Jennifer Carr & Cara Griffith have published Inconsistencies in New York’s Convenience of the Employer Test, also available on the Tax Analysts web site as Doc 2005-9805, 2005 STT 93-3. Here is the Conclusion:

New York’s convenience of the employer test has caused much consternation in the state tax world, and no wonder. The test, under which New York taxes 100% of nonresidents’ income even if they perform only a small portion of their work inside the state, is both unfair and unwise. First, the test creates a strong disincentive for telecommuting. That directly conflicts with several state and local policies encouraging teleworking as a way to ease New York’s serious commuting problems. Second, the test directly conflicts with New York’s use of a physical presence standard in unemployment benefits matters. In situations in which a teleworker of a New York employer who spent some time in New York lost his or her job, New York would likely deny the teleworker unemployment benefits even though 100% of the worker’s income was taxed under the convenience of the employer test. Finally, the convenience of the employer test is unwise, because its draconian nature creates a strong incentive for employees to stay out of New York entirely when possible. By taxing 100% of all income from employees who spend minimal time in New York, the state loses the opportunity to tax a portion of income earned by employees who would work some of the time in New York were it not for the test.

In sum, the test — though partially based on legitimate concerns about nonresidents reducing their New York income tax burden — is outdated, unfair, and, when compared with New York’s unemployment benefits law, grossly hypocritical. It should give way to a more proportional approach, which would provide tax revenue without punishing those who choose to work remotely.

For prior TaxProf Blog coverage, see here, here, and here