Client works for NY company but is CA resident and does not spend any time in NY. Trying to file a IT-203 in NY to refund the NY withholding and it rejects. Any ideas?

Forum|Forum|6 years ago
April 13, 2020
2 replies
15 views

I have indicated she is a full year resident of CA but needs a multi-state return (CA and NY). The NY non-resident inputs seem to not enable me to indicate the client has not lived or spent any time in NY. I keep trying to do work arounds and the return is rejecting at NY.

ProConnect Tax Online

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itonewbie

Level 15

That is because of the infamous NY personal income tax regulation section 132.18(a). NYS is notorious for the position it takes on sourcing to NY compensation of NRs who do not telecommute for the convenience of the NY employer. There are very narrow exceptions, provided it can be proven that the taxpayer’s home office is a bona fide employer office on any normal workday. My presumption is that the employer should be familiar with this provision of the tax law and would have already considered the possibility of taking a contrary position. This has been tried and tested in courts, challenged by both individual taxpayers and other states, and upheld over the years.

This presents a problem on the CA side. If you research the CA tax code and regulations, you will see that credit is only allowed to the extent CA tax is assessed on income sourced to another state and sourcing for this purpose is determined based on CA tax code (i.e. not NY tax code and regulations). Under CA regulations, wages are generally sourced based on where work is performed. Technically, this could trigger double taxation, which is well attested. Some states' regulations are more forgiving but not CA's, unfortunately.

You will likely need to be the bearer of bad news and decide what tax position to take in relation to CA (rather than NY).

---------------------------------------------------------------------------------Still an AllStar

BobKamman

Level 15

Did your client work in New York, before moving to California? Has he considered filing Form IT-2104.1 with the employer? In any case, I’m glad I don’t have that client. Here is an interesting discussion of the situation:

https://www.friedmanllp.com/insights/help-what-is-new-yorks-convenience-of-the-employer-rule-all-about

And of course, you're filing a New York return reporting the fees paid by this client, right?

itonewbie

Level 15

What I see happen a lot is telecommuting arrangements being set up by accommodating department heads and HR managers, who think of these simply as nice employee retention initiatives and talent strategies, without consultation with tax and legal professionals within and outside the company to first understand the ramifications of these arrangements at both the corporate and individual levels as well as how some of these risks may be mitigated. This occurs even at the largest MNCs.

For one, these telecommuters could establish nexus and PE, either domestically or internationally, which could create unnecessary corporate tax exposures. There may also be fiduciary duties for income and tax reporting and withholding at those jurisdictions along with various other employer obligations.

Telecommuting is actually not an issue that is only popping up now in this modern age of internet. Take a walk down the memory lane and we'll find landmark cases that defined judicial interpretations of "tax home" where some level of telecommuting was involved. The one that fascinates me most is Comm. v. Flowers!

---------------------------------------------------------------------------------Still an AllStar

itonewbie

Level 15

It will help a lot if clients speak to us first before structuring any deal. It's much easier to plan than to unwind what had already been done, if possible at all.

---------------------------------------------------------------------------------Still an AllStar

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