As our regular readers know (all 7 of them), one of the bigger SALT issues to come out of COVID, especially in New York, relates to New York’s “Convenience of the Employer” rule. Under that rule, wages that a nonresident employee earns while working outside of New York State are treated as New York-sourced income if the employee is working from home for their New York employer for their own convenience. As we reported back in October 2020, several months into the pandemic the New York Tax Department announced its position that COVID-related telecommuting would have no impact on its application of the convenience rule. And as we experienced in a number of personal income tax audits after that, the Tax Department extended this position even to situations where an employer had closed its office in New York.
This, of course, seemed especially bizarre: if my employer wouldn’t allow me to come to work in the office and required me to work from home, how could it be said that I was working from home for my own convenience and not due to employer necessity?
Thus, not surprisingly, we started to see some litigation on this issue. Earlier this year, we reported on the Zelinsky case, where the taxpayer (a law professor who lives in Connecticut) took on the Tax Department’s attempt to apply the convenience rule to tax his wages from a New York law school, including for periods of time when the school was closed by order of the New York State Government. That case is set to be decided in early February 2024, and when it comes out, our readers will be the first to know!
But last week, the Division of Tax Appeals issued on Order on a different case that gives us an initial glimpse into some of the arguments we can expect to see. In Matter of Richter (DTA Order No. 850212), the Petitioner filed a motion for summary determination, claiming that New York’s tax assessment should be cancelled as a matter of law and without the need for a hearing because the Tax Department improperly applied the convenience rule to days the taxpayer worked at home when his New York City office was closed due to the COVID-19 pandemic. (Full disclosure: our firm represents the taxpayer in this case). The facts in the case are straight-forward: the taxpayer had moved from New York in 2020 and in determining the percentage of his wage compensation that was earned in New York after the move, he excluded his out-of-state remote workdays. He believed the convenience rule couldn’t apply because he was not working outside New York for his own convenience; he was working outside New York out of necessity, because his employer closed its New York office.
As noted, the taxpayer filed a motion for summary determination, and to prevail on such a motion, the moving party must show that there are no issues of material fact requiring a hearing or further fact-finding. And here, the Administrative Law Judge (“ALJ”) concluded that material and triable issues of fact existed, so the motion was denied, and a hearing will proceed on the merits of the case in due course.
But in this short Order, the Judge hinted at a view of the convenience rule that seems a bit inconsistent with how the rule has been applied in other cases. Examining the issue, the ALJ first noted that under New York’s regulations at 20 NYCRR 132.18(a), the convenience rule provides “any allowance claimed for days worked outside of New York State 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 service of his employer.” Based on this definition, the ALJ suggested that in order to prevail, the taxpayer would have to offer evidence showing that he was obligated to perform his work duties from North Carolina out of his employer’s necessity, “as opposed to any other place petitioner may have found convenient to live and work in during the COVID-19 pandemic”
But the suggestion here that the taxpayer needs to prove there was something special about North Carolina that necessitated his work there seems to go beyond what the regulation requires. As noted above, for out-of-state workdays to count, they must be based on the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties. So, for example, assume I live in New Jersey and work in New York, and during the pandemic my employer closed its New York City office. But, of course, my employer still required me to work, and for most employees, the mandate was to work from home. Indeed, many employers, like the employer in the Richter matter, assigned their employees to work from their home office. On those facts, since my home was out-of-state, and since my employer was not providing me (or any employee) a place to work inside New York State, from a practical perspective my employer was obligating me to perform my employment duties out-of-state. The regulation doesn’t go so far as to require me to show that there was something specific or special about my New Jersey home that necessitated me to work there. Instead, the regulation only requires me to show that I was obligated to out-of-state duties based on my employer’s necessity, not based on my own convenience.
Indeed, reading the regulation as broadly as the ALJ seems to would turn the convenience rule on its head. As courts have recognized in prior cases, the purpose of the convenience rule is to eliminate the “obvious potential for abuse” by nonresidents working from home for their own convenience (Matter of Kitman, 92 A.D.2d 1018, 1019 (N.Y. App. Div. 1983). But in my example above, I’m not working from home for my own convenience. I didn’t choose to stay home. I worked from New Jersey because my employer required that I work, and my employer didn’t provide me with any other location from which I could work. The fact is, I was working from home because my employer required me to do so.
Other cases likely throw shade on the ALJ’s initial reading of the regulation as well. In Matter of Myron Fass, for example, the Third Department held that the specialized work that an employee did from his home in New Jersey could not have been performed at his employer’s New York office, and therefore the employee worked at his New Jersey home for his employer’s necessity (Matter of Myron Fass, 68 A.D.2d 977, 978 (N.Y. App. Div. 1979) aff’d 50 N.Y.2d 932, 932 (1980)). In doing so, the court noted that the convenience rule only applies to situations where the services performed by an employee outside of New York could have been performed at the employer’s New York office, noting that the pivotal question is whether the work “just as easily could have been performed at the employer’s New York office.” Notably, the Fass court did NOT require evidence proving that the employer required Mr. Fass to work in New Jersey as opposed to any other place he may have found convenient to set up the necessary facilities allowing him to do his work. Instead, it held that he needed to (and did) provide evidence that he could not do the work in New York.
Applying that rationale to these COVID-19 convenience rule cases, courts should be asking whether the out-of-state work the employee was doing from their home could have been done in New York. And if the employee had no place to work in New York, either because the employer voluntarily shut its doors or the government did it for them, that should be sufficient evidence to prove that the employee could not do the work in New York, and therefore that the convenience rule cannot apply.