New York’s Remote Work Tax Under Attack From Closest Neighbors

New York’s economy has long benefited from the roughly 500,000 people who commute into work from Connecticut and New Jersey every day—not only because of the spending they do on their lunch breaks, but the New York taxes applied to their wages.

Now, with more people continuing to work from home since the Covid-19 pandemic, elected leaders in Connecticut and New Jersey say that tax money belongs to them, not New York—and they’re willing to fight for it. New Jersey is offering an incentive for residents to sue New York over its taxation of telecommuters, and Connecticut said last week it plans to follow suit.

New York is one of a handful of states that has a “convenience of employer” rule, meaning workers must pay income tax to New York if their employer is based in the state, even if their job was done remotely. An exception is made for workers who were required by their job to work outside New York.

The arrangement has been criticized for decades—particularly by Connecticut residents who are pushed into a higher tax bracket in New York. But the backlash has intensified in recent years as many workers’ physical connection to New York weakens, with more opting for home offices over Manhattan’s gleaming office towers.

“We think it’s an unconstitutional overreach by the state of New York and we think our residents should be paying tax to us and they’d be paying it at a lower rate,” Jeffrey Beckham, the secretary of the Connecticut Office of Policy and Management, said earlier this month.

New York collected nearly $6 billion in income taxes from Connecticut and New Jersey residents in tax year 2021, the most recent data available, according to the Citizens Budget Commission. That figure accounts for roughly 10% of the state’s personal income tax collections—its largest revenue source—including people who still make the commute.

Amanda Hiller, New York’s acting tax commissioner and general counsel, has acknowledged that work habits have changed since the state implemented its convenience rule in the 1950s, and that the policy creates a “financial burden” on neighboring states. To prevent residents from being double taxed, Connecticut and New Jersey have credited residents for the taxes paid to New York. New Jersey spent $2.3 billion in credits for work tied to New York in tax year 2022, the most recent data available, according to the state Department of the Treasury. Connecticut spent $1.6 billion in credits for taxes paid to New York that same year, according to the Connecticut Department of Revenue Services.

Hiller said at a legislative hearing last Wednesday there have been discussions at New York’s top executive level that the convenience rule could be overturned, but she expects any decision is “probably years away.”

If the rule is overturned, Connecticut officials estimate the state could recoup $200 million annually in taxes currently paid to New York, Beckham said. New Jersey could bring in as much as $528 million annually, according to an analysis by Kroll Bond Ratings Agency.

“The jobs are in New York City and sometimes there are reasons—financial and otherwise—that those employees choose not to live in the city, and it has been a benefit to the state that they are still able to capture tax revenue from that population,” said Ana Champeny, vice president for research at the Citizens Budget Commission.

Officials in commuter states are banking that the courts may rule against New York’s convenience rule because remote work arrangements are more common, but they acknowledge any legal challenge faces a long and difficult road. New York also sends tax bills to workers as distant as California, Florida, and Pennsylvania.

“This would have to go to federal court, it would likely go to the US Supreme Court, likely take many years,” Beckham said.

A ‘Hard to Win’ Case

Connecticut and New Jersey have taken steps to stem their tax losses to New York. Both have implemented a convenience rule directed at New York, allowing them to tax the income of Empire State residents who work for Connecticut or New Jersey businesses. New Jersey is also offering $35 million in grants to businesses who assign their New Jersey-based employees to offices in New Jersey.

Garden State lawmakers sweetened the pot last year when they passed a law incentivizing residents to challenge New York’s income tax regime. Those successful at earning a tax refund from New York are eligible for a 50% tax credit on what they would then owe to New Jersey. Gov. Phil Murphy (D) signed the bill the same day the state filed a lawsuit against New York’s congestion pricing plan, saying it showed his commitment to “combat the unjust taxation of our hardworking residents by other states.”

Connecticut officials said last week they plan to offer the same tax credit as New Jersey to their residents who successfully sue New York, and will look to pass the measure in this year’s legislative session, which runs until May 8.

Still, residents looking to appeal their New York tax bills face an uphill battle, as one Connecticut resident’s long-running legal fight shows. In 2003, the New York Court of Appeals ruled against Edward Zelinsky, a Cardozo Law professor, who challenged the state’s convenience rule over income taxes he owed for work done remotely in his Connecticut home. Zelinsky is again challenging the constitutionality of New York’s convenience rule, in part seeking a refund of all taxes New York imposed on his income for most of 2020 when pandemic-era public health orders prevented him from accessing his classroom. A state tax judge ruled against him last December. He’s now appealing the determination.

“The problem is, it’s very hard to win in New York,” Zelinsky said in an interview. “I’m someone who is doing this because its the right thing to do and I’m not convinced this credit is going to really make it feasible for a lot of taxpayers or lawyers to pursue New York.”

Connecticut residents have more reason to take on New York because their income tax rates are much lower, topping out at 6.99% compared to New York’s peak rate of 10.9%. New Jersey’s income tax rates range from 1.4% to 10.75%.

A ‘Neutral Playing Field’

Alysse McLoughlin, a partner in Jones Walker LLP’s New York office, said Connecticut and New Jersey’s incentives may spur other legal challenges that the courts may be more sympathetic to, but that Zelinsky’s case will likely set a precedent for future lawsuits, she said.

“If you have someone working for a multinational corporation and has offices everywhere and yet at one point was assigned to a New York office, there might be less connection with the business than a school that is based in New York, which might be a more appealing fact pattern for a court,” she said. “However, the fact that they would be in the queue behind the Zelinsky case, it is very likely that whatever happens with Zelinsky will apply to those plaintiffs.”

Zelinsky said he doesn’t believe multiple versions of the same litigation will tip the scale in any one direction, but that Connecticut’s public stance could help turn public sentiment against New York’s tax rules.

“Congress can solve this problem and that’s one reason for public discussion,” he said.

Those fighting New York’s convenience rule are hoping the case could have a shot if it makes its way to the US Supreme Court, though the justices haven’t previously shown interest in the issue. In 2021, the court declined to hear New Hampshire’s suit against Massachusetts for temporarily taxing workers who were living and working in the Granite State during the pandemic. Connecticut, New Jersey, and several other states filed an amicus brief in support of New Hampshire.

“We doubt that New York courts will agree potentially with us, but once we get on a neutral playing field, it may be a little bit different,” Matthew Dayton, Connecticut’s undersecretary for legal affairs at the Office of Policy and Management, said in a recent finance committee hearing.