Intellectual Property Law

state terrorism -- new york's tortured theory for taxing telecommuters

By Obi

[blogger's disclaimer: the techlawyer is embroiled in a tax dispute with new york as i write this, in which the state claims to be able to tax moneys earned over a three year period pursuant to an agreement that required no performance whatsoever in new york except during the first 6 weeks of the agreement.  it's not  a telecommuting dispute, but raises similar constitutional issues.]

poor thomas huckaby.  he was living in tennessee, happy as you please, writing software for the national organization of industrial trade unions (noitu), when the long arm of the new york state department of taxation of finance knocked on his door, figuratively speaking, and demanded that he start, effective with two years in the past, sending money to that state's treasury representing the new york tax on 100% of his income.

i wasn't there at the time, but i can imagine huckaby's surprise.  a good citizen, huckaby had been filing new york state tax returns on which he allocated taxes to new york in proportion to the days he spent in the state.  this is normal taxpayer behavior, engaged in by taxpayers all over the country who often visit other states on business.  well, not all such taxpayers, no doubt, but those like sports figures or lawyers in high-profile cases, whose visibility makes them vulnerable to challenge.

huckaby's contract with noitu required him to be in new york about 25% of the time; otherwise he worked in his home state of tennessee, and had also worked there before being hired by noitu.  the conventional wisdom was that he should have allocated a quarter of his noitu earnings to new york, and indeed that is what he did.

unfortunately, this taxpayer was not conversant with full, horrific reach of new york state's convenience test".  under this test, an employee of a new york state employer who works outside the state part of the time  must pay new york income tax on the time worked out of state unless the time was spent out-of-state due to the necessity of the employer rather than for the employee's own convenience.

in a 2003 case, the new york state court of appeals had applied the "convenience test" to a professor who lived in connecticut but taught at cardozo law school in new york city.  the court noted that, under u.s. supreme court precedent, a tax will pass constitutional muster if it is "applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State".   the professor challenged the "fair apportionment" prong of this rule.  "Fairly apportioned", the court said, means (1) that if every state imposed the same kind of tax, no double taxation would result, and (2) the tax doesn't reach beyond the value  "fairly attributable to economic activity within the taxing state."  the court found that prof. zelinsky received benefits "every day" from new york: an employment opportunity and an office; a salary on every day that he works, which he could earn entirely within the state if he so chooses; his scholarly writings, drafted at home, attach prominence to his position as a professor at cardozo; police, fire and emergency health services, and public utilities (presumably of value because they keep the school open every day in the event the professor wanted to visit).

huckaby likely thought that someone from an adjacent state, with an office in new york and responsibility to be in new york to perform the primary function of his work, who chose to do paperwork at home to avoid a day's commute (and take advantage of the lower connecticut income tax rate)  was vulnerable to taxation  while he -- as a resident of a stat 900 miles distant who occasionally traveled to his employer's head office in new york -- could not possibly be fit into the zelinsky box.

famous last words. 

the d.t.f. offers two levels of administrative appeal.  huckaby lost in both venues.  he then took his case into the court system by appealing to the supreme court, appellate division.  he lost there, too.  this should have been no surprise since  in none of the dozens of appellate division appeals of deficiency notices in the past 7 years (i lost interest in counting after that time) has the appellate division ruled for the taxpayer.   

finally, huckaby appealed to the highest court in the state, the new york court of appeals.  that court's record over the past 7 years shows two losses for the taxpayer and one win.  the win, however, came only after  the u.s.supreme court shoved a prior ruling against the taxpayer down the court of appeals' throat.

in his case, huckaby persuaded 3 of the court of appeals judges.  unfortunately, he failed to persuade the other 4, who ruled that a 25% presence in new york was a sufficient basis for concluding that taxing 100% of huckaby's income was fair in light of "'host of tangible and   intangible protections, benefits and values' New York provided to the taxpayer".

in other words, the tighter nexus of zelinsky to new york state is brushed aside and all that matters is time spent in the state.  this may strike you as an outrage, particularly if you are a telecommuter to new york.  if so, you may want to consider joining the telework coalition, which is determined to prevent double taxation of teleworkers.  huckaby claims to be taking his case to the u.s. supreme court, which declined to hear the zelinsky case. amicus briefs would doubtless be welcomed.

Full post as published by TechLawyer on May 21, 2005 (boomark / email).