The New York Division of Tax Appeals (DTA) ruled that, under the New York State (NYS) convenience of the employer rule, a New Jersey resident working from home for his New York employer after the start of the COVID-19 emergency owed New York income tax for all wages he was paid in 2020, including those earned for services performed in New Jersey. (Matter of Bryant, DTA No. 830818, 9-12-2024.)

Facts

In April 2020, the taxpayer's employer closed its New York City (NYC) office and ordered employees not to report to work in the NYC office. Because of the NYC office closure, the taxpayer worked from his New Jersey residence for 208 days in 2020. Accordingly, the taxpayer argued that he owed New York income tax only for those days he was physically present in the NYC office, which was 11.59% of his gross income.

DTA ruling

The DTA stated that the taxpayer's employer was under no legal obligation to close its NYC office under the NYS COVID-19 Emergency Declaration, nor could the taxpayer prove that his employer ordered employees not to work from the NYC office. Accordingly, the DTA held that the taxpayer worked from home for his own convenience and not the necessity of the employer. It also ruled NYS income tax is imposed on all wages earned within and outside of NYS.

NYS convenience of the employer rule

NYS imposes a tax on nonresidents for income "derived from sources in" NYS, including income from a "business, trade, profession or occupation carried on" in NYS. (NY Tax Law Section 601(e)(1); NY Tax Law Section 601(b)(1)(B).)

For nonresident employees who perform services both in and outside of NYS, the income derived from NYS sources is determined by the proportion of days worked in NYS versus days worked everywhere else. Notably, however, under the NYS convenience of the employer rule, taxes related to work-from-home days for nonresident employees assigned to work in NYS are typically allocated to NYS, regardless of where the employee lives. There is a narrow exception to the convenience of the employer rule for those employees with a "bona fide employer [home] office." (20 NYCRR Section 132.18(a); 20 NYCRR Section 132.18(a); TSB-M-06(5)I; 20 NYCRR Section 132.18(a).)

The relevant regulation states that "any allowance claimed [by nonresidents of [NYS] for days worked outside [NYS] must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the services of his employer." In other words, while tax is generally allocated to NYS based on the number of days physically worked in the state, the convenience of the employer rule permits NYS to additionally tax remote workdays of nonresidents if they fall within the guidelines.

Convenience of the employer rule during and after the COVID-19 pandemic

In mid-March 2020, and for several months thereafter, NYS closed nonessential businesses due to the COVID-19 pandemic. ("Governor Cuomo Issues Guidance on Essential Services Under The 'New York State on PAUSE' Executive Order," New York State website, March 7, 2020) .

There was some uncertainty as to whether employees working from home due to government mandates would be taxed under the convenience of the employer rule. In an October 2020 update, the New York Department of Taxation and Finance (Department) stated that "if you are a nonresident whose primary office is in [NYS], your days telecommuting during the pandemic are considered days worked in [NYS] unless your employer has established a bona fide employer office at your telecommuting location." (Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for NYS Personal Income Tax, NYS Department of Taxation and Finance website.)

Ernst & Young LLP insights

The DTA has consistently held that nonresidents working from home during the COVID-19 emergency were not teleworkers for the necessity of the employer and could not claim exemption from NYS income tax. (See EY Tax Alert 2023-2041.) These COVID-19 related rulings demonstrate the very narrow exceptions the DTA recognizes in its application of the convenience of the employer rule.