From TiNY: We interrupt our not-so-regularly-scheduled … umm … schedule for a special report by our court-watch correspondents: Open Weaver Banks and Tim Noonan. I’m sure all our readers are familiar with Open as a result of her recent article “Do cross border incursions by extraterrestrial drones implicate New Jersey Use Tax?” But you may not be so familiar with Tim since he tends to keep a low profile.
All kidding aside, Happy Holidays from TiNY! As a special holiday treat, here is Open and Tim’s take on the November oral argument before the Tax Appeals Tribunal in Matter of Zelinsky (with some parenthetical commentary by TiNY). Zelinsky may end up being one of the most important SALT cases addressing the unique SALT circumstances resulting from the COVID-19 pandemic, and Judge DiFiore’s determination against Petitioner may be found here. Professor Zelinsky knew of our firm’s interest in convenience rule disputes and was kind enough to share a copy of the transcript of the Tribunal argument.
For the uninitiated: The convenience rule generally requires that nonresident employees assigned to a New York workplace treat as New York source income all compensation for work performed in New York and all compensation for work performed outside of New York (e.g. from a home office) if that work was not compelled to be performed outside of New York by employer necessity as opposed to employee convenience. The rule is not statutory, but instead resides in an anachronistic regulation that hasn’t aged well, and certainly did not contemplate the proliferation of remote work employment relationships.
Professor Zelinsky, a Connecticut resident, teaches law at the Cardozo School of Law in Manhattan. During the height of COVID, the school locked-down the campus consistent with government directives. Because of the lockdown, the professor Zoom-lectured his students from his home and treated his compensation paid by the school for that remote lecturing as Connecticut source income.
From Open and Tim:
From the transcript it was obvious that the Tribunal commissioners appreciated the importance of the case. They were extremely active, asking lots of questions throughout and giving both sides extra time to make their points. Good on them for this; they certainly seem to appreciate that the case is a big deal.
First, the Tribunal Commissioners challenged both parties to explain how the words “necessity” and “convenience” should be defined in the context of the convenience regulation. These two terms are key to the convenience of the employer regulation, which provides that when a nonresident employee performs services within and outside New York, his compensation treated as being from sources outside New York “must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.” Here’s an excerpt highlighting this, where Tribunal President Kaiman posed a question to the Professor:
PRESIDENT KAIMAN:· If it is coming down to the definition of "necessity" and "convenience", certainly you make an argument that's fairly compelling, that it was necessary that you work somewhere else. And if home is in Connecticut, it was necessary that you work at home.· So that's established, so to speak.
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The question is . . . what "necessary" means under the tax laws that we're speaking about? Is necessity something different than that everyday usage of the word "necessary"? And is convenience also different?· It was actually convenient that you had a home somewhere outside -- that you had a home to go to that you could work out of, but you still operated under the rubric of a New York institution that was based in New York, that was for students who were attending a New York school, virtually as it was. And so wasn't that a matter of convenience that you were able to do that?· Again, it really comes down to the definitions or the application of the words "necessity" and "convenience".
This is an interesting question, but from our perspective, we think the analysis starts and ends with the first part of the question above, and that the Professor’s argument in that respect is indeed “fairly compelling.” He wasn’t working from home for his own convenience; he was working from home because it was necessary to do so. He had nowhere else to go.
The next part of the analysis in President Kaiman’s question dives into whether we should be interpreting the terms differently for tax purposes. Surely, it was “convenient” that the Professor had a home in another state where he could work. And it was also “convenient” that New York employees and employers had wonderful video-conferencing technology that allowed work and life to continue at least in a virtual way.
But this kind of analysis puts the operative terms in the wrong place; the regulation at issue doesn’t speak of “convenience” and “necessity” in this way. The legal question isn’t whether it was “convenient” that the Professor was able to work from home. The legal question is whether he was working from home for his own convenience. And given that the only reason the Professor was working from home was because his employer (and New York’s governor) told him he couldn’t work in his New York office, it seems to us that this is one of the easier legal questions to answer. (TiNY: It would have been great to have someone ask the question: “And where were the students during these Zoom lectures?” Because I am sure most of the students were at home too, and that many of the students’ homes were located outside New York).
The other point that came up a couple times, and that we think is a bit of a red herring, involves resident vs. nonresident taxation: if the Tribunal cancels the assessment, doesn’t this give the Professor a tax benefit during COVID that his Westchester-domiciled colleague in the office next door wouldn’t get? The answer, of course, is yes, because the Connecticut tax rate is slightly lower than New York’s. But when courts have weighed this resident vs. nonresident policy, they’ve done so in situations where the taxpayer had the option to work from home or not. For example, in the Professor’s first case back in 2003 (TiNY: Somewhere in his closet I am sure the professor has a T-shirt with a picture of Agency Building 1 and the legend “Been there. Done that.”), the Court of Appeals noted that because he chose to work from home, it made no sense for the state to “subsidize such personal convenience,” by allowing him “to avoid paying taxes that his colleagues who do that work at home in New York—or at the law school—pay.”
But in this new case—at least for the 2020 tax year—the facts are different since the Professor had no choice. He was forced to work from home because his New York office closed. For taxpayers like this, the State is not subsidizing their personal convenience, nor is it encouraging tax avoidance. In other words, if a nonresident employee is allowed a choice as to whether to work from home, then it makes sense to employ a policy that removes an extra tax incentive that a New York resident employee would not have. But if the employee has no choice in the matter, then it should not offend any kind of fair tax policy to allow a nonresident of New York to be taxed differently than a resident of New York. That kind of disparate taxation happens all the time and is merely a function of states having different tax rates.
So now … we wait. A decision from the Tribunal is expected in the spring of 2025.
From TiNY:
The way it is: The convenience rule may have made sense at some point as something other than a crass money grab by New York from nonresidents. But with the proliferation of remote-work arrangements, the rule manifests another impetus for employers to move their offices to another state. Not smart, New York.
