October 2003

Necessity Versus Convenience: New York Nonresident Taxation

By Khondkar E. Karim and Brian J. Rebhun

Under New York law, nonresident individuals are taxed on income derived from New York sources. In the case of nonresident employees working partly in New York and partly outside the state, the tax statute provides that the portion of an employee’s wages derived in New York is determined by comparing the number of working days in New York with the total number of working days. The definition of a day worked outside New York, however, is puzzling.

The regulations provide that any allowance claimed for days worked outside New York State must be based on the performance of services out of necessity, as distinguished from convenience. The rule of convenience versus necessity has generated considerable controversy. If an employee resides in a state with location-based sourcing rules, the employee may have to pay income tax to the home state as well, with no offsetting credit for the New York taxes. For example, if an employee who is a domiciliary of New Jersey chooses to work from her home on any given day out of convenience, that day will be sourced to New York even though the employee was never physically present in New York.

Case Studies

In the case of Matter of Zelinsky, the New York State Appeals Tribunal ruled that the income of a nonresident employed in New York is not subject to apportionment to his state of residence (Tax Appeals Tribunal, Nov. 21, 2001). The petitioner, a nonresident who worked for his New York employer both in New York and at home in Connecticut, argued that under the due process and commerce clause, New York may impose tax on only the portion of salary allocated and apportioned to New York. The allocation of salary is based on the number of days the petitioner is actually (physically) present working in New York. Specifically, the petitioner maintained that Connecticut uses a physical presence standard for the sourcing of income and does not recognize the convenience of the employer test. Accordingly, Connecticut treats the days worked in Connecticut as generating income subject to tax by Connecticut, and does not allow a credit to offset the tax New York imposes on such income.

Thus, the petitioner claimed that the income was in fact subject to double taxation. Based on constitutional requirements, income must be fairly apportioned in order to comport with commerce clause standards against unduly burdening interstate commerce. The tribunal explained that the convenience rule has been viewed as protecting the integrity of the apportionment scheme by including income as taxable when it results from services substantially connected with New York but performed outside New York.

Regarding the petitioner’s due process argument, the administrative law judge determined that the convenience rule did not deprive the petitioner of his life, liberty, or property without due process. The judge added that because the petitioner was treated the same as any in-state counterpart (i.e., he was not subject to any additional tax in traveling to New York for his job), he received the benefits of the courts; the regulated labor market; and benefits from fire, police, and emergency services even on those days he chose to remain home. Thus, the tax imposed because of the convenience rule bore a fiscal relation to the protections, opportunities, and benefits given by the state.

Regarding the petitioner’s commerce clause argument, the administrative law judge noted that the fact that the petitioner lived in one state and worked in another did not constitute interstate commerce. The administrative law judge concluded that even if the regulation affected a nonresident’s choice of work location, it did not provide an advantage to residents employed by the petitioner’s employer; rather, all employees were treated equally with respect to tax on their New York income.

In the Matter of Phillips, Kenneth Phillips, a Pennsylvania resident, worked from 1988 to 1995 as a municipal bond salesperson for Lehman Brothers Inc., located in New York City. Phillips’ job required that he be able to analyze and monitor markets and execute trades at any time of the day or night. Lehman provided Phillips with a home office, equipped with computers, information systems, fax machines, and 25 telephone lines, from which he worked part of each week. The Supreme Court, appellate division, affirmed the Tax Appeals Tribunal decision stating that Phillips was working out of his home for his convenience rather than the necessity of Lehman Brothers. The court explained that because of the potential for abuse where the home is the workplace, the Department of Taxation and Finance has applied a strict standard of employer necessity in these cases. The court determined that, based upon the number of days that Phillips worked in the New York office, the tribunal could reasonably conclude that Phillips was able to carry out his requested duties from that office. The court also explained that the mere fact that taxpayers must perform their duties outside normal office hours is insufficient to justify a finding of employer necessity. Also, the court determined that the fact that the employer had installed necessary equipment in Phillips’ home office did not prove employer necessity.


A New Jersey resident is required to report on her tax return all taxable income received, whether the income is from New Jersey or outside the state. Therefore, if a New Jersey resident pays income tax both in New Jersey and another jurisdiction on the same income in the same tax year, the taxpayer is entitled to a credit against the income tax owed to New Jersey. Unlike Connecticut, where credit is based on the physical location, New Jersey allows credit based on the source of income. The Exhibit shows how the income tax and credit mechanism operates in New York versus Connecticut and New York versus New Jersey.

Employers should also be concerned about New York’s sourcing rule. New York employers have allowed many of their employees to telecommute and have flexible work schedules. One way to eliminate the problem of necessity versus convenience is to assign the employee to an office in the employee’s home state. The employee would still file a New York nonresident return and allocate income based only on days physically present in the state. The issue of assigning employees to offices in their home states, however, could cause problems in terms of extra withholding and unemployment taxes for the employer as well as subjecting the employer to potential nexus in that state. Furthermore, as technology expands and more employees are able to telecommute or have flexible work schedules, issues will arise concerning whether an employer has nexus with a specific state by merely having an employee work out of her home in that state. Employers should contact their state and local tax planners to determine the tax effects of potentially designating an employee from a New York office to an office in the employee’s home state.

Telecommuters and nonresident high-net-worth individuals have become the newest and biggest target of the New York State Department of Taxation and Finance. The Zelinsky decision will have a significant impact on the way nonresidents are taxed in New York as well as the way technology influences and shapes the taxing structure. It seems unfathomable for New York to tax income on work not actually physically performed in the state. Furthermore, in the light of New Jersey’s recent budget crisis, the very generous credit given to New Jersey residents may be adjusted and changed to something similar to that of Connecticut. Zelinksy will have a broad impact on how states in the New York City metropolitan area tax their residents and nonresidents.

Khondkar E. Karim, DBA, CPA, is an associate professor of accounting at the College of Business, Rochester Institute of Technology.
Brian J. Rebhun, JD, is a senior associate in Pricewater-houseCoopers LLP’s state and local tax consulting group.

Mark H. Levin, CPA
H.J. Behrman & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
Weiser LLP

Neil H. Tipograph
Imowitz Koenig & Co., LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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