New York’s Embattled Tax on Remote Workers Faces Key Court Test

A legal battle over New York taxation of out-of-state workers resumes in a Manhattan courtroom this week, in a case some lawmakers hope will reach higher levels and undermine the policy.

Edward Zelinsky, a Cardozo Law School professor, will argue New York owes him a refund for taxes imposed on his income when he worked remotely from his Connecticut home in 2019 and 2020, including when he was unable to access his New York City classroom because of the Covid-19 pandemic.

Lawmakers in states neighboring New York have encouraged these kinds of legal challenges, banking that one could rise as high as the US Supreme Court. That would give them a shot at overturning or at least weakening New York’s ability to tax out-of-state workers, preventing residents’ tax dollars from flowing out of Connecticut and New Jersey coffers.

New Jersey went as far as to create an incentive last year to encourage residents to sue over New York tax bills they received between 2020 and 2023, promising the taxpayers a credit on taxes they would then owe to New Jersey if they successfully earned a refund. Connecticut Gov. Ned Lamont (D) proposed a similar benefit earlier this year, but it didn’t pass before the close of the legislative session.

Zelinsky’s hearing before the New York State Tax Appeals Tribunal, in New York City Nov. 21, is a significant milestone in the broader effort to undermine New York’s taxation of remote workers. A favorable ruling for Zelinsky could clarify the prospects of similar, pending legal battles. It could also alter how businesses plan their office set-ups.

“In the process of ruling for the taxpayer, some new guidelines could come out,” said Open Weaver Banks, a Hodgson Russ LLP partner focused on state and local taxation. The tribunal could make a statement that “changes how someone plans around this home office issue,” she added.

New York’s “convenience of the employer” rule allows the state to tax the income of nonresidents if their New York employer doesn’t require them to live elsewhere for the job. Criticism of the exacting policy reached fever pitch after the public health crisis, fueling arguments that the rule doesn’t hold up in an era of Zoom meetings and irregular commutes.

But such cases face a difficult, costly battles in the courts, and so far few have pursued them for days worked remotely during the pandemic.

New Jersey has awarded only one refund, more than $7,000, to a taxpayer who successfully appealed a New York tax bill they received in 2020, according to the state Division of Taxation. That case was settled in the New York Division of Tax Appeals, which canceled its notice of deficiency on the taxpayer, and therefore didn’t rise to a level with larger ramifications for the convenience test.

Even a limited ruling curtailing New York’s ability to tax out-of-state workers in certain circumstances, such as mandated office closures, could be a revenue boon to Connecticut and New Jersey—which collectively spent nearly $4 billion crediting residents for 2022 taxes paid to New York.

Zelinsky Fight

Zelinsky is seeking to overturn an administrative law judge’s determination last December that New York had properly taxed his income when he worked remotely from Connecticut. The public health lockdown “cannot result in special tax benefits to those who do not live in New York” but still benefit from in-state employers, the judge said.

The professor will raise several arguments to bolster his case, including that his remote arrangement during the pandemic was done for Cardozo’s necessity, because the law school ordered staff not to return to their classrooms. More broadly, Zelinsky will also assert that taxing income earned both during and before the pandemic violates the US Constitution’s due process and dormant commerce clauses because he is “a nonresident that can’t be taxed like a resident,” he said in an interview.

If he loses at the tax tribunal, Zelinsky said, he will have to assess whether to continue his fight by appealing to the state Appellate Division. He said he’s “not oblivious to the notion that a ruling for me might serve as a precedent that would help other people.”

Zelinsky previously challenged the constitutionality of New York’s convenience rule, but the Court of Appeals ruled against him in 2003. That decision shouldn’t apply anymore because “remote work is perceived of differently today than it was 20 years ago,” he said.

Uphill Battle

Outside of Zelinsky’s fight, there have been at least two other efforts by taxpayers to get refunds for New York tax bills they received for 2020 while working outside the state after their offices shuttered. New Jerseyans Scott and Elizabeth Bryant sought a roughly $54,000 refund on their New York tax bill. Their petition was denied by the Division of Tax Appeals in September and they aren’t appealing the decision to the Tax Appeals Tribunal, according to their counsel, Howard Chernoff.

Another challenge was filed by Todd Richter, who changed his domicile from New York to North Carolina. He withdrew the case after his motion for a partial summary determination was denied by the Division of Tax Appeals last November, according to his counsel, Andrew Wright, a Hodgson Russ partner.

While New Jersey residents have their state’s new incentive to take on these fights, not many are willing to sign on for the expensive ordeal, said acting New Jersey Tax Commissioner Marita Sciarrotta. The legal process “requires a lot of perseverance and the alignment of critical information in order for it to prevail in New York court,” she said in an interview.

But there may be more demand than is currently apparent, said Banks, of Hodgson Russ. Taxpayers who were denied refunds in New York might choose to “slow track” their appeals process to see what happens with Zelinsky, she said.

“They’re just waiting in the wings,” Banks said.