Payback, New Jersey Style
On July 21, 2023, New Jersey Governor Phil Murphy signed into law retaliatory tax legislation aimed directly at its neighbor, New York. Assembly Bill No. 4694. The rule in the majority of states, including the rule in New Jersey prior to enactment of the new law, is that nonresident individuals are only taxed on their income earned from services actually performed in the state. To the great consternation of New Jerseyans, New York has long been an exception imposing what is known as the convenience of the employer rule. This rule requires nonresidents of New York to source their income to New York if their employer’s office is in New York, even if the nonresident performs the work for their employer outside of New York in their state of residency. The only exception to this rule is if the nonresident works for their New York employer outside of New York for the benefit of the employer and not for the convenience of the nonresident employee.
New York’s convenience of the employer rule has long disadvantaged both: (a) New Jersey residents who still are required to pay New York income tax if their office is located in New York even if they work from their homes in New Jersey; as well as (b) New Jersey itself, which provides its residents with a credit for the income tax that they pay to New York, effectively subsidizing New York’s taxation of New Jersey residents working in New Jersey.
Under the new legislation, nonresidents of New Jersey who work for a New Jersey employer and reside in a state that has a convenience of the employer rule (looking at you, New York), must source their income from services performed outside of New Jersey to New Jersey, unless the work is performed outside of New Jersey for the benefit of their employer.
Further, the legislation provides a tax credit to any New Jersey resident who successfully challenges another state’s convenience of the employer rule (looking at you again, New York), as well as a one-time credit to any New Jersey resident currently assigned to an office in another state (ahem, New York) who “seeks from the employer and accepts a permanent reassignment of work location to a New Jersey location during the taxable year.”
Finally, the legislation provides grants to businesses of 25 or more full-time employees that are principally located in another state (perhaps New York?) that, on or before July 1, 2028, “assign their employees, who are New Jersey residents assigned to locations outside of the State, to New Jersey locations.”
It is often said that two wrongs do not make a right. New Jersey and other states would better serve their residents who are caught up in the crosshairs of another state’s convenience of the employer rule by helping them to invalidate those rules rather than enacting their own such rules. The validity of New York’s convenience of the employer rule is currently being challenged at the New York Tax Appeals Tribunal (by a Connecticut resident, not a New Jersey resident). In the Matter of the Petitions of Edward A. and Doris Zelinsky, New York Division of Tax Appeals, DTA Nos. 830517; 830681 (Hearing April 24, 2023). Should that challenge progress into the New York courts, it is not known whether New Jersey would seek to intervene or file an amicus brief in support of the nonresident taxpayer.
This update is one in a series of updates written for the August 2023 edition of The BR State + Local Tax Spotlight.