Discussion:NYS non resident wages-really income in home state

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Discussion Forum Index --> Basic Tax Questions --> NYS non resident wages-really income in home state


Discussion Forum Index --> Tax Questions --> NYS non resident wages-really income in home state

Scottb (talk|edits) said:

5 April 2008
My client's employer is in NY but the client lives and works in NC (from her home). She visits NY office less than 10 days during the year. The employer is withholding NY tax not NC. I believe when I source her income, none of it should be NY. Also believe the employer should either not withhold or just withhold NC so we don't have to file a NY return for the refund. Client is an underwriter of commercial insurance for her employer whose clients are all over the country. Do I have this right?

Death&Taxes (talk|edits) said:

5 April 2008
New York's Courts found for the state in the Thomas Huckaby case in 2005 based on the work done in Tennessee was for the convenience of the employer in New York. Do a Google search on the name; the employer may be just covering himself, or may feel your client is in the same boat.

KatieJ (talk|edits) said:

5 April 2008
Well, I agree with you, Scott, but alas, the State of New York and the New York Court of Appeals do not.

Your client's situation is the result of the peculiar "convenience of the employer" rule in NY, which is embodied in NYCRR 20 §132.18. The gist of the rule is that if an employee whose primary office is in NY performs some of his services outside NY, all of his earnings are considered NY source income unless the out-of-state work is performed at that location out of necessity (because, by its nature, it could not be performed at the employer's NY location) and not for the convenience of either the employer or the employee. This rule has been upheld by the NY Court of Appeals (the high court in NY) on several occasions, and the U.S. Supreme Court so far has denied certiorari every time.

For years beginning after 2005, the Department of Revenue has softened its position somewhat on this rule. See TSB-M-06(5)I [1] for the somewhat Byzantine set of conditions the client must meet in order to have the home office considered a "bona fide office" of the employer. If you can meet those conditions, you can prorate the client's salary by the days to determine the amount of her NY source income. Otherwise, all of the income is subject to NY tax.

North Carolina allows credit for taxes paid to another state only on income with a source in the other state (N.C. Gen. Stat. §105-151(a)(1)). Most states with such source language in their credit statutes define the source of income by their own rules; North Carolina considers income from personal services to have its source where the services are performed. NC may not give your client credit for the tax she pays to NY on income earned by performing services in NC.

CrowJD (talk|edits) said:

5 April 2008
This is truly awful. This falls under the heading of: I learn something new every day. Notice how this puts the burden on the employee to pursue a determination, or a possible exception. Take time out of your work and your life, and your wallet to do this, and then end up possibly being fired as a trouble causer. I can't think of a federal law that would protect the employee from being fired by the employer if the employer became simply annoyed over the employee pursuing such a matter. Worse, yet, how would you proceed? Is there an administrative complaint process OR must you file a suit for declaratory judgment, or, heavens, sue your employer?

Scott: your client may want to look for an employer closer to home. Or put in for a transfer to FL.

Lizzit (talk|edits) said:

5 April 2008
As Katie sez, it must be a legit reason. Help them (the employer and the employee) come up with the legit commercial business reason for her to live so far away. Presumably, it's because they need clients met and cared for outside of NY. Further things that will skew a non-NY status - NC is more centrally located to her non-NC/non-NY client base, company pays for an office in NC, company files an NC return. Certainly, every day she visits a client outside of NY is a day she couldn't possibly have worked in NY, so based on ScottB's original query, I'm guessing she's got at least 80% of the days all sewn up.

Even if you manage to get a non-NY status, you will need to pay NY state tax on the NY workdays, and most other states will want a piece of the pie for the workdays in that state as well. You might end up filing a dozen or more state returns when done. NC will give a tax credit for any other state's taxes, so there won't be double tax.

KatieJ (talk|edits) said:

6 April 2008
Crow, the way to get an administrative hearing on this would be to file the return and pay the tax on 100% of the income, and then file a claim for refund based on a proration. Or you could file on a pro rata basis (most non-NY practitioners would do that without even thinking about it, this NY rule is so unique, not to say bizarre) and wait for the state to come after you -- which they may never get around to. (I'm not suggesting anything, you understand <G>)

We really thought the taxpayer was going to win the Huckaby case (796 NYS2d 312, 829 NE2d 276, 4 NY3d 427, 3/29/05 if you want to look it up) that D&T referred to above, and it was a great disappointment when the t/p lost and the Supremes denied cert. The rule was challenged back in the 1970's by a NJ resident who worked at home part of the time; the NY Ct of Appeals upheld the rule and cert. was denied. Then there was Zelinsky, the CT resident law professor at Cardozo who kept an office at home where he prepared lectures, did research, etc., and he lost too. But these taxpayers were all in contiguous states. The rationale behind the rule, as the Department has explained it in all these cases, is that a NY resident who worked at home wouldn't get a tax break, so a nonresident shouldn't either. Which misses the point entirely, of course (a nonresident presumably pays tax to his home state on that income, so he's not really getting a tax break), but the NY courts have bought it so far. Mr. Huckaby lived and worked in Tennessee, and spent about 25% of his time in the employer's NY office. He wasn't working at home to avoid NY taxes; he had worked for a software company in Tennessee and lost his job when it was reorganized. He negotiated a job with a NY user of the former employer's software whereby he could continue to live and work in Tennessee, and went to NY only on an as-needed basis.

The court noted in Zelinsky's case that it would be unconstitutional for the state to apply this rule to an employee who NEVER worked in NY. Going forward, that's one way to deal with this, and the employer may be helpful if it wants to retain the employee. Everybody in NY understands this problem, believe me.

Here's an outrageous inconsistency: A telecommuter may not be eligible for NY unemployment insurance benefits even though his income is subject to NY tax. A Florida resident worked for Reuters in NY, telecommuting from her Florida home. When Reuters decided to end the telecommuting arrangement and offered her a job back in NY, she declined and filed for unemployment in Florida. Florida denied her claim because she had worked for a NY employer. NY denied her claim because "physical presence determines localization." Actually, under the Uniform Unemployment Insurance Act, I think Florida was wrong and NY was right; the NY employer should have paid unemployment insurance tax to Florida on her behalf, not NY. But NY got the tax and wouldn't pay the benefits -- although if she ever set foot in Reuters' NY office, all of her earnings would be subject to NY income tax.

There is a bill pending in Congress that would outlaw this crazy NY rule. I can look up the number if anyone is interested.

Death&Taxes (talk|edits) said:

6 April 2008
I've railed enough here on Liz' point that the client could end up filing in a dozen states, but every time I print 9 states and one city for a resident of Texas who happens to work for the Texas Ranger baseball team, I shake my head and ask, where will this lead? We had liabilities like $11, $19....every state but California less than $100.....almost a ream of paper because California and Minnesota require full Federal copies while it seems impossible to do Massachusetts in less than 15 pages.

Getting back on topic, I could see no way that an insurance underwriter could service a territory from a New York desk without traveling to see the insured. This sounds far different from professors or Huckaby.

KatieJ (talk|edits) said:

6 April 2008
Yes, I agree, Scott's client may be able to make the case. It's important to follow the guidelines in the TSB-M I referred to above.

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