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Since the beginning of the COVID-19 pandemic in March of 2020, teleworking has been at the forefront of work-life-balance conversations and has become an increasingly popular option for employees. Not only did it make sense for most, but it called into question the true commitment required to pay for a higher cost of living, particularly when several cities saw increases in state and local taxes over the past few years. The result? Employees began emigrating from cities to lower-cost-of-living locations to work remotely for city-based companies.
While that decision may make sense and take less effort to effectuate in a place like Columbus, Ohio, the move to the “suburbs” of New York City and cities like it on the East Coast may result in a change of tax domicile to a surrounding state (namely, New Jersey, Pennsylvania, Connecticut and Rhode Island) or other more distant locations. With these changes, employers and employees alike continue to face challenges with state and local tax withholding obligations, as certain states will still subject employees working for an employer within their borders to income tax in that state, even if that employee is domiciled and working remotely in another state. New York has such a rule in place, subjecting employees to New York state income taxes if they make the choice to work remotely in another state, only exempting employees from this rule if employers have assigned them to their home states for the employers’ convenience.
While New York’s “convenience of the employer” (“COTE”) rule has succeeded in giving New York an ever-increasing revenue base over the past two decades, this rule has often subjected nonresident remote employees to double taxation (as both New York and the employee’s state of domicile have a right to tax the income earned by that employee). In some cases, the home state allows a tax credit for the New York income tax payment, resulting in a loss of tax revenue for the home state. However, change may be on the horizon, as criticism of the COTE rule has grown with the increasing popularity of remote work since the COVID-19 pandemic (even though a few other states have followed New York’s example and have attempted to tax nonresident remote employees working for state-based companies).
Several neighboring states have taken to combatting against New York’s COTE rule in an effort to overturn it and take back their revenue bases. New Jersey has introduced its own COTE rule to target (predominantly) New York residents that are working remotely in New York state for New-Jersey-based employers. In addition, both New Jersey and Connecticut have created a “bounty” for their residents: for any New Jersey or Connecticut resident that successfully challenges New York’s COTE rule and receives a refund from New York for taxes paid on “New York” employment, that resident will be entitled to a 50% credit on what taxes they would then owe to either New Jersey or Connecticut, respectively. Finally, individuals, like Professor Edward Zelinsky—a Connecticut resident employed in New York who has been embattled with New York over its COTE rule for over two decades—are choosing to fight against New York through the court system.
Although the COTE rule’s reign may be facing an end, employers should take great care to ensure that their state withholding obligations are up-to-date if they have employees working remotely on a recurring basis.
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