New Jersey and Connecticut Fight New York’s ‘Convenience of the Employer’ Tax Rule
Telecommuting, which became a permanent alternative for many people during the pandemic, has led to a dispute between New Jersey, Connecticut, and New York regarding personal income tax payments.
New York requires out-of-state workers employed by New York-based companies to pay New York income taxes, even if they primarily work from home. This has resulted in a financial burden for New Jersey and Connecticut, which provide tax credits to their residents to avoid double taxation.
To address this issue, New Jersey now offers a state tax credit to residents who work from home and appeal their New York tax assessment successfully. Connecticut is considering a similar measure. New Jersey’s tax credit is roughly half the refund of income paid to New York for the 2020-2023 period.
One New Jersey resident, Open Weaver Banks, has filed an appeal against New York’s tax rule. Banks argues that New York should have “softened” the requirements for out-of-state workers to pay taxes in New York. However, New York has maintained its stance, leading to legal challenges.
Both New Jersey and Connecticut have implemented retaliatory tax rules affecting New Yorkers who work remotely for their companies. However, the overall tax payments from these workforces do not offset the revenue lost by New Jersey and Connecticut.
Out-of-state taxpayers paid New York nearly $8.8 billion in taxes in 2021, roughly 15% of the state’s total income tax revenues. Of that amount, $4.3 billion came from New Jersey taxpayers, and $1.5 billion from Connecticut taxpayers.
New Jersey estimates that it could reap as much as $1.2 billion annually if residents working from home for New York companies are taxed at home. Connecticut could recoup about $200 million, its officials say.
Connecticut Gov. Ned Lamont has proposed an initiative similar to New Jersey’s, which is awaiting final legislative approval. The long-term goal of both states is to have New York’s rule overturned entirely, potentially requiring a legal challenge that reaches the U.S. Supreme Court.
A small number of states, including Arkansas, Delaware, Nebraska, and Pennsylvania, have tax rules similar to New York’s. However, New Jersey and Pennsylvania have a reciprocal income tax agreement.
The legal battle over the “convenience of the employer” rule is ongoing, with experts believing that eventually, the right litigant may challenge it successfully. However, some skeptics question New Jersey’s commitment to the effort, as it places the financial burden of a potentially lengthy and expensive legal challenge on the individual taxpayer.
