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The Carr case: New York is still the tax capital of the nation

Governor Andrew Cuomo says that he no longer wants New York to be “the tax capital of the nation.” The recent experience of Patrick J. Carr demonstrates the long distance New York must still travel to reach the governor’s goal.

Mr. Carr, an attorney, was a former New York resident who had moved to Florida. He remained a member of the New York bar but lived and maintained an office only in Florida.

When New York’s Department of Taxation and Finance audited Mr. Carr, the Department determined that, by virtue of his New York bar license, the income Mr. Carr earned in Florida providing legal representation was taxable to the Empire State. In Patrick J. Carr, administrative law judge Barbara J. Russo rejected the Department’s claim, concluding that Mr. Carr, a Florida resident, earned all of his income in Florida.

The good news is that Mr. Carr prevailed. The bad news is that New York’s Department of Taxation and Finance unnecessarily inflicted substantial cost on Mr. Carr, forcing him to defend himself against the Department’s unwarranted tax assessment.

Tax Analysts’ Cara Griffith labels the Department’s argument in Carr “ridiculous” and “contrary to state law.” She warns that Carr may signal that the Department “is getting more creative when attempting to impose income tax on residents that have moved out of” New York.

The Department’s position in Carr also flouted the Due Process clause of the US Constitution. Due Process forbids the kind of extraterritorial taxation of nonresidents the Department asserted against Mr. Carr, who lived in Florida, was no longer a resident of the Empire State and earned all of his income in Florida.

Carr is not an isolated case but, rather, reflects the determination with which the New York tax collector improperly seeks to export the costs of New York government onto nonresidents.

The litany of New York’s Carr-like litigation against nonresidents is long. Sometimes, the nonresident taxpayer, at great expense, convinces New York’s courts to curb the Department’s aggressive extraterritorial taxation. In Matter of Gaied v. New York State Tax Appeals Trib.the Department asserted that an individual who lived in New Jersey was taxable on his worldwide income as a New York resident because he owned a three-family apartment building on Staten Island and let his parents live in one of the building’s three apartments. This apartment, New York’s Court of Appeals ruled, was not Mr. Gaied’s “permanent place of abode in New York” because he did not live there.

The good news is that Mr. Gaied, like Mr. Carr, also eventually prevailed. The bad news is that Mr. Gaied had to take his case to New York’s highest court to reach the common sense outcome that the apartment used by his parents was not his home.

Other nonresident taxpayers have not been so fortunate. I am something of a poster boy for the Department’s projection of New York’s tax authority beyond its boundaries. The Department takes the position that nonresidents such as me owe New York income taxes on the days we work at our out-of-state homes and do not set foot in the Empire State. Though every independent commentator rejects as unconstitutional this extraterritorial taxation of nonresidents, New York’s courts have sustained the Department’s position.

Thus, the Department, bolstered by New York’s courts, holds that I must pay New York income tax on days I work at home in New Haven, Connecticut; that Thomas Huckaby owes New York income tax on days he works at his home in Nashville, Tennessee; and that Manohar Kakar must pay New York income tax on the days he works at his residence in Gilbert, Arizona.

Consider as well the case of John J. Barker. Mr. Barker lives with his wife and their three children in Connecticut. Mr. Barker commutes daily to Manhattan where he works as an investment manager. The Barkers bought a beach house in the “seasonal community” of Napeague, New York. The Barkers’ use of this beach home “was sporadic,” basically occurring on isolated weekends during the summer. For the Department and New York’s Tax Appeals Tribunal, this was enough to make Mr. Barker taxable as a New York resident.

Anyone who has experienced a New York tax audit, as a nonresident taxpayer or representing a nonresident taxpayer, understands that these cases are not aberrational. Rather, these cases reflect the Department’s fierce determination to tax nonresidents, regardless of constitutional or tax policy norms.

The Department’s behavior signals to those who live, work or invest in New York and those who contemplate living, working or investing in New York that, as far as the Department of Taxation and Finance is concerned, New York is an unwelcoming place.

Carr is the most recent manifestation of New York’s overly-aggressive and unconstitutional approach to nonresidents. As long as New York’s Department of Taxation and Finance behaves this way, New York will, despite Governor Cuomo’s protestations, continue to deserve its reputation as the “tax capital of the United States.”

Image Credit: “Tax Day, New York City” by Amit Gupta. CC BY NC 2.0 via Flickr.

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