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Court of Appeals Upholds the “Convenience of the Employer Doctrine" in Matter of Huckaby

On March 29th, the New York State Court of Appeals released its long-awaited decision in Matter of Huckaby, ___ N.Y.2d ___ (2005).  The Huckaby Court upheld the New York State Department of Taxation and Finance’s application of its controversial “convenience of the employer doctrine,” which in the Huckaby case was applied to tax 100% of the wages of a telecommuter who worked for a New York employer from his home in Tennessee. 

Factual Background

During the 1994 and 1995 tax years, Mr. Huckaby worked for the National Organization of Industrial Trade Unions (“NOITU”), which is based in Jamaica, New York.  His duties consisted primarily of supporting software programs used by NOITU, assisting the computer department in selecting new information technology, and generally helping NOITU to meet its computer programming needs.  Because the nature of his work allowed it, NOITU agreed to permit Mr. Huckaby to work from his home in Tennessee.  As a result, Mr. Huckaby came to New York infrequently for work purposes.  In fact, during the years that were in dispute, Mr. Huckaby spent approximately 75% of his work days in Tennessee, and 25% of his workdays in New York.  Mr. Huckaby worked from his Tennesee home purely as a matter of convenience, and was not required to do so by his employer.

On his 1994 and 1995 New York State nonresident income tax returns, Mr. Huckaby allocated his income between New York and Tennessee based on the number of days he spent working in each state.  The New York State tax department audited Mr. Huckaby’s returns and determined that he should have paid New York State income tax on 100% of his income.  The tax department justified its findings based on the “convenience of the employer doctrine,” which generally requires nonresidents who work for a New York employer to treat days worked outside of the state as New York work days if the taxpayer worked outside of New York for his or her convenience.  Mr. Huckaby paid the tax department’s assessment under protest, and filed an administrative appeal seeking a refund.

The Court’s Decision

The Court denied Mr. Huckaby’s refund claim, and upheld the “convenience of the employer doctrine” on both statutory and Constitutional grounds.  Statutorily, the Court concluded that the tax department’s convenience of the employer doctrine is consistent with the legislative intent behind section 631(c) of the Tax Law, which permits the taxation of a nonresident’s income even if the income is only partly derived from New York sources.  From a Constitutional perspective, the Court held that the convenience doctrine, as applied to Mr. Huckaby, did not violate either the Due Process Clause or the Commerce Clause of the United States Constitution.  Though the Court recognized that the outcome may be different for Due Process purposes in the case of a nonresident who spends a trivial amount of time working in New York (e.g., one day), it determined that Mr. Huckaby had spent sufficient time working in New York to justify the taxation of his entire income.  As to the Commerce Clause, the Court held that it did not even apply because Mr. Huckaby and his employer were not engaged in interstate commerce.

In short, the Court’s decision stands for the proposition that New York may tax a nonresident’s entire income if he or she: (1) works for a New York employer; and (2) spends a non-trivial amount of time working in the State.  The fact that the employee may live and work primarily in a state that is not within a reasonable commuting distance from New York is irrelevant.

Implications of the Decision

New York has consistently applied its convenience of the employer doctrine in an aggressive manner, and the Court’s decision in Huckaby is likely to foster similar applications of the rule in future income allocation audits.  But Huckaby does not speak with the finality that one might presume upon a first glance at the case.  The decision contained a strongly-worded three judge dissent, and it is possible that the case may be reviewed and overturned by the United States Supreme Court.  Moreover, legislation is currently pending before the United States Congress that would void New York’s convenience of the employer doctrine by prohibiting the states from taxing the income of a nonresident earned for services performed in another jurisdiction. 

In the meantime, nonresident taxpayers—and New York employers that are responsible for properly withholding income tax from the nonresident employee’s wages—should consider the impact of the Huckaby decision, and whether the convenience rule is applicable to them.  If an audit has already commenced, a determination should be made as to whether a host of available defenses may be raised.  In addition to other arguments that have been successfully raised in other cases, the Huckaby decision itself recognizes that New York may not be permitted to apply the convenience of the employer doctrine in those cases where a nonresident employee spends a “trivial” amount of time working in New York.  Presumably, this means something less than 25% of one’s work days, which was the amount of time spent in New York by Mr. Huckaby.

Conclusion

The Huckaby decision raises a multitude of issues to be considered by nonresident employees and New York employers.  Members of the Hodgson Russ LLP State and Local Tax Practice Group are well-versed in New York’s convenience of the employer doctrine and other income allocation rules.  We also have extensive experience in assisting taxpayers through the murky and sometimes rough waters of a New York State income tax audit, and have handled a host of administrative and state court appeals.  If you have any questions about these or other State and Local Tax matters, please contact one of our State and Local Tax Practice Group attorneys, which are listed at 1-800-724-5184 (Buffalo) or 1-800-232-0526 (New York City), or visit our website at www.hodgsonruss.com.