New York Loses Bid to Tax CT Telecommuter

In a rare victory for a telecommuter in a “convenience of the employer” rule case, an administrative law judge has held against the state Division of Taxation and said New York has no business taxing all of the income of a man who worked from his home in New Canaan, CT.

Matter of C. Gregory Devers, 819751, illustrates that while the controversial test used to determine if out-of-state residents can allocate earnings between New York and another jurisdiction is a high hurdle, it is not insurmountable.

Reversal of Fortune

The administrative decision comes only 6 weeks after the Court of Appeals, in a 4-3 opinion, upheld a tax scheme that permits New York to tax 100% of the income of out-of-state residents who work for New York-based companies but perform their work out of state.

New York adheres to a tax policy that generates an estimated $100 million a year in revenue but, according to critics, jeopardizes the future of telecommuting in the state.

Under the convenience of the employer test, an employee of a New York firm who lives and works out of state must generally pay tax on his or her entire income. A taxpayer is permitted to allocate income only if he or she is working out of state because of the necessity of the employer. In other words, a telecommuter who works from home in, say, Memphis must pay full taxes on New York-source income unless required by the employer to work in Tennessee.

Last month, U.S. Sen. Christopher Dodd (D-CT) and Rep. Christopher Shays, (R-CT) re-introduced their Telecommuter Tax Fairness bill, which would bar states like New York from collecting income taxes on employees for work performed outside the state.

The same measure was introduced last year in response to the case of Edward Zelinsky, a tax law professor who teaches at the Benjamin N. Cardozo School of Law in Manhattan who frequently works from his home in Connecticut (see Matter of Zelinsky, 1 NY3d 85 [2003]). Zelinsky upheld the convenience of the employer test as it related to traditional commuters. In March, the Court of Appeals extended that rule to telecommuters in Matter of Huckaby, 8.

Passing the Test

The Devers matter involved a Connecticut resident, Gregory Devers, who worked for Winstar Wireless Inc., a telecommunications company that had been based in New York. In 1999, Winstar moved most of its functions to Virginia, but maintained a presence in Manhattan, from which Devers telecommuted to the Virginia office.

Later that year, Winstar advised Devers, then 63, that he had to either move to Virginia or work out of his home in New Canaan. Devers opted to telecommute and, from that point on, was a formal member of Winstar's Virginia technical group.

His pay stub and location code were changed to Virginia, his building pass to the Manhattan office was rescinded, and his desk at the Third Avenue location was given to someone else.

Winstar eventually went bankrupt, and Devers' employment with the company was terminated. Then New York State came after him for about $12,000 in taxes it said was owned for 1999.

Administrative Law Judge Brian L. Friedman acknowledged that “courts have generally upheld a strict standard of employer necessity where the residence is the workplace.” But he said this matter is different in that Devers really had no choice but to telecommute to Virginia and therefore met the test.

“Had he not accepted the relocation, petitioner would have been forced to move to Virginia (and pay all expenses associated therewith) or lose his employment altogether,” Friedman wrote.

In a rare victory for a telecommuter in a “convenience of the employer” rule case, an administrative law judge has held against the state Division of Taxation and said New York has no business taxing all of the income of a man who worked from his home in New Canaan, CT.

Matter of C. Gregory Devers, 819751, illustrates that while the controversial test used to determine if out-of-state residents can allocate earnings between New York and another jurisdiction is a high hurdle, it is not insurmountable.

Reversal of Fortune

The administrative decision comes only 6 weeks after the Court of Appeals, in a 4-3 opinion, upheld a tax scheme that permits New York to tax 100% of the income of out-of-state residents who work for New York-based companies but perform their work out of state.

New York adheres to a tax policy that generates an estimated $100 million a year in revenue but, according to critics, jeopardizes the future of telecommuting in the state.

Under the convenience of the employer test, an employee of a New York firm who lives and works out of state must generally pay tax on his or her entire income. A taxpayer is permitted to allocate income only if he or she is working out of state because of the necessity of the employer. In other words, a telecommuter who works from home in, say, Memphis must pay full taxes on New York-source income unless required by the employer to work in Tennessee.

Last month, U.S. Sen. Christopher Dodd (D-CT) and Rep. Christopher Shays, (R-CT) re-introduced their Telecommuter Tax Fairness bill, which would bar states like New York from collecting income taxes on employees for work performed outside the state.

The same measure was introduced last year in response to the case of Edward Zelinsky, a tax law professor who teaches at the Benjamin N. Cardozo School of Law in Manhattan who frequently works from his home in Connecticut (see Matter of Zelinsky, 1 NY3d 85 [2003]). Zelinsky upheld the convenience of the employer test as it related to traditional commuters. In March, the Court of Appeals extended that rule to telecommuters in Matter of Huckaby, 8.

Passing the Test

The Devers matter involved a Connecticut resident, Gregory Devers, who worked for Winstar Wireless Inc., a telecommunications company that had been based in New York. In 1999, Winstar moved most of its functions to Virginia, but maintained a presence in Manhattan, from which Devers telecommuted to the Virginia office.

Later that year, Winstar advised Devers, then 63, that he had to either move to Virginia or work out of his home in New Canaan. Devers opted to telecommute and, from that point on, was a formal member of Winstar's Virginia technical group.

His pay stub and location code were changed to Virginia, his building pass to the Manhattan office was rescinded, and his desk at the Third Avenue location was given to someone else.

Winstar eventually went bankrupt, and Devers' employment with the company was terminated. Then New York State came after him for about $12,000 in taxes it said was owned for 1999.

Administrative Law Judge Brian L. Friedman acknowledged that “courts have generally upheld a strict standard of employer necessity where the residence is the workplace.” But he said this matter is different in that Devers really had no choice but to telecommute to Virginia and therefore met the test.

“Had he not accepted the relocation, petitioner would have been forced to move to Virginia (and pay all expenses associated therewith) or lose his employment altogether,” Friedman wrote.