The CPA Journal

N.Y. convenience rule taxing to At-Home Workers

By Wayne K. Berkowitz, CPA, JD, LLM, David Berdon & Company LLP

Although technology has allowed many to trade wingtips at the office for bunny slippers at home, New York State tax authorities continue to insist that employees working from their out-of-state homes for their own convenience must still pay New York State personal income tax.

Example. A nonresident of New York State works at home for a New York State company. This employee’s home state asserts that services were performed in the home state and should be taxed there. New York contends that the employee was not required to work at home and did so strictly for his convenience. As a result of this convenience test, New York insists that the wages are New York source income, even though they are performed outside of the state.

A few states—notably New Jersey—provide credit for the tax paid to New York, but many do not. Generally, a resident or home state credit is provided for earned income only when it is not earned in that state. This means that the employee’s home state will deny any credit for the tax paid on that income to any other state. New York’s convenience rule means that this same income is also sourced to New York. The result: The employee is doubly taxed with no offsetting credit.

Regulations provide that days worked outside of New York “must be based on 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 courts have narrowly defined the necessity requirement of the convenience test.

Recently, a nonresident New York City law school professor challenged the convenience test as unconstitutional. The professor’s duties required that he teach classes and meet with students on campus three days per week for 28 weeks each year. He spent the remaining 24 weeks working exclusively at home in Connecticut. An administrative law judge upheld the convenience test and reapportioned 100% of the income to New York. The judge held that the professor’s sole motivation for working at home was convenience and that he worked in one state and lived in another strictly by choice. The fact that Connecticut would not provide a credit for the additional New York tax was no basis for invalidating the convenience test. This decision is being appealed.

In another case, a Nashville software writer joined a New York State client after his employer folded. The writer continued to work from Nashville—visiting the New York office about seven times a year and staying in a hotel. When filing his taxes, the writer allocated for the time spent in New York. Nevertheless, the court ruled that he worked in Nashville at his own convenience and needed to apportion his entire salary to New York.

An appellate court stretched the convenience test even further in the case of an employee of a global investment bank who worked out of his Pennsylvania home. Due to the international nature of his duties, the employee was required to work at all hours. Moreover, his work was highly confidential and the bank preferred that he not be present in the office. He was provided with a computer and 25 telephone lines in his home office. The court ruled that none of this was necessary, but instead done for the employee’s convenience. The court thought the bank could have reasonably adapted their offices to serve the employee’s needs.

Over the years, New York has successfully applied the convenience test in some unexpected situations, including cases where—

ill health prevented an employee from going to the office
there was no room for the employee in the New York office
a salesman was regularly outside New York with prospects conducting business and social activities (a red alert for those using an out-of-state golf course as a place of business)
the employee used the office only when it was available, as little as one day per week (a hoteling office arrangement).

New York has even taxed those who—for the most part—do nothing anywhere. One taxpayer, who spent most of her time in Florida, was paid $50,000 by her husband’s New York company. Her inactivity in Florida (as opposed to her inactivity in New York) was deemed for her own convenience and the full amount was subject to tax in New York.

Is it possible to overcome the convenience test? New York State’s Audit Guidelines state that the duties performed must be “those, which by their very nature, cannot be performed in New York State.” In 1980, a product tester for several Manhattan magazines was able to demonstrate that the facilities required for his job were unavailable at the office. His home office contained a firing range with special ballistics equipment and storage facilities, a garage for various automobiles and motorcycles, and a stable and kennel for horses and dogs. Unfortunately, there is little other history of taxpayers successfully meeting the test.

State and Local Editor:

Stewart Buxbaum, CPA
S. Buxbaum & Company, P.C.

Interstate Editor:

Nicholas Nesi, CPA
BDO Seidman LLP

Contributing Editors:

Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

STATE AND LOCAL TAXATION