NJ offers telecommuting residents reward to successfully appeal NY income tax

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

Their home states are wondering as well.

Fed up with losing out on hundreds of millions of dollars in tax revenue each year, New Jersey is now offering a state tax credit to residents who work from home and successfully appeal their New York tax assessment. Connecticut is considering a similar measure.

The Garden State's bounty — a rebate worth roughly half a person's refund of income taxes they paid to New York for the 2020-2023 period — has been claimed so far by one winning litigant since the state made the offer in July, according to the state’s Division of Taxation. That taxpayer received a $7,797.02 refund for their efforts. Officials hope that person's windfall will encourage others to follow suit.

Another New Jersey resident who is taking up the state's offer is Open Weaver Banks, a tax attorney who prefers working from home to braving an "awful" commute into the Big Apple. She's also filed one of a growing number of similar challenges.

“The process of doing the refund and the appeal isn’t all that intimidating to me,” said Banks, a tax partner at Hodgson Russ LLP. “I'm on New Jersey's team here. I would like to see more residents doing this. I think they have a really fair point."

New York requires out-of-state commuters who work for New York-based companies to pay New York income taxes, even if they’ve stopped physically going in to the office most days a week, unless they can satisfy very strict requirements for what constitutes a bona fide home office.

A home office near a specialized track to test new cars, for example, might qualify if it couldn’t be replicated in New York. But a worker with specialized scientific equipment set up in their home that could be duplicated over the border would still have to pay, according to a memorandum from the New York State Department of Taxation.

When the nature of work was upended in 2020, New York should have “softened” these requirements, Banks said. “And they didn’t. They are just standing by and fighting the claims."

Both neighboring states have implemented “retaliatory” tax rules that affect New Yorkers who work remotely for Connecticut or New Jersey-based companies, but these workforces are far smaller and their overall tax payments don't make up the difference.

Out-of-state taxpayers paid New York nearly $8.8 billion in 2021 in taxes, roughly 15% of the state’s total income tax revenues, according to the Citizens Budget Commission in New York. Of that, $4.3 billion came from New Jersey taxpayers and $1.5 billion from Connecticut taxpayers.

It’s unclear how much of that was earned at home. But out-of-state employees of New York-based companies who work remotely are increasingly appealing their tax bills, Amanda Hiller, the acting commissioner and general counsel for the New York Department of Taxation and Finance, told state legislators recently.

Hiller acknowledged that New York’s decades-old policy, known as a “convenience of the employer rule,” has created a financial burden for New Jersey and Connecticut, which provide tax credits to their residents for the income taxes they’ve paid New York so they are not double-taxed.

New Jersey's Division of Taxation said the state's long-term goal is to have New York's rule overturned entirely, something that will likely require a taxpayer's legal challenge to succeed before the U.S. Supreme Court. That could be a tall order: New Hampshire tried to sue Massachusetts for temporarily collecting income tax from roughly 80,000 of its residents who worked from home during the pandemic, and the Supreme Court rejected the complaint without comment.

Officials in New Jersey estimate it could reap as much as $1.2 billion annually if residents working from home for New York companies are taxed at home. Connecticut could recoup about $200 million, its officials say.

Connecticut Gov. Ned Lamont has proposed an initiative similar to New Jersey's that needs final legislative approval. It's unclear, however, whether it can pass before the session ends May 8.

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

Indeed, the top marginal state income tax rate, as of Jan. 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.

“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 City. “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 been trying, so far without success, to challenge New York’s tax rule for about 20 years, including a pending case over the 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 agreement.

Andrew Sidamon-Eristoff, who is in the unique position of being the former New Jersey state treasurer and a former New York commissioner of taxation and finance, believes eventually the right litigant will “get it before the right court to challenge it.”

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

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