The United States Supreme Court recently denied certiorari for a Court of Appeals of New York case holding that New York could tax 100% of the income of a Tennessee resident who telecommuted from Tennessee for a New York employer 75% of the time, and was only physically present in New York 25% of the time. The Plaintiff sought Supreme Court review under 28 U.S.C. Section 1257(a) because of the constitutional questions involved in the case. The Plaintiff had brought suit against the New York State Division of Tax Appeals to overturn a decision that 100% of his income was taxable in New York. The decision relied on New York’s “convenience of the employer” test which states that nonresidents working for New York employers must pay taxes on work done in another state unless it is done out of state for the necessity of the employer. The Plaintiff claimed that taxing the income he earned in Tennessee was a violation of New York tax law and violated his due process rights. The Court of Appeals of New York denied both his claims.
The Court began by addressing the Plaintiff’s claim that taxing the income he earned in Tennessee violated provisions of New York’s tax law for taxing non-residents. Section 631(b)(1)(B) specified that taxable activities were ones “carried on in the state” and section 601(e)(1) said that taxable income should come from “sources in the state.” The Plaintiff argued that since 75% of his work was conducted in Tennessee, it was not carried on in the state and was not from sources in the state; thus, New York could not legally tax it. In response, the Court noted that the legislative history was unclear as to whether the language referred to the location of the employee or the employer; however, in 1960, the legislature had recognized the complexities of a system for taxing nonresidents who work outside the state and had delegated regulation to the State Tax Commission and then the Commissioner of Taxation and Finance. The Commissioner had developed the “convenience of the employer” test, and the Court had previously approved it in Matter of Speno v. Gallman, 35 N.Y.2d 256. Thus, following the “convenience of the employer” test and taxing 100% of Plaintiff’s income did not violate New York tax law.
The Court then turned to the Plaintiff’s claim that taxing his income disproportionate to the amount of time he worked in New York violated his due process rights and the dormant Commerce Clause. Under the Commerce Clause, each state can only tax the proportion of income earned in the state. This requirement was designed to protect interstate commerce. However, the Court found that the Plaintiff was not participating in interstate commerce—he was merely choosing to do an in-state job from an out-of-state location. Thus, the Commerce Clause proportionality standard did not apply, and the Court only had to look to whether his due process rights had been violated. To protect due process rights, the Court must make sure there were minimal connections between the state and the taxpayer and that the income taxed was “rationally related to values connected with” the state. The fact that the Plaintiff worked in the state 25% of the time was enough to establish a minimal connection, and the Plaintiff’s income was rationally related to the benefits New York provided, even though the Plaintiff chose to not always be in the state to take advantage of them. The Court further noted that even if proportionality was appropriate, the fact that the Plaintiff spent 25% of his time in the state was significant enough to satisfy a “rough proportionality requirement.” Finally, the Court found that the “convenience of the employer” test had been appropriately designed to separate interstate commerce (an employee forced to work out of state by his employer) from non-interstate commerce (an employee choosing to work out-of-state though his work could be done in-state). Thus, its discrimination was appropriate.
Since the “convenience of the employer” test did not violate New York tax law or due process, the ruling of the lower court was affirmed.
Three judges joined in a dissent stating that the case is contrary to New York tax law, because taxing non-New York residents should only be done to prevent tax fraud, and clearly the Plaintiff in this case was not attempting tax fraud. Also, the Court had previously interpreted the tax code’s statement that taxable activities were ones “carried on in the state” to refer to the employee’s location rather than the employer’s, contrary to the majority opinion’s analysis. The dissenters also argued that 100% is so out of proportion with 25% that the income is not “rationally related to values connected with” the state, and thus violates due process. In addition, until this decision, salary alone was not considered sufficient “value”.