New York-New Jersey Remote-Work Tax Feud Needs US Intervention

In the TV show “Mad Men,” a lower-level employee berates Don Draper and then tells him, “I feel bad for you.” The show’s main character coolly replies, “I don’t think about you at all.” This terse put-down describes New York’s response to Connecticut’s and New Jersey’s complaints about its convenience of the employer rule—but the sentiment now flows in both directions.

Who Thinks About Their Neighbors?

New York’s convenience rule has irked its neighbors for many years. It redirects to New York’s coffers massive amounts of individual income tax revenues from services rendered to New York employers by nonresidents performing those services from an out-of-state location for “non-necessary” reasons.

In addition to depriving its neighbors of tax revenue, New York imposes an additional cost by taking advantage of Connecticut’s and New Jersey’s tax credits for individual income taxes paid to other states. For New Jersey, this credit historically cost hundreds of millions of dollars a year, but New York’s convenience rule was difficult to fight when the bridge-and-tunnel crowd was commuting into Manhattan on most days.

The pandemic radically changed the way people work and commute—and continues to do so as hybrid work keeps office attendance at a fraction of the pre-pandemic norm. Those New Jersey residents who once reliably labored in Manhattan are now spending a large portion, or even the majority, of their working hours in New Jersey.

Yet as long as these employees are assigned to a New York office by their employer, New York continues to tax these employees’ earnings as New York source income.

New York isn’t the only state whose aggressive income tax policies for nonresident commuters have been questioned recently. Massachusetts implemented a regulation in March 2020, which continued to levy its income tax on the earnings of non-resident persons who previously worked from Massachusetts locations but began telecommuting from a location outside the state as a result of Covid-19 restrictions.

New Hampshire moved to file an original jurisdiction suit in the US Supreme Court challenging this regulation in October 2020 and was supported by an amicus brief filed by a group of states that included New Jersey. The Supreme Court declined review in an order issued in June 2021, noting that only Justices Samuel Alito and Clarence Thomas would have granted New Hampshire’s motion.

Shift to Offense From Defense

Last month, New Jersey implemented new legislation that creates its own convenience of the employer rule. The measure also creates a refundable gross income tax credit for New Jersey residents equal to 50% of any refund the resident obtains for income taxes paid to another state that were paid on the basis that the income was derived from services rendered from a New Jersey location.

The legislation further appropriates $10 million per fiscal year to fund a nonrefundable gross income tax credit of $2,000 for individuals who request and obtain a reassignment from their employer to move from an out-of-state location to an in-state location.

New Jersey isn’t alone in challenging New York’s convenience rule—Connecticut implemented its own in 2019 but limited its application to nonresidents working from home when the taxpayer’s state of residence applies a similar tax.

New Jersey’s new law is intriguing for both retaliating in-kind to New York’s convenience rule and creating an explicit incentive for New Jersey residents to file New York refund claims.

Is It Constitutional?

Lin-Manuel Miranda’s “Hamilton” quips that “everything is legal in New Jersey,” but does this new law pass muster? One logical reaction is that the arguments raised against New York’s convenience rule and Massachusetts’ regulation haven’t gone away.

From a due process perspective, does New Jersey have sufficient connections to justify the imposition of a direct income tax on activities that are performed outside of the state? If the answer is yes, is the tax fairly apportioned under the Commerce Clause? From a state sovereignty perspective, does the Constitution permit New Jersey to offer financial incentives to its residents for filing refund claims in another state?

New Jersey’s New Hampshire v. Massachusetts amicus brief ironically appears to have answered these questions in the negative.

New Jersey’s response to these inconvenient questions may just be, “I don’t think about you at all.” As long as Congress and the Supreme Court decline to provide definitive guidance on states’ ability to impose income taxes on remote workers, there’s no real incentive for New Jersey (or other states) to answer them or even articulate a cohesive defense.

As noted in the amicus brief, the expense and hassle of litigating a personal income tax case through the administrative hearings process, and appellate litigation in state courts that have no policy reason to harm their own states’ fiscal interests, is an “insufficient” option for challenging such laws. Taxpayers are also precluded from challenging convenience of the employer rules in federal courts, thanks to the Tax Injunction Act.

With any luck, the legacy of New Jersey’s new legislation will be inspiring Congress or the Supreme Court to finally address limitations on states’ abilities to tax remote workers in a post-pandemic society and resolve one of the more contentious state and local tax issues of recent years.

The case is New Hampshire v. Massachusetts, U.S., No. 22O154, motion denied 6/28/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Adam P. Beckerink is head of Duane Morris’ state and local tax group, where he represents multinational corporations and high-net-worth individuals in tax disputes, controversies, and litigation with revenue authorities in the US.

Dakota Newton is an associate in Duane Morris’ state and local tax group. He represents mid-size and multinational entities in transactional and large controversy matters.

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