The ongoing debate about the taxation of remote workers, specifically amongst New York, New Jersey, and Connecticut, seems to be intensifying with evolving remote work culture due to the Covid-19 pandemic. The primary issue lies in the application of the “convenience of the employer” test which, despite having the support of New York courts, seems to be standing on shaky ground.
The concept of the convenience test allows New York law to calculate a nonresident employee’s income from New York sources based on the proportion of workdays spent inside the state to the total number of workdays. The law defining the convenience quotient specifies that allowances claimed for days worked outside New York state should necessarily be a result of out-of-state duties in service to the employer. This essentially means that any work that could have been carried out at the employer’s New York facility, even when performed out of state, is considered a New York workday for tax purposes.
This test has been condoned by New York courts on the grounds that New Yorkers who work from home shouldn’t be burdened with higher tax rates in comparison to out-of-state residents who share their employment circumstances. In cases such as Zelinsky v. Tax Appeals Tribunal, the courts backed the constitutionality of the convenience test, claiming that it upholds tax apportionment rules by taxing income stemming from New York but implemented elsewhere, to prevent tax evasion.
However, this stance may face challenges in the long run due to constitutional issues under the Commerce Clause and Due Process Clause, especially if put forth for review by a non-New York court. The principle that a state cannot tax value earned outside its borders may render the rule of sourcing all income to the employer’s location, regardless of where the services were delivered, externally inconsistent. Furthermore, while New York asserts it offers benefits and protections that justify taxing a nonresident’s income, such benefits are also extended by the employee’s home state, sparking further debates on the fairness of this tax rule.
In response, New Jersey and Connecticut have enacted legislation criticizing this tax rule. For example, New Jersey, in 2023, rolled out legislation aimed at countering this tax regulation by establishing a reciprocal convenience test and offering incentives to residents challenging this rule. Connecticut too, inspired by New Jersey’s steps, has announced similar measures in their proposed budget for fiscal 2025.
However, these legal challenges face steep hurdles, notably the substantial resources required for litigation. Even though the stance of the New York Court of Appeals is the subject of ongoing debate, the counter measures by neighboring states may well instigate a closer reexamination of New York’s convenience test by the court.
The complexity of this issue highlights the increasing challenges faced by professionals and corporate entities alike in navigating multi-jurisdictional tax laws in the era of remote work. It remains to be seen how this dispute will ultimately shape future taxation policies affecting remote workers and employers.