New York’s Convenience-of-Employer Test Stands on Wobbly Ground

Taxation of remote workers has long been a contentious issue, particularly between New York and two of its neighboring states, New Jersey and Connecticut. This friction has been growing since the onset of Covid-19 and stems from New York’s application of the misnamed “convenience of the employer” test.

Although New York courts have consistently upheld the convenience test, it remains susceptible to challenges based on the Commerce Clause and Due Process Clause, especially if a non-New York court ever takes up the issue.

Both New Jersey and Connecticut have enacted legislation in response to the convenience test, which could eventually result in a successful challenge to New York’s remote worker taxation policy.

Convenience Test

New York law generally dictates that a nonresident employee’s income from New York sources is calculated based on the ratio of workdays spent inside the state to total workdays spent anywhere.

However, the “convenience of the employer” test, or convenience test, provides a radical qualifier by adding that “any allowance claimed for days worked outside 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.”

The New York Department of Taxation and Finance considers any work performed out of state that could have been performed at the employer’s New York facility to be a New York workday.

New York courts condoned the convenience test by rationalizing that New Yorkers who work from home shouldn’t pay more taxes than other states’ residents who do the same. Furthermore, in Colleary v. Tully, the court rejected claims of the test’s unconstitutionality, emphasizing it upholds the tax apportionment rules by taxing income from services connected to New York but performed elsewhere to prevent tax evasion.

In Zelinsky v. Tax Appeals Tribunal, the court held that imposition of the convenience test to source 100% of the income of Cardozo Law School professor Edward Zelinsky to New York comported with both the Commerce Clause and Due Process Clause of the US Constitution. Rejecting Zelinsky’s challenge to the convenience test, the court found the Commerce Clause wasn’t implicated because Zelinsky’s employment was wholly within New York.

Zelinsky also argued that tax wasn’t fairly apportioned under the external consistency test. The court rejected his claim, stating he failed to demonstrate “that the income attributed to New York was in fact out of all appropriate proportion to the business transacted here.”

Rejecting Zelinsky’s Due Process Clause challenges, the court noted Zelinsky “purposefully avail[ed] [him]self of the benefits of an economic market in the forum [s]tate,” and that “an ample foundation to justify the tax is provided by the host of tangible and intangible benefits flowing directly and indirectly to petitioner from New York, the location of the law school that supplies his total relevant income.”

Constitutionality

Even though New York courts have consistently upheld the convenience test, it will continue to be vulnerable to constitutional challenges under the Commerce Clause and Due Process Clause, especially if a non-New York court ever decides on them.

New York’s convenience test taxing a nonresident’s income from personal services when such services are performed in other states raises external consistency test concerns. Although states can adopt different sourcing rules, such rules must fairly apportion income to the state. A rule that doesn’t fairly attribute an employee’s personal service income to the employee’s activities performed in a state would violate the principle that a state may not tax value earned outside its borders.

Implicit in this principle is that a rule denying a taxpayer the ability to apportion its income when a portion of that income is taxable in other states would be barred by the Commerce Clause. A right to a portion of the tax base is an important part of the fair apportionment requirement that New York courts evaluating the convenience test have previously either overlooked or ignored.

In Zelinsky’s case, the court ignored that teaching was only a portion of his duties. It hasn’t explained why interstate commerce isn’t implicated when a nonresident commutes across state lines to conduct economic activity, even when by choice. In the context of New York’s convenience test, it’s dubious that sourcing all income a nonresident derives from personal services performed in other states would withstand scrutiny and be found externally consistent.

The Due Process Clause restricts a state’s ability to tax income from interstate business to what is rationally related to values connected with the taxing state. This requirement, stemming from the Due Process Clause’s focus on territorial jurisdiction rather than the Commerce Clause’s concern with interstate burdens, implies a limitation on a state’s authority to tax all income of a nonresident whose services are provided outside the state.

While New York claims it offers benefits and protections that justify taxing a nonresident’s income, the employee’s home state also offers such benefits. This strongly suggests that New York’s convenience test attributing to the employer’s location all the nonresident employee’s income derived from personal services performed out of state isn’t rationally related to values connected with the taxing state.

Regional Counteroffensive

Following the US Supreme Court’s rejection of New Hampshire’s challenge against Massachusetts’ Covid-19 emergency telecommuting tax regulation, New Jersey and Connecticut have taken legislative steps to incentivize residents to contest similar tax rules from other states.

In July 2023, New Jersey enacted legislation establishing a reciprocal convenience test for residents of states with similar policies. The same legislation also created a framework to encourage residents to challenge New York’s convenience test. Successful challengers could receive a bonus credit equal to 50% of their New Jersey tax liabilities.

This law also seeks to recover lost tax revenue by mandating that New York residents employed by New Jersey-based companies remit income tax to the state, while earmarking $35 million in grants to incentivize companies to assign New Jersey-based employees to New Jersey locations.

Connecticut had previously adopted a reciprocal convenience test in 2019, and last month, Gov. Ned Lamont (D) unveiled his proposed budget for fiscal 2025, which includes incentives (apparently “inspired” by New Jersey’s efforts) for Connecticut residents to challenge New York’s convenience test.

Outlook

Despite these incentives, challenging New York’s convenience test presents considerable obstacles for individuals, primarily because of the resources needed for litigation.

The New York Court of Appeals’ stance—which hinges on the argument of not disadvantaging New Yorkers and asserts that the Commerce Clause isn’t relevant in this scenario—is difficult to reconcile. However, legislative efforts by other states against New York’s convenience test may spawn a new understanding by the relevant courts.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Arthur R. Rosen is counsel at McDermott Will & Emery, with focus on tax planning and litigation in state and local tax matters for corporations, partnerships, and individuals.

Michael J. Hilkin is partner at McDermott Will & Emery, with focus on tax controversy and transactional issues related to state and local income, franchise, sales and use, gross receipts, and other business taxes.

Jonathan C. Hague is an associate at McDermott Will & Emery, with focus on state and local tax controversies, compliance, and multistate planning opportunities.

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