If you're a New Yorker and you spend a day working from home - or Times Square - New York may want to know.
Photo by Eje Gustafsson.New York has earned a reputation for making life miserable for individuals who work there but live, or claim to live, elsewhere. Now the state has dreamed up a way to let some of its own most successful residents share the pain.
If this sounds like a peculiar way to show that “New York is open for business!”, as its current advertising slogan proclaims, all I can say is that I agree with you. And it could be a spectacularly self-defeating way for the state’s Department of Taxation and Finance, playing the role of the high inquisitor, to raise revenue for the state’s coffers.
Side note to Govs. Chris Christie of New Jersey and Dannel Malloy of Connecticut: Although New York’s revenooers are technically targeting New Yorkers for special handling, it is really your treasuries that are in their crosshairs. If you return fire, New York may figure out that it has a lot more to lose than to gain. Then again, considering Albany picked this fight in the first place, it may not. To quote another New York slogan, this one from the state lottery: “You never know.”
I became aware of New York’s new tactic because it was directed at one of my firm’s clients. This individual lives in Manhattan, where he pays New York state and city income taxes, but works as a senior executive for a company in Connecticut. His employer gives him a Form W-2 that reports all his income as earned in Connecticut. He files tax returns in Connecticut, where he pays taxes only on his salary as a nonresident, and in New York, where he is taxed on his salary and on all his other income. New York gives him a credit for the Connecticut taxes he pays, which avoids double taxation, as is standard procedure everywhere there is a state income tax.
The New York tax department recently contacted him and asked for a breakdown of all the days he actually worked in Connecticut in the years 2012, 2013 and 2014, as well as the days he worked outside that state, such as on business trips or if he worked from home. This, too, would be standard procedure if the individual were a New York nonresident. Since a nonresident only owes tax on the share of income he earns within another state, places like New York typically want to make sure the nonresident is not shortchanging them by understating the share of taxable income earned within their borders.
But our client is a New York resident. He already declares all his income to New York, no matter where it is earned. Though I was incredulous at the logic, New York’s objective was clear: It wanted to find that he was not entitled to a New York credit for taxes paid to Connecticut on all of his salary because not all of it was earned there. Some of it would be deemed to be earned elsewhere if he had even one workday outside that state. Since he is a top executive who has a high income, even a partial disallowance of the credit could mean more revenue for New York.
All of this is technically correct, and none of it reflects any change in longstanding tax principles. But in nearly 30 years of tax practice I have never seen a state take this audit approach with one of its residents. And if I were going to see it, I would not have expected New York to be the state making the first move, because it probably has more to lose with this approach than any other place in the nation.
Why? Because New York has an enormous number of highly paid executives, professionals and financiers who live in neighboring jurisdictions - that’s you, Connecticut and New Jersey - and who commute to Manhattan to work. It has a much smaller number of people in my client’s situation. That is why my client’s travel pattern is known all over the metropolitan region as a “reverse commute.”
If New York determines that not all of my client’s compensation was earned in Connecticut, he is not going to pay double taxes on that income. He is going to file an amended return in Connecticut, report the allocation of income away from that state, and ask for a refund. New York’s gain will be Connecticut’s loss.
And if New York determines that my client earned income in some other state that has an income tax, perhaps because he may have spent a few days attending meetings in, say, California, New York may not necessarily gain any revenue for those days. My client might decide to file a California return, pay the tax there and claim a credit (to which he would be clearly entitled) in New York for the California tax. If California’s tax on that income is higher than Connecticut’s, New York would have to grant my client the increased credit, and the state would actually lose money because of the change.
The only situations in which New York would clearly gain - albeit at Connecticut’s expense - would be for income that is deemed to have been earned during travel abroad, or in states like Texas and Florida that do not have an income tax, or in states that have a lower tax rate than Connecticut’s.
But here’s the thing: Nonresident executives and professionals based in New York travel for business, too. They earn a lot of money, just like my client. And there are a lot more of them than there are people in my client’s situation. So if New Jersey and Connecticut decide to apply the same techniques to their residents that New York is using with my client, someone in Albany is going to end up pretty embarrassed.
For that matter, I can only imagine the conversation that would ensue if the blunt-spoken Christie were to call New York’s Andrew Cuomo for a little governor-to-governor chat about the situation. New Jersey’s chief executive is currently occupied with some goings-on in New Hampshire, but that distraction will be over pretty soon.
Not that I think Cuomo has anything to do with New York’s recent gambit. He is way smarter than that, and if anyone had bothered to ask the famously hands-on governor about this idea, I have a strong suspicion he would have seen the problems with it and told them to stand down.
Should an executive who travels for business file returns in each and every state that taxes wages in which she or he performs any work ? If the numbers involved are large enough, the technical answer is yes. And if New York and other states are going to proceed this way, it is probably how things will work in the future. But it is not a very useful or practical approach, which is why most executives have not conducted themselves this way in the past, nor have most states challenged them when the fraction of workdays in their jurisdiction is small. (If you are a consultant or other employee who spends extended periods in another state, you should already be filing there, and most probably are.)
What are the problems with filing everywhere? First, there is the cost of preparing those extra returns, which is not insignificant because states’ tax rules vary widely, though senior executives can clearly afford to get their taxes professionally done. Yet it hardly makes economic sense when the compliance costs are close to, or even more than, the taxes in question.
Second, each return can generate follow-up questions or exams from states that want to make sure they are not being shortchanged. Even if you are scrupulous about tracking your time and allocating your income, it is time-consuming and expensive to deal with those exams. If you are a high-paid executive, you may have plenty of money but you generally don’t have plenty of time to spend on tax audits. Plus, states may be confused when an individual files only sporadically because she travels to their jurisdiction in some years but not others. It makes it appear that some returns have been incorrectly skipped.
Finally, what constitutes a workday nowadays, especially for a top executive who is pretty much always on the job? New York and other states still use the traditional approach of counting workdays by excluding weekend days, holidays and other presumably non-working time. How quaint. But if we really are going to be technical, then every day is a workday for a lot of high earners, and everyone has to account for all their time in pretty much every place they spend any of it.
I know I already used the word “finally,” but since we are talking about New York taxes, there has to be one more weird angle - and so there is. It is New York’s unique “convenience of the employer” rule, which neither the U.S. Supreme Court nor Congress has gotten around to striking down. Under this rule, if a Connecticut resident has an office in New York but works at home, New York arbitrarily deems this to be a day worked in New York unless the out-of-state work is for the convenience of the employer, which it basically never is. New York does not only apply this rule to residents of neighboring states; it applies it to residents of places like Florida and Tennessee, too.
Under this rule, New York would have to deem a day my client worked at home as having been worked in Connecticut, and thus eligible for a credit for Connecticut taxes paid. Will the state apply its rule in this even-handed way, or is it a heads-we-win-tails-you-lose offer that applies only to nonresidents of New York? I don’t know, because my client has not had to take this position with the auditor. But somebody else’s client is bound to do so. Stay tuned.
Finally - again - New York set one more trap for my client. Just weeks after asking for the 2012 data, the state requested my client waive the statute of limitations for that audit. But my client would risk having Connecticut’s statutory period close for requesting a refund in that state, though in some cases it is possible to make a so-called protective refund claim. An unrepresented taxpayer would probably have granted the auditor’s waiver request, failing to recognize the potential deadline trap in Connecticut. But my colleagues, as is our standard practice, refused. We told the auditor to finish the audit within the statutory period (auditors hate when this is demanded), and we provided the requested information within 48 hours.
So look sharp, Connecticut and New Jersey, and kudos to you folks in New York’s tax department. It should be interesting to see how raiding your neighboring states’ finances and making some of your most successful citizens miserable works out for you.
Posted by Larry M. Elkin, CPA, CFP®
If you're a New Yorker and you spend a day working from home - or Times Square - New York may want to know.
Photo by Eje Gustafsson.
New York has earned a reputation for making life miserable for individuals who work there but live, or claim to live, elsewhere. Now the state has dreamed up a way to let some of its own most successful residents share the pain.
If this sounds like a peculiar way to show that “New York is open for business!”, as its current advertising slogan proclaims, all I can say is that I agree with you. And it could be a spectacularly self-defeating way for the state’s Department of Taxation and Finance, playing the role of the high inquisitor, to raise revenue for the state’s coffers.
Side note to Govs. Chris Christie of New Jersey and Dannel Malloy of Connecticut: Although New York’s revenooers are technically targeting New Yorkers for special handling, it is really your treasuries that are in their crosshairs. If you return fire, New York may figure out that it has a lot more to lose than to gain. Then again, considering Albany picked this fight in the first place, it may not. To quote another New York slogan, this one from the state lottery: “You never know.”
I became aware of New York’s new tactic because it was directed at one of my firm’s clients. This individual lives in Manhattan, where he pays New York state and city income taxes, but works as a senior executive for a company in Connecticut. His employer gives him a Form W-2 that reports all his income as earned in Connecticut. He files tax returns in Connecticut, where he pays taxes only on his salary as a nonresident, and in New York, where he is taxed on his salary and on all his other income. New York gives him a credit for the Connecticut taxes he pays, which avoids double taxation, as is standard procedure everywhere there is a state income tax.
The New York tax department recently contacted him and asked for a breakdown of all the days he actually worked in Connecticut in the years 2012, 2013 and 2014, as well as the days he worked outside that state, such as on business trips or if he worked from home. This, too, would be standard procedure if the individual were a New York nonresident. Since a nonresident only owes tax on the share of income he earns within another state, places like New York typically want to make sure the nonresident is not shortchanging them by understating the share of taxable income earned within their borders.
But our client is a New York resident. He already declares all his income to New York, no matter where it is earned. Though I was incredulous at the logic, New York’s objective was clear: It wanted to find that he was not entitled to a New York credit for taxes paid to Connecticut on all of his salary because not all of it was earned there. Some of it would be deemed to be earned elsewhere if he had even one workday outside that state. Since he is a top executive who has a high income, even a partial disallowance of the credit could mean more revenue for New York.
All of this is technically correct, and none of it reflects any change in longstanding tax principles. But in nearly 30 years of tax practice I have never seen a state take this audit approach with one of its residents. And if I were going to see it, I would not have expected New York to be the state making the first move, because it probably has more to lose with this approach than any other place in the nation.
Why? Because New York has an enormous number of highly paid executives, professionals and financiers who live in neighboring jurisdictions - that’s you, Connecticut and New Jersey - and who commute to Manhattan to work. It has a much smaller number of people in my client’s situation. That is why my client’s travel pattern is known all over the metropolitan region as a “reverse commute.”
If New York determines that not all of my client’s compensation was earned in Connecticut, he is not going to pay double taxes on that income. He is going to file an amended return in Connecticut, report the allocation of income away from that state, and ask for a refund. New York’s gain will be Connecticut’s loss.
And if New York determines that my client earned income in some other state that has an income tax, perhaps because he may have spent a few days attending meetings in, say, California, New York may not necessarily gain any revenue for those days. My client might decide to file a California return, pay the tax there and claim a credit (to which he would be clearly entitled) in New York for the California tax. If California’s tax on that income is higher than Connecticut’s, New York would have to grant my client the increased credit, and the state would actually lose money because of the change.
The only situations in which New York would clearly gain - albeit at Connecticut’s expense - would be for income that is deemed to have been earned during travel abroad, or in states like Texas and Florida that do not have an income tax, or in states that have a lower tax rate than Connecticut’s.
But here’s the thing: Nonresident executives and professionals based in New York travel for business, too. They earn a lot of money, just like my client. And there are a lot more of them than there are people in my client’s situation. So if New Jersey and Connecticut decide to apply the same techniques to their residents that New York is using with my client, someone in Albany is going to end up pretty embarrassed.
For that matter, I can only imagine the conversation that would ensue if the blunt-spoken Christie were to call New York’s Andrew Cuomo for a little governor-to-governor chat about the situation. New Jersey’s chief executive is currently occupied with some goings-on in New Hampshire, but that distraction will be over pretty soon.
Not that I think Cuomo has anything to do with New York’s recent gambit. He is way smarter than that, and if anyone had bothered to ask the famously hands-on governor about this idea, I have a strong suspicion he would have seen the problems with it and told them to stand down.
Should an executive who travels for business file returns in each and every state that taxes wages in which she or he performs any work ? If the numbers involved are large enough, the technical answer is yes. And if New York and other states are going to proceed this way, it is probably how things will work in the future. But it is not a very useful or practical approach, which is why most executives have not conducted themselves this way in the past, nor have most states challenged them when the fraction of workdays in their jurisdiction is small. (If you are a consultant or other employee who spends extended periods in another state, you should already be filing there, and most probably are.)
What are the problems with filing everywhere? First, there is the cost of preparing those extra returns, which is not insignificant because states’ tax rules vary widely, though senior executives can clearly afford to get their taxes professionally done. Yet it hardly makes economic sense when the compliance costs are close to, or even more than, the taxes in question.
Second, each return can generate follow-up questions or exams from states that want to make sure they are not being shortchanged. Even if you are scrupulous about tracking your time and allocating your income, it is time-consuming and expensive to deal with those exams. If you are a high-paid executive, you may have plenty of money but you generally don’t have plenty of time to spend on tax audits. Plus, states may be confused when an individual files only sporadically because she travels to their jurisdiction in some years but not others. It makes it appear that some returns have been incorrectly skipped.
Finally, what constitutes a workday nowadays, especially for a top executive who is pretty much always on the job? New York and other states still use the traditional approach of counting workdays by excluding weekend days, holidays and other presumably non-working time. How quaint. But if we really are going to be technical, then every day is a workday for a lot of high earners, and everyone has to account for all their time in pretty much every place they spend any of it.
I know I already used the word “finally,” but since we are talking about New York taxes, there has to be one more weird angle - and so there is. It is New York’s unique “convenience of the employer” rule, which neither the U.S. Supreme Court nor Congress has gotten around to striking down. Under this rule, if a Connecticut resident has an office in New York but works at home, New York arbitrarily deems this to be a day worked in New York unless the out-of-state work is for the convenience of the employer, which it basically never is. New York does not only apply this rule to residents of neighboring states; it applies it to residents of places like Florida and Tennessee, too.
Under this rule, New York would have to deem a day my client worked at home as having been worked in Connecticut, and thus eligible for a credit for Connecticut taxes paid. Will the state apply its rule in this even-handed way, or is it a heads-we-win-tails-you-lose offer that applies only to nonresidents of New York? I don’t know, because my client has not had to take this position with the auditor. But somebody else’s client is bound to do so. Stay tuned.
Finally - again - New York set one more trap for my client. Just weeks after asking for the 2012 data, the state requested my client waive the statute of limitations for that audit. But my client would risk having Connecticut’s statutory period close for requesting a refund in that state, though in some cases it is possible to make a so-called protective refund claim. An unrepresented taxpayer would probably have granted the auditor’s waiver request, failing to recognize the potential deadline trap in Connecticut. But my colleagues, as is our standard practice, refused. We told the auditor to finish the audit within the statutory period (auditors hate when this is demanded), and we provided the requested information within 48 hours.
So look sharp, Connecticut and New Jersey, and kudos to you folks in New York’s tax department. It should be interesting to see how raiding your neighboring states’ finances and making some of your most successful citizens miserable works out for you.
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