The continuing irrationality of New York’s “Convenience of the Employer” rule
By Edward Zelinsky
On Friday, 17 May 2013, two Metro-North commuter trains collided near Bridgeport, Connecticut. Through the following Tuesday, the Metro-North accident disrupted normal commuter train service between parts of Connecticut and New York City. To cope, Connecticut Governor Dannel Malloy asked residents of the Nutmeg State to work from their homes until rail service could be restored. New York’s long-standing policy of double taxing nonresident telecommuters penalized those Connecticut residents who complied with Governor Malloy’s request that they work at home until train service to the Big Apple could be restored.
Under New York’s “convenience of the employer” doctrine, the Empire State double taxes persons throughout the country on the days such persons perform work at their out-of-state homes for New York-based employers. New York thereby improperly projects its taxing authority beyond its borders throughout the nation. When an individual works at home, it is the home state, not New York, which provides public services to that individual. Most states (quite correctly) do not grant credits against their respective income taxes for the taxes New York assesses under the employer convenience rule.
In a typical case, New York imposed its income tax on Manohar Kakar for the days he worked at his home in Gilbert, Arizona. If, for example, Mr. Kakar needed police or EMT assistance on a day he worked at home in Arizona, it was Arizona, not New York, which would have provided such assistance. It is accordingly Arizona, not the Empire State, which had a legitimate claim to tax the income Mr. Kakar earned since it was Arizona which provided government benefits to Mr. Kakar on that work-at-home day. Nevertheless, New York, despite the persuasive criticism of independent commentators, insists on imposing its income taxes on the day a nonresident, like Mr. Kakar, works at his out-of-state home for a New York employer. New York thereby projects its taxing authority beyond its boundaries, indeed throughout the nation.
Consequently, Connecticut residents who work for New York employers and who heeded Governor Malloy’s call to work at home after the Metro-North accident will be penalized by double income taxation of their salaries allocable to those work-at-home days. Connecticut provided such residents with public services on those work-at-home days and thus will legitimately collect income taxes attributable to the income earned on those days. However, New York under the employer convenience banner will also assess income taxes on those days – even though the Connecticut residents who followed Governor Malloy’s advice to work at home did not set foot in New York on those days.
Governor Andrew Cuomo has commendably stated that New York should shed its problematic status as the tax capital of the United States. However, New York will retain that dubious distinction as long as New York persists in irrational tax policies like its double taxation of nonresident telecommuters on days such telecommuters work at home. It is questionable whether New York’s fiscal balance benefits from the employer convenience doctrine since that doctrine drives nonresidents to cut their ties to the Empire State to avoid tax on their telecommuting days. As a result, New York loses the taxes it could legitimately collect on the days these employees would actually have worked in New York.
Congress, under the Commerce Clause of the U.S. Constitution, could preclude New York’s use of its employer convenience rule to tax income earned outside of New York’s borders. Most recently, in the 112th Congress, Senators Blumenthal and Lieberman, along with Representatives DeLauro, Murphy and Himes, sponsored legislation (S. 1811, H.R. 5615) to preclude any state from taxing income earned outside the state’s borders. Such federal legislation is an overdue reaffirmation of the constitutional norm that states may only tax the economic activity which occurs within their respective borders. New York flouts that rule when it projects its taxing authority beyond its boundaries via the employer convenience rule by taxing individuals on the days they work at their out-of-state homes.
Adopting legislation takes time. In the meanwhile, Governor Cuomo should suspend New York’s enforcement of its double income tax policy for the days when Metro-North commuter train service was impaired. Even better, Governor Cuomo should implement his pledge to dethrone New York as America’s tax capital by repealing the irrational employer convenience rule altogether.
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.