New Jersey Encourages Remote Workers to Challenge New York Tax Assessments

Telecommuting, a pandemic-era novelty that has become a permanent alternative for many people, has left some Connecticut and New Jersey employees of New York-based corporations wondering why they are still required to pay personal income tax to the Empire State.

Their home states are also wondering.

Fed up with losing hundreds of millions of dollars in tax income each year, New Jersey is now providing a state tax credit to residents who work from home and successfully appeal their New York tax assessment. Connecticut is exploring a similar proposal.

The Garden State’s jackpot — a rebate equal to about half of a person’s return of income taxes paid to New York for the 2020-2023 period — has been claimed by one successful litigant since the state made the offer in July, according to the Division of Taxation. The taxpayer received a $7,797.02 reimbursement for their efforts. Officials hope that the individual’s fortune will inspire others to follow suit.

Another New Jersey resident who is taking advantage of the state’s offer is Open Weaver Banks, a tax attorney who prefers working from home to enduring an “awful” drive to the Big Apple. She has also filed one of an increasing number of comparable challenges.

“The process of doing the refund and the appeal isn’t all that intimidating to me,” said Banks, a Hodgson Russ LLP tax partner. “I’m on the New Jersey team here. I’d want to see more residents do this. I think they have a very valid point.”

Out-of-state commuters who work for New York-based companies must pay New York income taxes, even if they no longer physically come into the office most days of the week unless they meet very tight conditions for what constitutes a bona fide home office.

A home office near a specialized track for testing new automobiles, for example, may qualify if it cannot be recreated in New York. However, a worker with sophisticated scientific equipment at home that could be copied across the border would still be required to pay, according to a memorandum from the New York State Department of Taxation.

When the nature of labor changed in 2020, Banks believed New York should have “softened” these standards. “And they didn’t. They are simply standing by and challenging the claims.

Both adjacent states have established “retaliatory” tax policies that penalize New Yorkers who work remotely for Connecticut or New Jersey-based enterprises; but, these workforces are significantly smaller, and their aggregate tax payments do not compensate.

According to the Citizens Budget Commission of New York, out-of-state taxpayers paid over $8.8 billion in taxes to the state in 2021, accounting for roughly 15% of total income tax collections. New Jersey taxpayers contributed $4.3 billion, while Connecticut taxpayers contributed $1.5 billion.

It’s not known how much of that was earned at home. Out-of-state employees of New York-based companies who work remotely are increasingly appealing their tax bills, according to Amanda Hiller, the acting commissioner and general counsel for the New York Department of Taxation and Finance, who spoke to state senators recently.

Hiller recognized that New York’s decades-old policy, known as the “convenience of the employer rule,” has created a financial hardship for New Jersey and Connecticut, which provide tax credits to their people for income taxes paid in New York, preventing them from being doubly taxed.

According to New Jersey’s Division of Taxation, the state’s long-term goal is to have New York’s rule completely overturned, which will most likely require a taxpayer to file a legal challenge before the United States Supreme Court. That might be a tall order: New Hampshire attempted to sue Massachusetts for temporarily collecting income taxes from around 80,000 of its people who worked from home during the pandemic, but the Supreme Court dismissed the complaint without comment.

New Jersey officials believe that if citizens who work from home for New York corporations are taxed at home, the state may earn up to $1.2 billion each year. Connecticut officials estimate that they might reclaim roughly $200 million.

Connecticut Gov. Ned Lamont has suggested a similar plan to New Jersey’s, which requires final legislative approval. It’s unclear, however, whether it will pass before the session closes on May 8.

“We think it’s an unconstitutional overreach by the state of New York,” Jeffrey Beckham, secretary of Connecticut’s state budget office, recently stated. “We think our residents should paying tax to us and they’d be paying at a lower rate.”

Indeed, as of January 1, the top marginal state income tax rate for people in New York was 10.90%. According to the Tax Foundation, the top rates in Connecticut and New Jersey are 6.99% and 10.75%, respectively.

“An awful lot of people are hurt by these laws,” said Edward Zelinsky, a Connecticut resident, tax law expert, and professor at Yeshiva University’s Cardozo School of Law in New York. “While New York and other states like to pretend that these are wealthy people, the people who are most hurt by this rule are often people of modest income, middle income, people who can’t afford lawyers.”

Zelinksy has attempted, but failed, to challenge New York’s tax regulation for nearly 20 years, including a pending litigation involving the revenue he made working from home when his school was closed due to COVID-19 restrictions.

A few states, including Arkansas, Delaware, Nebraska, and Pennsylvania, have tax regulations identical to New York’s. New Jersey and Pennsylvania have a reciprocal income tax agreement. Andrew Sidamon-Eristoff, a former New Jersey state treasurer and New York commissioner of taxation and finance believes that the appropriate plaintiff will “get it before the right court to challenge it.”

However, former New Jersey state Sen. Steven Oroho, an accountant who commuted to New York City for nearly two decades and pushed as a legislator to address the inequity, is skeptical of the state’s commitment to the effort, which places the financial burden of a potentially lengthy and expensive legal challenge on the individual taxpayer.

“New York is very, very aggressive and unfortunately, in my view,” Oroho went on to say, “New Jersey has been extremely passive.”