The New York State Department of Taxation and Finance has finally issued guidance related to its application of the convenience of the employer test during the Covid-19 pandemic. In its Frequently Asked Questions, the Department applies current policy and concludes that New York-based employees teleworking outside the state due to the Covid-19 pandemic must continue to source their income to the state under the “convenience of the employer” test, unless the narrow “bona fide employer office” exception applies. New York has long-adopted the convenience of the employer test, which deems a nonresident who teleworks outside the state to be working at its employer’s New York location (and, hence, such wages would be New York-sourced), unless the nonresident teleworks out of necessity for the employer and not just for the employee’s convenience. Not unexpectedly, the Department’s FAQs indicate that teleworking due to the pandemic is not out of necessity for the employer. However, the Department does not provide any insight into its determination.

Individual taxpayers have frequently challenged New York’s convenience of the employer test over the years, but not in the context of a global pandemic. Over those decades since the convenience of the employer test was first adopted in 1960, the New York Court of Appeals has sustained the Department’s test despite several challenges based on the Commerce, Due Process, and Equal Protection Clauses of the U.S. Constitution.[1] The “bona fide employer office” exception to the test is impossibly narrow and infrequently met, but may be ripe for a challenge given the circumstances of Covid-19 and the significant change in facts resulting from the pandemic’s mandatory remote work orders.[2]

More generally, sourcing employee wages due to the various mandatory remote work orders have caused a rift among the states. While New York’s convenience of the employer test is controversial, other states have adopted similar policies during the Covid-19 period. Most notably, a Massachusetts regulation effectively adopts a temporary convenience of the employer test during the pandemic period.[3] This policy has a distinctly adverse impact on New Hampshire residents, as New Hampshire does not impose an income tax on wages. As a result, New Hampshire recently filed a complaint to the United States Supreme Court requesting that the Court permanently enjoin Massachusetts from enforcing the regulation.[4] In that complaint, New Hampshire argues that the Massachusetts regulation is “a direct attack on a defining feature of the State of New Hampshire’s sovereignty.”

[1] E.g., Huckaby, supra, at n. 36; Zelinsky v. New York State Tax Appeals Tribunal, 1 NY3d 85, 801 NE2d 840, 769 NYS2d 464 (2003), cert. denied, 541 US 1009, 124 S. Ct. 2068 (2004).

[2] ESUS discusses New York’s and other states’ convenience of the employer tests, here and here.

[3] ESUS discusses the Massachusetts regulation and related federal legislation, here.

[4] The New Hampshire complaint is available, here.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This Week’s Question: Approved by California voters in 1978, Proposition 13 placed significant limits on property taxes, and landed this chief proponent on cover of Time magazine.

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

This is episode one of a two part podcast series based upon our webcast addressing  SALT Issues Related to Worker Classification and Teleworking. In this marketplace podcast, we discuss ongoing worker classification disputes in California, as well as other states, and the SALT implications resulting from those disputes. In the next episode, we will  discuss SALT issues that teleworking may create for marketplaces with various business models, and provide tips on how to best position your business for the new normal of permanent remote work.

 

 

 

 

 

 

 

 

 

Listen now:

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This Week’s Question: The Eversheds Sutherland SALT Team is thrilled to have added two new Partners in the past six weeks. Please name these Partners.

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

The Georgia Court of Appeals held that a group of telecommunications dealers that were AT&T subsidiaries (collectively “AT&T”) had standing to challenge the Georgia Department of Revenue’s (“DOR”) denial of sales tax refund claims.  Effective May 5, 2009, O.C.G.A. §§ 48-2-35 and 48-2-35.1 were amended to provide standing for “dealers” to file refund claims on behalf of customers from whom tax had been erroneously collected.

Here, AT&T filed refund claims for taxes it erroneously collected from customers purchasing wireless Internet access during the period of November 1, 2005 until September 7, 2010.  After the DOR denied the refund claims in 2015, AT&T filed suit.

Initially, the trial court granted a motion to dismiss AT&T’s action. The court of appeals affirmed, holding that AT&T needed to refund the allegedly erroneously paid sales taxes to customers before receiving a refund from the DOR.  The supreme court reversed and remanded the case to the court of appeals to consider AT&T’s remaining issues.  On remand, the court of appeals upheld the trial court’s ruling that AT&T lacked standing to seek refunds for the period prior to May 5, 2009 – the effective date for amendments to  O.C.G.A. §§ 48-2-35 and 48-2-35.1.  On petition for certiorari, the supreme court again reversed and remanded the case, holding that the statutory amendments could be applied retroactively to give AT&T “representational” standing to recover refunds on behalf of its customers.  The supreme court reasoned that because the 2009 amendments merely amended the procedure to facilitate the recovery of sales taxes and did not alter or create any rights or obligations, the amendments applied retrospectively.  On the latest remand, the court of appeals reversed its prior opinion and determined that AT&T had standing to bring the suit for a refund claim on behalf of its customers.

New Cingular Wireless PCS, LLC v. Dep’t of Revenue, No. A16A2003, 2020 Ga. App. LEXIS 527 (Ga. Ct. App. Sept. 28, 2020)

On September 24, 2020, the Texas Court of Appeals upheld the Texas insurance premium tax on insurance policies for bales of cotton temporarily stored at Texas warehouses.  The court rejected the taxpayer’s arguments that: (1) the tax violated the Commerce Clause and the Import-Export Clause of the United States Constitution; and (2) the insurance at issue was nontaxable “export property,” rather than taxable surplus lines insurance.

First, the court dismissed the Commerce Clause challenge because the McCarran-Ferguson Act removed any restrictions on a state’s authority to “regulate and tax” the insurance business. Further, the assessed tax was not unconstitutional because the taxpayer was unable to show that the tax failed any of the criteria required under Complete Auto Transit, Inc. v. Brady and Japan Line, Ltd. v. County of Los Angeles.

Second, relying on the test articulated by the U.S. Supreme Court in Michelin Tire Corp. v. Wages, the court dismissed the Import-Export Clause challenge because the tax did not “usurp the federal government’s authority to regulate foreign relations, deprive the federal government of import revenues, or disturb harmony by allowing coastal states to tax goods coming through their ports.”  Ultimately, the court concluded that: (1) the tax applies equally to insurance covering goods that are exported or domestically consumed and does not create a special tariff that favors or disfavors exports to certain countries; (2) the taxpayer did not allege that the tax deprives the federal government of import revenues; and (3) the tax did not violate the foreign Commerce Clause test (which is equivalent to the Import-Export Clause test’s third prong).  In support of its conclusions, the court found relevant that the taxpayer is a Texas corporation, the insurance policies were negotiated in Texas, the cotton was stored in Texas warehouses, and the premiums were paid by the Texas warehouses. The court further reasoned that the tax did not create a substantial risk of international multiple taxation because the taxpayer did not provide a basis for another state to impose an insurance premium tax; and, the tax did not prevent the federal government from speaking with one voice when regulating commercial relations with foreign governments.

Finally, the court rejected the taxpayer’s argument that the premiums were not subject to the tax because the policies should have been characterized as marine cotton insurance (a subset of export property) instead of taxable surplus lines insurance. While a July 2011 statutory amendment required that for the tax to apply Texas must be the insured’s home state, all but two of the policies were effective before that date.  As a result, the tax was due as long as the insurance was written on property or risks located in Texas.  Therefore, the court held that the tax satisfied the post-amendment requirement because each policy was written, procured, or received at a Texas office and insured cotton stored in Texas warehouses. Moreover, the court determined it was also irrelevant whether the insurance was marine cotton insurance; as that determination matters only for whether the insurance is subject to rate regulation, not whether it is subject to the premium tax.

Rekerdres & Sons Insurance Agency, Inc. v. Hegar, No. D-1-GN-16-006194 (Tex. Ct. App. Sept. 24, 2020).

A New York City Administrative Law Judge held that a New Jersey S corporation (“Taxpayer”) was subject to New York City general corporation tax (“GCT”) on gain from the sale of a minority limited partner interest in a limited partnership that leased and managed New York City real estate. The Taxpayer argued that the gain was from an intangible not used in its trade or business, and the gain should therefore be sourced to its domicile and excluded from its taxable income for GCT purposes. The ALJ disagreed, citing a City regulation that says a corporation will be treated as “doing business” in the City for GCT purposes if it holds a limited partner interest in a limited partnership that does business in the City. In the Matter of Mars Holdings, Inc., TAT(H)16-14(GC) (NYC Tax Trib., ALJ Div. June 26, 2020)).