By Edward Zelinsky
I may be losing my status as the poster boy for New York’s irrational income taxation of nonresidents. The recent decision of New York’s Tax Appeals Tribunal threatens to bestow this dubious honor upon Mr. John J. Barker.
As a law professor, I routinely commute from my home in New Haven, Connecticut to Manhattan where I teach my classes at the Cardozo Law School of Yeshiva University. On most days when I don’t teach, I work at home. Modern technology (e.g., the internet, email, legal databases like Lexis and Westlaw) allows me to research and write at my residence in Connecticut while staying in touch electronically with my Cardozo students and colleagues. Given its obvious benefits, such “telecommuting” is blossoming.
On days when telecommuting nonresidents like me work at our out-of-state homes, New York takes the irrational position that we are really working in the Empire State, though in fact we are outside New York’s borders. By the legal fiction known as the “convenience of the employer” doctrine, New York assesses income taxes for nonresident telecommuters’ work-at-home days – even though we do not set foot in New York on those out-of-state days. New York’s convenience of the employer doctrine typically results in double taxation on the days nonresident telecommuters work at their out-of-state homes.
When I challenged New York’s convenience of the employer rule as unconstitutional, I found myself in a prolonged and public controversy over New York’s irrational taxation of nonresident telecommuters. I ultimately lost my case in New York’s highest court.
John J. Barker of New Canaan, Connecticut now finds himself enmeshed in an equally convoluted controversy about New York’s self-destructive tax policies vis-a-vis nonresidents of the Empire State. Mr. Barker was an investment manager who commuted regularly from his home in New Canaan to his office in Manhattan for the years in question, 2002 through 2004. During these years, Mr. and Mrs. Barker had three young children. When not working at his Manhattan office, Mr. Barker was deeply involved in community activities in New Canaan. Mrs. Barker was a full-time mother, raising the Barker children in the Nutmeg State. New York concedes that the Barkers were domiciled in Connecticut from 2002 through 2004.
Nevertheless, New York insists that the Barkers were New York residents and owe a second, New York income tax on their investment income by virtue of the modest beach house the Barkers owned in Napeague, New York. The Barkers used this house for short, sporadic vacations. In 2002, for example, the Barkers used their small New York beach house five times for a total of only nineteen days. Mrs. Barkers’ parents used this beach house more regularly, both during the summer and throughout the rest of the year.
As a Connecticut resident who worked in the Empire State, Mr. Barker filed nonresident New York State income tax returns and paid New York State income taxes on the compensation he earned in Manhattan as an investment manager. On audit, New York’s Department of Taxation and Finance claimed that, by virtue of his beach house, Mr. Barker was a New York resident and thus owed New York tax on his investment income as well. Since Mr. Barker was a Connecticut resident for these years (he really lived in New Canaan), Mr. Barker properly paid Connecticut income tax on his investment income. New York, asserting that the Barkers were New York residents because of their modest and little-used vacation house, sought a second state tax on the Barkers’ investment income.
New York’s Tax Appeals Tribunal recently sustained this double tax. Even though the Barkers stayed at their small New York beach house for a handful of days each year, the Tribunal let the Department tax the Barkers as New York residents by virtue of their minimally-used vacation home.
The Barkers are not New York residents under any reasonable understanding of the term. They simply do not live in New York. Nevertheless, the Empire State taxes them like they do. While Mr. Barker should pay New York taxes on the salary he earns in Manhattan, there is no rational basis for New York to tax Mr. Barker’s investment income. Mr. Barker is a Connecticut resident.
Mr. Barker thus threatens to displace me as the poster boy for New York’s systematic overtaxation of nonvoting nonresidents.
The economic fallout from New York’s convenience of the employer doctrine is self-evident: Nonresident telecommuters sever their ties to the Empire State to avoid New York’s double taxation of the incomes they earn on the days such telecommuters work at their out-of-state homes. Similarly, the costs of the Tax Appeals Tribunal’s Barker decision have quickly manifested themselves as summer homes, like the Barkers’ modest house, have become tax liabilities to their owners.
New York’s tax policymakers have long been oblivious to the economic costs of such behavior. There are many reasons that New York has hemorrhaged population, capital, employment and businesses over the last three decades. Chief among these has been New York’s self-destructive tax policies.
Governor Andrew Cuomo has made a good start at reducing New York’s onerous tax burdens. In a particularly apt phrase, Governor Cuomo observes that New York cannot expect its economy to thrive as the “tax capital” of the United States.
The next stage in Governor Cuomo’s tax reform campaign should be to eliminate those irrational features of New York’s tax law which cause nonresidents to shun the Empire State. Abolishing the convenience of the employer doctrine and overturning Barker would be good places to start.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.