HELPING NEW YORK RECOVER:
Removing An Unfair Tax On Telecommuters

By NICOLE BELSON GOLUBOFF

Monday, Dec. 03, 2001

Among the many consequences of September 11 and the anthrax scare is that an increasing number of businesses are exploring the use of telecommuting - that is, having employees work outside the office rather than physically travel to it. Rightly so. Telework offers numerous advantages to businesses that can help them survive the devastating economic effects of the recent terrorism and a looming recession.

Unfortunately, New York - while struggling to recover from September 11's terrible losses - continues to retain a tax rule concerning allocation of personal income that impedes interstate telework.

The rule survived constitutional challenges at the end of November, but it has been widely criticized. In light of the enhanced need for telework in New York right now, it is time to change the rule.

Telework Benefits Before and After September 11

Telework has long offered businesses economic advantages. It increases productivity, both of telecommuters and their office-based colleagues. One reason telecommuters' productivity increases is that they can convert time they previously spent commuting to the office into work time.

Telework enables businesses to recruit highly qualified candidates from afar, without requiring such candidates to relocate. And it reduces both recruitment and turnover costs. Furthermore, telework can help businesses reduce overhead expenses, including real estate costs.

Telework also helps achieve public policy goals. For example, it enables some workers to balance work and family responsibilities better than they otherwise could. Indeed, it enables some workers who could not work at all due to family responsibilities or their own disabilities to work either part-time or full-time.

Telework is also pro-environment. By reducing the number of employee commute trips, telework can reduce vehicular air pollution.

With a war on American soil, telework has even more to recommend it. Decentralizing workers can save lives in the event of either bombing or germ attacks. It can help businesses continue operations if their main worksites are damaged or even obliterated.

How New York's Tax Rule Hurts Telework

These benefits notwithstanding, New York's non-resident personal income tax allocation rule can hinder the efforts of New York businesses to expand their use of telework.

Here's how the tax rule currently works: Suppose a Connecticut (or other non-resident) employee of a New York employer telecommutes on a part-time basis for personal convenience. New York requires the Connecticut employee to allocate the income earned while working at home in Connecticut as New York income, subject to New York taxation.

What if the arrangement is not for the Connecticut employee's convenience, but rather is a necessity for the New York employer? Then the situation changes: The telecommuter can allocate the income to Connecticut.

The Difficulty of Satisfying the Telecommuting Necessity Test

While the rule may seem reasonable, the application can be harsh. Under New York tax law, proving that telework is an employer necessity is extremely difficult to do. It may not be enough that a New York employer requires an employee to work off-site in Connecticut. It may not even be enough that a New York employer does not give the Connecticut-based employee an office in its New York offices. According to New York, if the employee could perform the job at the main office with proper accommodation by the employer, telecommuting is not necessary.

What if a business has lost its office space in the World Trade Center and asks its non-resident employees to telecommute a few days a week as part of a recovery plan? New York's aggressive approach suggests that it still might not consider the telecommuting arrangement necessary if there is alternative real estate to rent elsewhere in New York that would accommodate the employees full-time.

A Broad Definition of Who Is a Part-time Non-Resident Telecommuter to New York

What about a telecommuter from a region that is not within reasonable commuting distance - for example, Vermont? If that employee visits his company's New York office only once or twice a year, one might think New York would treat the income he earns in Vermont as Vermont, rather than New York, income. Unfortunately, New York may have a different view.

Conflicting State Rules May Lead to Double Taxation

Another problem for non-resident telecommuters is that their home states may use a different method for sourcing income than New York does. Disparate allocation policies can lead to double taxation for telecommuters.

For example, some states, such as Connecticut, use the "physical presence" allocation method: Income is taxed based on where it is earned. Thus, if a Connecticut resident telecommutes three days a week to New York, Connecticut will tax her on the income she earns on the three telecommuting days.

Now suppose the work the Connecticut resident performs at home could also be performed in the employer's New York offices. In this situation, New York would regard the telework arrangement as failing the "necessity" test. Thus, New York, would also tax the telecommuter's income for the three days she telecommutes.

Here is one more wrinkle: Connecticut does not give its telecommuting residents a credit for taxes paid to New York on income earned in Connecticut. So the upshot of the two states' rules is that the employee is subject to double taxation on the same income. She is taxed both because she could be in New York, and because she actually is in Connecticut - a costly situation.

The Effect of New York's Approach

New York's allocation policy deters non-residents from telecommuting to New York. It provides skilled non-residents with strong economic incentives to seek employment in their home states. That is a serious problem, especially after September 11.

What is a displaced New York business, once located in or around the World Trade Center area, to do? What is a non-displaced but failing New York business to do? Such firms may simply fold - or they may follow their employees, physically relocating outside New York in a place convenient to workers' homes.

A Tax Professor's Constitutional Challenge to New York Tax Law

Zelinsky commuted to Cardozo to teach classes and meet with students. He also routinely worked from his Connecticut home - preparing and grading examinations, writing recommendations, and conducting academic research and writing.

For two tax years in dispute, Zelinsky apportioned part of his Cardozo salary to New York, based on the number of days he commuted to the New York campus. But New York disagreed with the apportionment, claiming that all his income, including that earned for work performed from home, was New York income.

Zelinsky challenged New York's determination, claiming that the "convenience versus necessity" rule is unconstitutional as applied in his case: New York was taxing the same income that was subject to Connecticut tax when Connecticut would not give him a credit for taxes paid to New York.

Zelinsky argued that the income he earned while working in Connecticut was not sufficiently connected to New York for New York to be able to tax it. New York's tax on that income, he said, violated the Constitution's prohibition against deprivation of property without due process of law. Zelinsky also claimed that New York's taxation violated the Commerce Clause, which prohibits a state tax affecting interstate commerce that is not "fairly apportioned."

Preliminary Determination in The Tax Professor's Case

The Division of Tax Appeals Administrative Law Judge ("ALJ") rejected both the Due Process and the Commerce Clause claims.

The ALJ rejected the Due Process claim, in part, because Zelinsky's salary from Cardozo "appears to have been entirely connected with and resulted from his duties as a professor of law for this New York employer." Thus, the judge concluded, the income "bears [a] reasonable connection" to New York.

The judge also noted that - whether Zelinsky telecommuted or not - he received the "same benefits of New York employment as do his in-state counterpart employees." For example, he could use New York courts. He enjoyed a "regulated labor market," as well as fire, police, and emergency health services, among other services. Thus, his income was "fairly attributable" to his "overall economic activities within New York."

The judge rejected the Commerce Clause claim, in part, on the ground that Zelinsky's teaching job does not involve interstate commerce - as a job in which Zelinsky, for example, bought and sold goods might. The judge also said that the fact that Zelinsky lived and was employed in different states - and the fact that he chose to work in two different states - did not constitute interstate commerce.

The judge also determined that if Connecticut were to apply New York's "convenience versus necessity" allocation method, then non-resident telecommuters would not be at risk of double taxation - and Connecticut's choice, the judge reasoned, should not affect which allocation method New York can use.

The judge discussed the rationale for New York's rule: It avoids "subterfuge" by non-resident telecommuters whose home states may either impose no income tax, or tax income at a lower rate than New York. These employees might elect to telecommute precisely so they can allocate their income to their home states and reduce their tax liability.

Such "subterfuge," according to New York, would give non-resident telecommuters a tax advantage over in-state telecommuters. For example, if Connecticut's personal income tax rates were lower than New York's, the Connecticut resident telecommuting to a Manhattan employer would try to maximize telework days, so that he could allocate more of his income to the jurisdiction with the lower rate. An Albany resident telecommuting to that Manhattan employer would receive no similar tax advantage from maximizing her telework days.

The judge emphasized that New York's rule puts "residents and nonresidents employed in New York on an equal footing, with neither receiving any special tax benefit resulting from their choice to work at home rather than at their employer's facilities." However, the judge acknowledged that Zelinsky "pays a price for choosing to work at home."

The Decision on Appeal

Zelinsky appealed, and, on November 21, 2001, the New York Tax Appeals Tribunal affirmed the ALJ's determination.

The Tax Appeals Tribunal emphasized that Zelinsky failed to provide certain important evidence. For example, he failed to provide an employment contract stating that he was actually compensated for his days at home. According to the court, "the evidence does not demonstrate that [Zelinsky] was compensated for anything but his appearance at, and performance of duties in, New York City at the school as an instructor."

The court explained further, "We believe the school's position is critical because if [Zelinsky's] value to the school is his presence in the classroom, ... then [it is reasonable] to conclude that his three days in New York comprise 100% of the basis for his salary .... Allocation of the New York source income was not justified and should not have been made in a vacuum .... We believe it was just this type of arbitrary allocation the rule was meant to prohibit."

Further, Zelinsky failed to provide evidence that he actually paid any tax to Connecticut. Thus, he failed to provide evidence of double taxation.

Because the court considered that Zelinsky earned his salary entirely in New York where he taught - and because, as the ALJ had found, Zelinsky enjoyed the same benefits of New York employment as his in-state peers - the tax was sufficiently related to his business activities in New York. The court also agreed with the ALJ that the "convenience rule does not promote the interests of in-state employees over out-of-state employees - it merely puts them on an equal tax basis."

According to the court, Zelinsky was to blame for the threat of double taxation: He "unilateral[ly]" and voluntarily allocated his income to Connecticut, where he knew it would be subject to tax and where he knew he would receive no credit for taxes paid to New York.

The court also blamed Connecticut for the double taxation threat. It noted that New York had its tax policy in place at least as early as 1967. Connecticut enacted its income tax in 1991. Connecticut's refusal to provide its residents with a credit for taxes paid to another jurisdiction on income earned in Connecticut created the double taxation problem, the court said.

This argument has the ring of "They started it." Even if such an argument defeats a constitutional challenge - a matter likely to be the subject of continued debate - it does not render New York's policy sound. By holding fast to a rule that makes interstate telework too expensive for workers, New York is hurting its own businesses.

NESTOA'S Position on Telecommuting Tax Rules

The North Eastern State Tax Officials Association ("NESTOA") is an organization of tax administration agencies. Its members include New York and New York City, as well as two states with many New York commuters, Connecticut and New Jersey. (Members also include Delaware, D.C., Maine, Maryland, Massachusetts, New Hampshire, Pennsylvania, Rhode Island, Vermont, and Philadelphia.)

On September 24, NESTOA's Income Tax Working Group issued a report concerning telecommuting and allocation of personal income in its member states. The Working Group could not reach a unanimous decision on which allocation method to recommend. Moreover, the report made the disclaimer that, "in recommending a particular approach, [the Group] is not in any way implying that its methodology is the only correct way to allocate personal income between multiple taxing jurisdictions." But an "overwhelmingly majority of the Working Group," at least, did have a recommendation to make.

That majority recommended "that the Commissioners adopt a physical presence methodology for the allocation of salaries and wages of a non-resident individual rendering personal services as an employee based on where the personal services are actually rendered." In short, if New York adopted this approach, non-residents who work part-time at home for New York companies would not pay New York taxes on income earned on telework days - regardless of whether they telecommute for convenience or necessity.

New York should follow NESTOA's recommendation. Put simply, it should not tax non-resident telecommuters' income that they earn and owe taxes on elsewhere. To do so is to penalize such employees for helping to keep New York businesses alive, and in New York.


Nicole Belson Goluboff is the author of The Law of Telecommuting (ALI-ABA 2001), which concerns the legal implications of telework for employers and workers in all industries. The book covers the tax consequences of telework, as well as its labor and employment law implications, workplace safety, intellectual property, zoning, insurance and other legal areas telework affects. Ms. Goluboff is also the author of Telecommuting for Lawyers (American Bar Association 1998), which addresses why and how law offices should implement telework programs.

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