NY Court of Appeals upholds the tax on nonresident telecommuters

Just weeks before tax day, the New York Court of Appeals ratcheted up taxpayer tensions, deciding Huckaby v. New York State Division of Tax Appeals. The Court held on March 29 that New York could apply its “convenience of the employer” rule to tax a Tennessee telecommuter on 100% of his income even though he earned only 25% of that income in New York.

As you recall, Huckaby was a Tennessee resident working for a New York company. Huckaby and his employer agreed he would continue to work from Tennessee, traveling to New York only as needed.

For the two relevant tax years, Huckaby filed New York nonresident income tax returns, allocating his income between Tennessee and New York based on the number of days he spent working in each state. Because he spent a quarter of his time in New York, he paid taxes to New York on a quarter of his income.

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Just weeks before tax day, the New York Court of Appeals ratcheted up taxpayer tensions, deciding Huckaby v. New York State Division of Tax Appeals. The Court held on March 29 that New York could apply its “convenience of the employer” rule to tax a Tennessee telecommuter on 100% of his income even though he earned only 25% of that income in New York.

As you recall, Huckaby was a Tennessee resident working for a New York company. Huckaby and his employer agreed he would continue to work from Tennessee, traveling to New York only as needed.

For the two relevant tax years, Huckaby filed New York nonresident income tax returns, allocating his income between Tennessee and New York based on the number of days he spent working in each state. Because he spent a quarter of his time in New York, he paid taxes to New York on a quarter of his income.

However, under the convenience of the employer rule, if a nonresident chooses to telecommute to a New York employer some or most of the time, the nonresident must allocate the income earned at home to New York. Relying on this rule, New York’s Department of Taxation and Finance disallowed Huckaby’s allocation and taxed him on his entire income, including the 75% he earned in Tennessee.

Huckaby challenged the Department’s position, first at the administrative level and then in court. Before the Court of Appeals, Huckaby argued that New York’s application of the convenience rule violated his Due Process and Equal Protection rights under the U.S. Constitution, as well as the state’s statutory Tax Law.

Although the Court of Appeals’ decision was split 4-3, the majority thought that applying the convenience rule to Huckaby complied with both the Constitution and the Tax Law. Huckaby plans to appeal the court’s decision to the U.S. Supreme Court.

By upholding such a grossly disproportionate tax on so remote a telecommuter, New York’s highest court warned the nation that it will wrest tax dollars from nonvoting, nonresident telecommuters working anywhere in the country for New York employers.

However, there’s been plenty of evidence before Huckaby that New York considers interstate teleworkers fair game. In some cases, New York has pursued telecommuters living in neighboring states. In others, New York has gone revenue hunting in Maine, New Hampshire and Florida. 

In the Zelinsky case, the Court of Appeals held that taxing the entire income of a telecommuter who both lives close to New York State and often works there was valid under the Constitution. The U.S. Supreme Court allowed this view to stand when it refused to hear Zelinsky’s appeal last spring.

Now, the Huckaby court tells us that taxing the entire income of a telecommuter who lives far from New York and rarely works there also complies with the Constitution. In a scathing opinion, however, the dissenting judges objected that the majority’s conclusions lacked legal precedent or “persuasive reason” – excellent grounds for Supreme Court review.
 
To redress New York’s overreaching, the Supreme Court must accept Huckaby’s petition for review and reverse the New York court’s decision. Even so, a positive outcome for Huckaby may cure only part of the problem that New York’s convenience rule creates.