Remote work, a pandemic-era novelty that has become a permanent option for many people, has some employees of New York companies in Connecticut and New Jersey wondering why they still have to pay personal income taxes in the Empire State.
Their home states are wondering, too.
New Jersey is tired of losing hundreds of millions of dollars in tax revenue every year. now offers State tax credit for residents who work from home and successfully appeal a New York State tax assessment. Connecticut is considering a similar measure.
The Garden State’s award — a rebate worth roughly half of the income tax refund a person paid to New York for the 2020-2023 period — has so far been claimed by one successful plaintiff since the state made the offer in July, according to state data . Taxation department. This taxpayer received a refund of $7,797.02 for his efforts. Officials hope the man’s windfall will encourage others to follow his example.
Another New Jersey resident taking up the state’s offer is Open Weaver Banks, a tax lawyer who would rather work from home than endure the “horrible” trip to the Big Apple. She also filed one of a growing number of similar challenges.
“The refund and appeal process doesn’t scare me that much,” said Banks, a tax partner at Hodgson Russ LLP. “I’m on Team New Jersey here. I wish more residents would do this. I think they have a really fair point.”
New York requires out-of-state commuters who work for New York businesses to pay New York state income taxes even if they stop physically going to the office most days of the week, unless they can meet very strict requirements regarding what constitutes a bona fide home office.
For example, a home office near a dedicated new car testing track may qualify if it cannot be replicated in New York City. But a worker who has specialized scientific equipment installed at home that can be duplicated abroad will still have to pay, according to memorandum from the New York State Department of Taxation.
As the nature of work changed in 2020, Banks said, New York should have “relaxed” those requirements. “And they didn’t. They just stand on the sidelines and fight the claims.”
Both neighboring states have enacted retaliatory tax rules that affect New Yorkers who work remotely for companies in Connecticut or New Jersey, but those workforces are much smaller and their overall tax payments don’t make up the difference.
Out-of-state taxpayers paid New York nearly $8.8 billion in taxes in 2021, representing roughly 15% of the state’s total income tax revenue, according to the New York Citizens Budget Commission. Of that, $4.3 billion came from New Jersey taxpayers and $1.5 billion from Connecticut taxpayers.
It is unclear how much of this amount was earned at home. But employees of New York companies who work remotely are increasingly appealing their tax bills, Amanda Hiller, acting commissioner and general counsel of the New York Department of Taxation and Finance, recently told state lawmakers.
Hiller acknowledged that New York’s decades-old policy, known as the “employer convenience rule,” has created a financial burden on New Jersey and Connecticut, which provide tax breaks for their residents to pay income taxes they paid to New York. they are not subject to double tax.
The New Jersey Department of Revenue has said the state’s long-term goal is to eliminate New York’s rules entirely, which would likely require a taxpayer lawsuit to succeed in the U.S. Supreme Court. This could be a tricky task: New Hampshire tried to sue Massachusetts for temporarily levying income taxes on about 80,000 of its residents who were working from home during the pandemic, and The Supreme Court rejected the complaint no comments.
New Jersey officials estimate it could raise up to $1.2 billion a year if residents working from home for New York companies are taxed at home. Connecticut could recover about $200 million, its officials say.
Connecticut Gov. Ned Lamont has proposed an initiative similar to New Jersey’s, which requires final legislative approval. However, it is unclear whether it can be adopted before the end of the session on May 8.
“We believe this is an unconstitutional overreach by New York State,” Jeffrey Beckham, secretary of the Connecticut State Budget Office, said recently. “We believe our residents should pay us a tax, and they will pay a lower rate.”
Indeed, the top marginal state income tax rate as of January 1 for individuals in New York is 10.90%. Connecticut’s top rate is 6.99% and New Jersey’s is 10.75%, according to the Tax Foundation.
“These laws hurt so many people,” said Edward Zelinsky, a Connecticut resident, tax law expert and professor at Cardozo School of Law at Yeshiva University in New York. “While New York and other states like to pretend it’s rich people, the people who suffer the most from this rule are people with modest or moderate incomes, people who can’t afford lawyers.”
Zelinsky has been trying unsuccessfully for nearly 20 years to challenge a New York tax rule, including a pending case over income he earned working from home while his school was closed due to COVID-19 restrictions.
A small number of states, including Arkansas, Delaware, Nebraska and Pennsylvania, have tax rules similar to New York’s. New Jersey and Pennsylvania have a reciprocal income tax treaty.
Andrew Sidamon-Eristoff, who is in the unique position of being the former New Jersey State Treasurer and former New York State Commissioner of Taxation and Finance, believes that ultimately the right plaintiff will “get the case before the right court to argue it.”
But former New Jersey state Sen. Stephen Oroho, an accountant who commuted to New York for nearly two decades and who as a lawmaker pushed to address inequality, said he is skeptical of New Jersey’s commitment to the effort, which he blames the financial burden of potentially lengthy and costly litigation on the individual taxpayer.
“New York is very, very aggressive, and unfortunately, in my opinion,” Oroho said, “New Jersey has been extremely passive.”