By Leonard J. Candela

The New York State Department of Taxation and Finance recently ruled [TSB-A-02(4)I, July 24, 2002] that a New York resident was not entitled to a resident tax credit for income taxes paid to New Jersey on gambling winnings from a New Jersey casino.

Facts of the Ruling

The taxpayer, a New York resident, won a slot machine jackpot of an undisclosed amount at the Trump Taj Majal Casino in Atlantic City, N.J. The taxpayer, pursuant to N.J. tax law, filed a New Jersey Non-Resident Gross Income Tax Return and paid tax on the winnings. The taxpayer then petitioned New York for an opinion as to whether he could claim a resident tax credit, under N.Y. Tax Law section 620, for income taxes paid to New Jersey.

There was no question that the winnings were taxable in New Jersey. The N.J. Tax Law section 54A:5-(a)(5) provides that income from N.J. sources for nonresidents includes income attributable to wagering transactions other than the N.J. Lottery. Technical Bulletin TB-20, Gambling Winnings of Nonresidents, provides that N.J.–source income of nonresidents from wagering transactions includes winnings from slot machines.

N.Y. Tax Law section 620 allows residents a tax credit for taxes paid to another state. Section 620(a) provides that “A resident shall be allowed a credit against the tax otherwise due under this article for any income tax imposed for the taxable year by another state of the United States … both derived therefrom and subject to tax under this article” (emphasis added).

Section 620(a) would appear to allow the taxpayer a resident credit for N.J. taxes on the facts stated. In ruling against the taxpayer, however, New York relied on Regulation section 120.4(d), which provides that “Income derived from sources within” another state is construed so as to accord with the definition of the term “derived from or connected with NYS sources” in relation to the adjusted gross income of a nonresident individual. The New York sources of income and deductions are detailed in N.Y. Tax Law Section 631(b) and include items attributable to—

Accordingly, New York determined that the gambling winnings were not “derived from sources within another state” since they were not in accord with the definition “derived from or connected with NYS sources,” as required by New York Regulations.

Unreasonable Interpretation

This opinion violates both the spirit and the letter of the law. The same income is taxed by both states. By not allowing the resident state credit, New York is effectively subjecting the same income to tax in both states. Isn’t the purpose (at least in part) of the resident credit to limit or reduce the duplication of state taxes on income? Nowhere does section 620(a) provide the limitation in the regulations that the credit is limited to taxes paid on income that meets the N.Y. definition of income taxable to nonresidents. New York does not allow casino gambling, so nonresidents could not “derive” slot machine winnings “from NYS sources.”

The statutes support the resident credit for this taxpayer. The Regulations are overly expansive by imposing additional limitations not in the statutes. Although the courts upheld the regulations as a reasonable interpretation of the statute, they seem to add restrictions not intended by the law. The statute’s use of “derived therefrom” would appear to restrict the credit to taxes correctly and properly paid to another state, rather than to limit the credit to types of income that would be taxable in New York to a nonresident. Additionally, the reference to income “derived” from the other state is used in conjunction with, and should be construed jointly with, income taxable by New York. The phrase “derived therefrom and subject to tax under this article” would seem to imply that the credit is allowed for taxes paid on income properly taxed by the other state and by New York. This ruling interprets this to mean that the credit is allowable on income taxed by the other state only if New York would tax nonresidents on similar income, a reasoning that is difficult to accept.

At the very least, this opinion should have been distinguished on its facts. It involved a type of income—slot machine winnings—that is not yet currently in New York, but presumably would be taxable in New York if it were to be legalized. This opinion should serve to caution practitioners and New York State residents that not all taxes paid to other states will qualify for the resident state credit.