The physical aftermath of Storm Stella is now over. The tax aftermath of Storm Stella, however, has just begun.
How can a winter storm cause taxes? Because New York State, under its so-called “convenience of the employer” doctrine, subjects nonresidents to state income taxation on the days such nonresidents work at their out-of-state homes for their New York employers. Nonresident commuters, who worked from their out-of-state homes during Storm Stella, consequently owe income taxes to New York even though, on that snowy day, they did not set foot in New York.
For many commuters, New York’s extraterritorial taxation of nonresidents results in double state income taxation. Connecticut, for example, correctly imposes its income tax on its residents for the days these residents work at home in the Nutmeg State since, on a day when a Connecticut resident works at home, Connecticut and its municipalities provide public amenities such as fire and police services to these Connecticut residents working at home.
When a Connecticut resident works at home for a New York employer, neither state provides a credit for the taxes paid to the other. Consequently, the Connecticut resident who wisely worked at home during Storm Stella will pay income taxes to both Connecticut and New York – even though New York provided no public services to them on that work-at-home day.
As for other states, New York’s “convenience of the employer” doctrine unfairly causes the state of residence to subsidize New York. For example, a New Jersey commuter who worked at home during Storm Stella can take a credit against their New Jersey income taxes for the day she worked at home in the Garden State. By this credit, New Jersey’s treasury (and thus its taxpayers) effectively subsidize New York’s extraterritorial taxation of income earned across the border in the Garden State. New Jersey effectively surrenders income tax revenue on days when New Jersey, not New York, provides services to the New Jersey resident who works at her home.
For many commuters subject to New York’s double taxing “convenience of the employer” rule, the financial consequences of Stella lie in wait to appear on their 2017 state income tax returns.
Every independent legal commentator on New York’s “convenience of the employer” doctrine concludes that this doctrine violates the US Constitution, since, on the day a nonresident works at his out-of-state home, New York taxes income is earned outside its borders. When New York’s “convenience of the employer” doctrine was last tested in the courts, three judges of the Court of Appeals (New York’s highest court) agreed that New York’s extraterritorial taxation of income earned in other states is unconstitutional. Unfortunately, four of their colleagues ignored these compelling constitutional concerns under the Due Process and Commerce Clauses, and instead upheld New York’s taxation of nonresidents’ incomes earned at their out-of-state homes.
Governor Cuomo eloquently declares that he no longer wants New York to be the “tax capital of the United States.” The Governor’s commendable goal will remain beyond reach as long as New York unconstitutionally taxes nonresidents’ incomes on the days they work at their out-of-state homes.
At a minimum, Governor Cuomo should announce that New York will not assert income taxes against nonresident commuters who worked at home during the week of Storm Stella. More fundamentally, the Governor should instruct the New York Department of Revenue and Taxation to revoke the administrative regulation which promulgates the “convenience of the employer” rule and the extraterritorial taxation the rule causes.
Given the unlikelihood of Governor Cuomo pursuing either course, Congress should legislate, as it has in other similar instances to rationalize the system of interstate income taxation. In prior Congresses, senators and representatives concerned about New York’s extraterritorial taxation of nonresident telecommuters have introduced the Multi-State Worker Tax Fairness Act. If enacted into law, this legislation would forbid New York (or any other state) from taxing nonresidents on income earned working at their out-of-state homes.
In an age when telecommuting is a norm of the workplace, such federal legislation, if enacted into law, would sensibly forbid double state income taxation of the sort caused by New York’s overreaching beyond its borders. Storm Stella should now be a memory. Instead, for many commuters subject to New York’s double taxing “convenience of the employer” rule, the financial consequences of Stella lie in wait to appear on their 2017 state income tax returns.
Featured image credit: New York by Anthony Delanoix. Public domain via Unsplash.