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A closely divided Court of Appeals Tuesday upheld a controversial tax policy that has made New York state the bane of telecommuters, and something of an outcast among its neighbors. The court held in a 4-3 opinion that a telecommuter who lives and works in Tennessee but is employed by a New York-based company must pay New York taxes on 100 percent of his income even though he spends at most 25 percent of his working time in the Empire State. In Matter of Huckaby, 8, the court rejected constitutional challenges to the so-called “convenience of the employer” test that enables New York to tap the income of people who live outside the state but work for an in-state firm. Under the convenience of the employer test, if the employee works out of state due to the needs of the employer, he or she may apportion income between the days spent in and out of New York. But if the employee works out of state for his or her own convenience, New York claims the right to tax all of the earnings, no matter how much time was spent working here. The rationale for New York’s convenience test was explained 31 years ago in Matter of Speno v. Gallman, 35 NY2d 256 (1974): “Since a New York resident would not be entitled to special tax benefits for work done at home, neither should a nonresident who performs services or maintains an office in New York State.” But telecommuting challenged that rationale, raising new questions in tax law as states struggle to determine which jurisdiction is predominant when a telecommuter’s activity blurs geographic distinctions. Most states have resolved the issue by apportioning income. New York, however, is loath to abandon an income stream that brings in an estimated $100 million every year. Most of New York’s neighbors have urged the state to abandon a tax policy drafted in part to ensure that people living in adjoining states pay their fair share for the public services and benefits they enjoy by virtue of their employment with a New York firm. Critics claim that policy, which sometimes results in double taxation since the earnings of some workers are taxed both by their home state and New York, threatens the future viability of telecommuting. “The decision is not only bad for telecommuters nationwide, but for New York businesses,” said Nicole Belson Goluboff, an attorney in Scarsdale specializing in telecommuting issues. “It compromises their ability to recruit and retain candidates from a nationwide and highly skilled applicant pool. It is a reaffirmation of New York’s anachronistic and counterproductive hostility to telework.” In Washington, D.C., Senator Christopher Dodd, D-Conn., and Representative Christopher Shays, R-Conn., last year introduced legislation that would bar states like New York from imposing its tax policies on traditional commuters and telecommuters. That legislation, which has not been re-introduced by the 109th Congress, was sparked by a Court of Appeals ruling in 2003, when the court upheld the convenience of the employer test against a challenge initiated by Edward Zelinsky, a tax law professor who teaches in New York but frequently works from his home in Connecticut (see Matter of Zelinsky, 1 NY3d 85). Tuesday’s opinion extended the reach of Speno and Zelinsky to the realm of telecommuting. Although the legal issues raised in Zelinsky were similar to those in Huckaby, Tuesday’s ruling has far broader ramifications for the modern and increasingly common practice of telecommuting, observers said. Unlike Zelinsky, who lives within relatively easy commuting distance from where he teaches, Benjamin N. Cardozo School of Law, Thomas L. Huckaby lives some 900 miles and a two-hour plane trip from the company that employs him. Huckaby is a modern telecommuter who has little opportunity to benefit from the New York public services that are readily available to Zelinsky, a more traditional commuter. Goluboff said that while some other states also use a convenience of the employer test, New York is by far the most aggressive and is taxing residents of several non-contiguous states — including Tennessee, Florida, New Hampshire, Maine and North Carolina. What this means for New York is that businesses may decide to move elsewhere, said Goluboff, adding that for new businesses “looking for a place to set up shop, New York doesn’t look terribly attractive.” But the state tax department heralded the ruling and disputed that it would negatively impact telecommuting. “Obviously, we are quite pleased that the Court of Appeals continued to uphold the constitutionality of the convenience of the employer test,” said Thomas Bergin, spokesman for the Tax Department. “We think it is a viable tax policy that will continue for some time.” In Tuesday’s opinion, the majority expressed some reservations over the fundamental fairness of taxing out-of-state residents who have only remote links to New York. But in the final analysis, Judge Susan Phillips Read, joined by Chief Judge Judith S. Kaye and Judges Albert M. Rosenblatt and Victoria A. Graffeo, concluded that the convenience of the employer test does not inherently offend either the Commerce Clause or the Due Process provision in the U.S. Constitution. “Petitioner criticizes the convenience test as unfair and unsound as a matter of tax policy and a discouragement to telecommuting,” Read said. “Maybe so. We do not view it as our role, however, to upset the Legislature’s and the Commissioner’s considered judgments so long as the convenience test has been constitutionally applied in this case.” On Tuesday, the court majority said there may be some point at which the tax is so disproportionate — for instance, if the taxpayer works only one day a year in New York — that its application would violate due process. But it declined to draw any line and said that in the Huckaby case, spending 25 percent of one’s time in New York is plenty to justify the tax and “satisfy any rough proportionality requirement called for by due process.” ‘CONVENIENCE’ CRITICIZED A three-judge dissent led by Judge Robert S. Smith objected on both statutory and constitutional grounds. Smith accused the majority of concocting “a novel Commerce Clause theory as a companion to its novel due process theory.” He implied that the majority contorted due process and commerce clause principles to create a constitutional niche for an otherwise indefensible tax policy. “It is evident, I suggest, that the majority’s constitutionalizing of the Commissioner’s convenience rule is based on a different kind of ‘convenience’: it conveniently allows New York State to tax telecommuters like Huckaby,” Smith wrote. Judges George Bundy Smith and Carmen Beauchamp Ciparick joined him. ARGUMENTS ON APPEAL Court records show that Huckaby is a computer programmer who lives and worked in Nashville for a software development company called Multi-User Computer Solutions. One of the company’s clients was the National Organization of Industrial Trade Unions, based in Jamaica, Queens. After Multi-User Computer reorganized in 1991, Huckaby accepted a job with the trade union organization on the condition that he remain in Tennessee. He has worked from a home office since then. The dispute centers on the 1994 and 1995 tax years, when Huckaby spent 75 percent of his working days in Tennessee and 25 percent in New York. He acknowledged liability for New York income tax reflecting his workdays in this state, but objected when the state — citing the convenience of the employer test — demanded tax on his entire income. Huckaby’s appeal by Peter L. Faber of McDermott, Will & Emery in Manhattan focused on three main points. He argued that the convenience of the employer test was devised to prevent abuses by commuters whose main place of business is New York, not “nonresident telecommuters”; that the due process clause mandates a fair apportionment of taxes when a citizen resides and works in different states; and that the Commerce Clause bars the sort of impact on interstate commerce that allegedly occurred as a result of New York’s application of the convenience of the employer test on Huckaby. Assistant Solicitor General Julie S. Mereson countered that Huckaby’s employer receives the value of a New York venue every day of the year. Faber responded that it is not the employer who is paying the tax at issue, but his client. Read and the majority seemingly accepted Mereson’s argument. Smith, however, found “troubling” the notion that an in-state entity that pays a taxpayer’s salary is itself a “value” for due process purposes. “If the location of the taxpayer’s employer is a taxable ‘value’, there is no reason in principle why New York may not tax all out-of-state employees of New York firms — for example, a New York company’s California sales manager, or a secretary who works in a New York law firm’s Boston office,” Smith wrote. “And other states can return the compliment.” Faber said that he will consult with his client about the possibility of seeking leave to the U.S. Supreme Court. “I think the majority opinion on the due process issues is wrong in focusing on the employer rather than the employee,” Faber said. “We are considering our options and may well petition the Supreme Court. This is an issue of national significance.”

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