Court: Out-of-State Telecommuter Must Pay New York Income Tax

In a recent decision that might have wide ranging implications for the growing number of people who work by telecommuting from home, the New York Appeals Court ruled that a Nashville man who works remotely via a PC for a New York-based union — but 25 percent of the time performs his employment within New York borders — must pay New York income tax for his entire salary.

Thomas Huckaby, a Tennessee computer programmer, worked 75 percent of the time from his home and would travel to New York to work only about a quarter of the time during the period in question. He initially paid New York State income tax on just 25 percent of his earnings.

Significant Time in State

However, relying on a New York law that states that a worker’s income is taxable if he or she chooses to live outside the state, as opposed to if she/he is transferred to another location, the New York Appeals Court decided that New York has the right to tax 100 percent of a non-resident employee’s income derived from New York sources.

Huckaby argued that since he only worked at the company’s New York headquarters 25 percent of the time, he should only have to pay the state income tax on 25 percent of his income.

However, the appeals court responded by saying that Huckaby “is the one who chose to accept employment from a New York employer (with advantages of a New York salary and fringe benefits) while maintaining his residence in Tennessee, some 900 miles and two-hour plane trip distant from his New York employer’s office.”

The appeals court also noted that the amount of time that Huckaby spent working in New York (25 percent) is significant enough to satisfy any legal argument against taxation based on constitutional grounds.

Specifically, the court justified its decision and New York’s tax policies by noting that by taxing only income sourced from New York, constitutional considerations are satisfied because “New York has the right to tax 100 percent of a nonresident employee’s income derived from New York services. When a nonresident employee must perform work out of state for the employer’s necessity, a nexus is created between the employer and the foreign state. New York does not tax the nonresident employee’s income derived from these activities.”

Another Case

However, the appeals court did acknowledge that its decision could have the effect of discouraging telecommuting and that there might be some point at which the tax is so disproportionate — for instance, where the taxpayer works only one day a year in New York — that its application would violate the U.S. Constitution.

In his dissent, Justice Robert Smith stated, “I am aware of no case in which it has been held, or even argued, that an in-state source of payment for services done outside the state is a constitutionally valid basis for taxing the recipient of the payment.”

Most states have resolved the issue by apportioning income. In 2004, the Telecommuter Tax Fairness Act of 2004 was introduced by U.S. Senators Christopher Dodd and Christopher Shays, both of Connecticut, that would abolish the current double taxation on income that results from New York laws on this matter.

On a related matter, the Huckaby decision appears to be at odds with another New York Appeals Court’s decision (In the Matter of Maxine Allen v. Commissioner of Labor), where the court held that physical, not virtual presence governs eligibility for unemployment insurance benefits.

In that case, the appellant, Maxine E. Allen, argued that during the period in question, she worked from home via electronic access to Reuters’ mainframe computer located at their head office in New York. Following termination of her employment, Allen filed a claim for unemployment benefits, which was subsequently denied on the basis that she was not eligible since all of her work was performed in Florida.

Unfair Approach

In holding that physical presence determines eligibility for unemployment benefits, the court rejected Allen’s claim that physical presence was not required for the purposes of such benefits because her entire services were realized and consequently localized at Reuters’ mainframe in New York.

Relying on an earlier decision, the court explained that the law sets out four tests to determine eligibility, namely, “localization, location of base of operations, source of direction or control, and employee’s residence.” In this case, the court stated that “physical presence is the most practical indicium of localization for the interstate telecommuter who inhabits today’s virtual workplace linked by Internet connections and data exchanges.”

When the above two cases are considered together, it appears that New York courts are telling telecommuters that New York will force them to pay taxes in the form of income tax but will not provide them with any employment-rated assistance such as unemployment benefits.

Apart from not being justifiable on legal grounds, such approach is simply unfair.

Javad Heydary, an E-Commerce Times columnist, is a Toronto lawyer licensed to practice in both Ontario and New York and is the managing editor of

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