considered to be New York sourced, unless the work was performed outside of New York for such services that are “the necessity of the employer”, opposed to for the convenience of the employee. It has been New York’s position that if an employee is assigned to the employer’s New York office or if the primary office is deemed to be in New York, any home workday would be considered to be New York. This is unless the home office is considered to be a bona fide employer office. The bona fide office designation requires the examination of several complex factors in making such determination. Coupled with such analysis, this requires the consideration that if a remote employee would be deemed to be assigned to New York, or if the employee’s primary work location would otherwise constitute as New York.
Tax practitioners since the start of the pandemic have requested guidance from New York as to if the state would interpret employees working from home as for convenience, opposed to necessity due to Covid-19. Although the FAQs are informal, what is unclear about the state’s position is even in the midst of work from home orders, if New York is going to assert this rule. Employees might question such logic, as state and government officials continue to issue advisories encouraging work from home, while many employees may contest they are working from home out of necessity, as they may otherwise be at high-risk of severe illness. That being said, based on this limited guidance from New York, the Department most probably will take an aggressive view of the Convenience of Employer rules during the pandemic. Provided such an interpretation, it’s conceivable this may be contested by taxpayers as some resident states might not provide a resident credit for wages earned while working from within such state.
As states and localities continue to face significant budget shortfalls due to Covid-19, it is expected that states’ audit divisions will continue to expand enforcement policies. Withum’s State and Local Tax Group can help businesses navigate through these uncertain times.