Telecommuters recently received some bad news from New York State's highest court. In In the Matter of Huckaby, the New York Court of Appeals ruled that a man who lives in Tennessee but works over the Internet for a company in New York must pay income tax to New York on his entire salary, not just the portion related to the time he actually spent working at his employer's New York headquarters. The case could have significant implications for almost five million telecommuters nationwide.
The case was decided under New York's "convenience of the employer" tax regulation, which provides that when a nonresident is employed by a New York employer, income derived from work in another state is taxable by New York unless performed outside of New York for the necessity of the employer. The taxpayer contended that this test violates both the statute that it implements and the Commerce and Due Process Clauses of the United States Constitution. The Court of Appeals, in a 4-3 decision, disagreed and upheld the tax as assessed.
Huckaby, who lived in Tennessee, had been a computer programmer for a local software company. When Huckaby's employer in Tennessee reorganized and eliminated his position, a New York organization hired Huckaby. Huckaby took the new position with the explicit understanding that he would live in Nashville and commute to New York only as needed. The parties agreed that this amounted to approximately 25 percent of travel over the two tax years in question. Huckaby conceded that he worked in Tennessee for his own reasons and that his employer would not have objected if he had worked full time in New York.
Huckaby's appeal rested on three major issues: (1) that the convenience of the employer test precludes New York from taxing income attributable to work that he carried out for his New York employer from his Tennessee home office; (2) that the Due Process Clause requires a fair apportionment of taxes when a citizen resides and works in different states; and (3) that the Commerce Clause bars the sort of impact on interstate commerce that allegedly occurred as a result of New York's application of the convenience of the employer test on Huckaby.
Justice Susan Phillips Rand, writing for the majority, dismissed those arguments and concluded that the convenience of the employer test does not inherently offend either the Commerce Clause or Due Process Clause of the United States Constitution:
"Petitioner criticizes the convenience test as unfair and unsound as a matter of tax policy and a discouragement to telecommuting. Maybe so. We do not view it as our role, however, to upset the Legislature's and the Commissioner's considered judgments so long as the convenience test has been constitutionally applied in this case. For all reasons given, we conclude that the convenience test as applied to petitioner complies with the requirements of Due Process and equal protection."
Huckaby is expected to appeal the ruling to the United States Supreme Court, but that Court has previously refused to hear an appeal in a very similar case. In the meantime, telecommuters and their employers should consider how to protect against the risk that they will be subject to tax by the employer's home state.
Larry Zanger is a partner in the Chicago office of Holland & Knight LLP. He is a member of the Business section and focuses his practice on corporate and computer law. He may be reached at 1-888-688-8500.