As our regular readers know, we’ve been following the Zelinsky “convenience-rule” case through New York’s Division of Tax Appeals over the past couple of years. Back in December 2023, we covered the first phase of the case, where a New York ALJ upheld the Tax Department’s position that New York’s onerous convenience of the employer rule can apply to a taxpayer even in the situation where the taxpayer’s employer closed their New York office. That prior blog post and some others contain all the background around the case, so click here and here for more details. I also covered the convenience rule in general detail in a Noonan’s Notes article a few years ago, so click here to see if you need a crash course on the rule.
So, what’s the latest? In a decision that was posted on the Division of Tax Appeals' website yesterday, New York’s Tax Appeals Tribunal upheld the determination of the administrative law judge and rejected all of Professor Zelinsky’s arguments. We’ll be breaking down the decision in a more comprehensive post and/or article, but a few quick takeaways:
- First, and probably not surprisingly, the Tribunal refused to consider Professor Zelinsky’s arguments that changes in technology and the way people do business allow the Tribunal to revisit, or more specifically, reverse, the prior decision of the Court of Appeals in Zelinsky I. According to the Tribunal, the Tax Department’s application of the convenience rule still passes constitutional muster, both for due process purposes and commerce clause purposes. And interestingly, most of the decision is dedicated to these constitutional issues.
- What may be the bigger issue—and definitely the more controversial one—is the application of the convenience rule to days when Professor Zelinsky’s employer’s office (or specifically, his school) was closed. To justify the rather unusual position that the professor worked from home for his convenience on days when his employer actually required him to do so, the Tribunal first attempted to distinguish the 1979 Fass case, where a taxpayer successfully was able to avoid application of the convenience rule on the basis that his New Jersey home had specialized facilities that were necessary for him to do his job—facilities which could not be set up in his New York office. Pointing out the obvious—that being a law school professor doesn’t require use of any specialized facilities—the Tribunal distinguished Fass. But as pointed out in our prior blog post, no one is arguing that these COVID cases are “specialized facility” cases. Instead, the argument in these cases is that, due to pandemic closures, work was required to be performed away from New York because there was no office to work at in New York in the first place. In other words, the idea that a taxpayer can only ever avoid application of the convenience rule if their home office has specialized facilities just misses the mark.
- The Tribunal also cites and discusses the Colleary case, which is interesting because that’s not one of the cases that has ever been discussed in significant detail, in large part because the taxpayer’s position in that case didn’t make much sense. The taxpayer there argued that while he worked in the office two days a week, he had a separate set of duties that he needed to perform at home the other three days of the week. The court in Colleary came to the rather obvious conclusion that the bifurcation of the taxpayer’s services was inappropriate because all his services related to his work for the same employer. But the Tribunal also cited this case for the proposition that this was a case where the taxpayer’s employer “maintained no office for the taxpayer in New York for the performance of his duties.” That seems like an off logical leap, however, since the taxpayer definitely had an office to work in for that employer two days a week—a factual situation that is miles away from what we all dealt with during COVID, when offices were just closed completely.
- Lastly, the Tribunal justified application of the convenience rule on nexus grounds, basically on the theory that the professor’s work in Connecticut wouldn’t have been sufficient to establish nexus in Connecticut for Cardozo:
For us, the nature of the employment relationship is paramount in considering whether the days on which a taxpayer claims to have performed personal services outside New York are subject to application of the convenience rule. In other words, the question boils down to whether the employer established a nexus in another jurisdiction by directing its employee to perform personal services in that out-of-state location for its own necessity (see Matter of Huckaby at 437 ["[t]he convenience test stands for the proposition that New York will not tax a nonresident's income derived from a New York employer's participation in interstate commerce because in such a case the nonresident's income would not be derived from a New York source"]). Absent a showing of such a fact, a nonresident taxpayer's personal services performed for a New York employer will be subject to the convenience rule if the taxpayer performs those personal services both within and without New York. As petitioner has not shown that Cardozo required him to perform the functions of his job at his home in Connecticut, as opposed to anywhere else, we conclude that the convenience of the employer rule was properly applied in calculating petitioner's New York apportionment ratio under Tax Law § 631 and 20 NYCRR 132.18.
So the question boils down to nexus … and whether Cardozo had nexus in Connecticut as a result of one of its employees working there remotely? If that’s true, then why isn’t the case that Cardozo telling Professor Zelinsky to work from his home in Connecticut is enough to allow for Cardozo to have nexus in Connecticut? They knew he lived there, and they gave him the equipment necessary to work there. And more importantly, isn’t it the case that almost every state would hold that the presence of a remote employee is enough to create nexus for the remote employee’s employer? That issue was tackled specifically in the 2021 Telebright case out of New Jersey, and most states seem to go along with this, absent special rules. Given that, it’s odd for the Tribunal to justify its conclusion around this nexus point.
- But whether Cardozo had nexus in Connecticut or not, the fact remains that Professor Zelinsky wasn’t working in Connecticut for his own convenience. He was working in Connecticut because his employer told him to. And he was working in Connecticut because he had no other place to work during the throes of the pandemic. Thus, although the Tribunal held that Professor Zelinsky “has not shown that Cardozo required him to perform the functions of his job at his home in Connecticut,” the opposite is really true. They absolutely required him to perform the functions of his job at home in Connecticut because they gave him no other place to work. The whole convenience rule issue in these COVID cases really boils down to that. And stated that way, it really shouldn’t be so controversial!
So, what’s next? Professor Zelinsky has already announced his intention to appeal, and frankly, this is probably one of those cases where we will need New York’s courts to step in and right what seems like an obvious wrong. There’s precedence for this, too. In my 2014 Gaied case, we needed to go all the way to New York’s Court of Appeals to overturn prior decisions of an ALJ, the Tribunal, and the Appellate Division on a legal conclusion that seemed obvious to everyone outside Tax Department circles. Perhaps the Zelinsky case will enjoy a similar fate!
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