By Craig Reilly

Law360 (December 18, 2020, 4:12 PM EST )

Craig Reilly

The end of 2020 is here. A time to reflect and appreciate the memories and blessings of the past ... oh, never mind. I can't even fake it. 2020 is finally coming to a close. So long. Farewell. Good riddance.

Most of us will happily say goodbye to global pandemics, disputed elections and struggling economies. The road to recovery is hopefully in front of us, leaving behind a year of unexpected twists and turns and bumps (and a few holes) in the road.

While COVID-19 has undoubtedly overshadowed most news from 2020, including New York state tax news, there actually were tax updates over the past 12 months, a few of which were even unrelated to the fallout from the worst global pandemic in over a century.

So while I can't promote this as your typical warm and fuzzy New Year reflection column, we can still look back at some of the noteworthy 2020 New York tax events, while hoping for a happy, healthy and prosperous 2021.

New York's Holiday Wish List: Federal COVID-19 Relief

It's unlikely that we'll ever be able to mention 2020 without discussing the devastating fallout from COVID-19. And the financial impacts on New York state and New York City are likely to linger for years, especially without significant relief efforts from the federal government.

Just this month, New York political leaders, including New York Gov. Andrew Cuomo, New York City Mayor Bill de Blasio, Senate Majority Leader Andrea Stewart-Cousins and Assembly Speaker Carl Heastie delivered a letter[1] to New York state's congressional delegation, asking Congress to ensure enough funding in the next federal stimulus package to avoid "further massive damage" to the city and state budgets.

According to the letter, "New York has the highest number of deaths in the nation and has among the highest number of unemployed people in the nation because," the letter continues, "COVID came to New York before the Trump Administration even acknowledged COVID's presence on the Eastern seaboard."

New York's lawmakers therefore request at least $4.5 billion in aid for the Metropolitan Transit Authority; $15 billion in state aid; and at least $9 billion in direct aid to New York City. These are big dollar amounts. But as the letter makes clear, the state and city see this as just the beginning of a longer relief process, with New York's legislative leaders still hoping that more substantive relief can be passed in the New Year.

Whether those holiday wishes come true, the letter is a clear sign that COVID-19 has dramatically impacted the state and city's finances and immediate budget concerns. It should therefore come as little surprise that much of the other noteworthy 2020 New York tax news was somehow directly or indirectly related to the reactions and impacts of COVID-19's unexpected arrival.  

The Cross-State Battle Over COVID-19 Telecommuting

One of the most immediate and widespread impacts of COVID-19 has been the shift to temporary — and in some instances, permanent — telecommuting. New York state residents, and New York state nonresidents who typically commute to work in the state, are currently spread out everywhere from Maine to Florida to California to Washington, and everywhere in between.

In the months since offices across the country shut their doors, many states have issued guidance related to how state personal income taxes should be handled during the pandemic, with a specific focus on telecommuting employees.

The primary question addressed by this guidance has been whether an employee telecommuting from outside a state due to the pandemic owes personal income tax in their home state or in their employer's state — or both.

New York finally joined the mix in October when it quietly updated a COVID-19 FAQ.[2] Most of what was included in the state's release contained basic residency and domicile guidance, but tucked in these FAQs were the following question and answer:


The excerpt includes a hyperlink to a technical services memorandum,[3] which explains the state's bona fide employer office safe harbor rules.

These safe harbor rules allow an out-of-state telecommuter credit for days worked out-of-state if the individual can establish a bona fide employer office in his or her home. And although the recent FAQ does not specifically reference New York's convenience of the employer rule, this is the same, longstanding rule that New York has followed in the typical telecommuting context.

New York's convenience rule provides that when determining the New York source income of a nonresident employee "any allowance claimed for days worked outside New York state must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer."[4]

Many of us wondered whether the New York Tax Department would seek to apply its convenience rule concepts to telecommuting during the pandemic — which, by the way, has been decidedly inconvenient and most certainly necessary due to physical office closures and  executive shut down orders — but we now have our answer.

Nothing has changed in the face of the worst global pandemic of the past 100 years. If a taxpayer is working from home, whether as a result of COVID-19 restrictions or not, New York state is generally going to treat the telecommuting days as days worked within the state.

There are, however, a few important exceptions to the rule. First, as was the case before the pandemic, the employee can avoid this result if they can establish a bona fide employer office at their telecommuting location. Second, New York's convenience rule only applies to an employee if the employee's assigned or primary office is in New York.

So, by opening a real office in an out-of-state state location, and by making clear that the employee's new primary or assigned office is located at that new location, the convenience rule should not apply.

And there is perhaps now a more obvious rationale than ever for an employer to open another office, given that most employers have either kept their primary office closed, especially in major metropolises like New York City, or have been subject to extreme limitations about the number of employees able to work in their existing locations.

Not surprisingly, other states have followed New York's lead, and a brewing cross-border legal fight over the issue suggests that a simple FAQ won't be the last we'll hear on this topic.

Massachusetts, for example, implemented its own emergency regulation this year, indicating that


New Hampshire, which has no individual income tax, responded to Massachusetts new rule by filing a motion for leave with the U.S. Supreme Court to file a bill of complaint requesting that the court hear its constitutional challenge to Massachusetts's regulation: "Live Free or Die!"

New Hampshire argues that the regulation violates the commerce and due process clauses of the U.S. Constitution by taxing New Hampshire residents for work performed entirely in New Hampshire. And other states have recently lined up to join New Hampshire in its fight, with rumblings of at least one of New York's neighbors, New Jersey, preparing an amicus brief arguing that the Supreme Court should hear the case.

New Jersey's amicus brief would follow an earlier New Jersey senate panel bill that instructed New Jersey's treasurer to study New York's taxation of New Jersey residents.

At the time the senate bill was released, New Jersey Senate Republican Budget Officer Steven Oroho announced in a NJ.com opinion article that, "If New York were prevented from taxing New Jersey residents who no longer go to work in that state, we could generate hundreds of millions — perhaps billions — of tax dollars for New Jersey, all while lowering the income tax bills of former commuters substantially."[6]

This additional revenue comes from the fact that New Jersey currently offers its residents a dollar-for-dollar credit for most taxes paid to New York under the convenience rule. So with millions, if not billions, of dollars of revenue at stake, it's no wonder New Jersey's looking to join the fight.

A Potential Silver Lining for New York City Partnerships

As the cross-border fight over telecommuting suggests, the current pandemic has changed the working landscape for commuters everywhere, and this is especially true in New York City, which became the early epicenter for the crisis.

Now more than ever, individuals who used to travel into the city for work are logging in remotely from home, delivering their services miles away from their Manhattan offices. In addition to several important personal income tax questions, this has also created potential tax saving opportunity for professional service companies subject to the New York City unincorporated business tax, or UBT.

While New York state's convenience of the employer rule often treats an employee's compensation earned while telecommuting as if it were earned at the employer's office location, the convenience rule is limited, at least for the time being, to personal income tax. It does not apply to business taxes.

And for purposes of determining the source of business receipts for New York City's UBT, the New York City Administrative Code[7] sources service receipts to the location where the services are actually performed. Because there is no convenience rule under these sourcing provisions, it would appear that the apportionment should be based on where the telecommuters are physically located — whether that be Montauk, Miami or Montana.

This could be a real game changer for New York City-based professional service companies, such as hedge funds, law firms and accounting firms that are structured as partnerships, LLCs or sole proprietorships subject to the UBT.

For example, prior to the ongoing stay-at-home orders, if a hedge fund had 10 employees, and they all worked from the fund's New York City office, all income generated from the performance of those services would be sourced to the city for UBT purposes.

If, however, the same employees are now instead telecommuting — four from their apartments in Manhattan and six from their homes in Connecticut — it is likely that only 40% of the income generated from those services should be sourced to New York City, proportionately reducing the entity's UBT tax liability.

This may be one of the few pandemic-driven telecommuting scenarios that comes with welcome news for New York taxpayers. That said, New York City's current fiscal position has it up against the ropes, and this could very well make city auditors even more aggressive than usual. So, as with much else that has occurred over the past year, the future still holds a lot of uncertainty.

New New York Taxes?

I sound like a broken record, but the fallout from COVID-19 has left a gaping hole in New York City's and state's finances. And, with talks over additional rounds of federal stimulus stalled heading into year end, the state and city continue to look for new revenue raisers as possible fixes to the ongoing budgetary crises.

Two new proposals that stood out over the past year were New York City's so-called pied-à-terre tax and a potential New York state — as mentioned above, New York City already has one of these — unincorporated business tax.

The city's pied-à-terre tax has been introduced as part of every legislative cycle since at least 2013. The proposal was seriously considered during state budget negotiations in 2019 but was ultimately left out of the final budget. Discussions then ramped up again this year, with a recent analysis finding the measure could raise $390 million annually.[8]

The current proposal would authorize New York City to administer a tax on certain nonprimary residences worth $5 million or more, and include one- to- three-family houses, co-ops and condos.

It would create a graduated tax, starting at a rate of 0.5% for the first $1 million above a property value of $5 million and maxing out at a top rate of 4% for properties worth $25 million or more. Recent amendments to the proposal would exempt properties that are rented on a full-time basis and allow New York City to create other local exemptions.[9]

There are several open questions regarding the proposal: How would the legislation define the term "primary residence"? How would the law apply to real property where legal title to the property is held by a trust or other entity?

And opposition to the proposal from New York City real estate groups remains fierce. But it appears the city and state are seriously considering the proposal, which may make it that much more expensive for out-of-towners to maintain their little — or not so little — places in the city.  

The other new potential tax that seems to be generating a renewed focus recently is New York state's potential entity-level tax on unincorporated businesses, such as partnerships. Back in 2018, the state released a bill discussion draft outlining what a possible state-level unincorporated business tax could look like.[10]

For a while, though, efforts to push forward that type of legislation seemed to stall, while other states, such as New Jersey and Connecticut, moved ahead with enacting their own pass-through entity level taxes. The idea behind these new taxes is to avoid or work around the $10,000 cap on state and local taxes, which was enacted as part of the Tax Cuts and Jobs Act.

The workaround imposes taxes at the pass-through entity level, rather than the individual level, and then offers individuals a credit against their own state personal income taxes. This ensures the income is still taxed only once by the state, while, hopefully, allowing residents to avoid the SALT cap, since the states enacting these laws understood current IRS rules to allow for the full deduction of taxes paid by entities.

There remained until recently, however, a level of uncertainty as to whether the IRS would view the workarounds as legitimate, which likely prevented states such as New York from jumping on the bandwagon.

This all changed in November when the IRS issued Notice 2020-75.[11] The notice clearly informed taxpayers that the IRS intends to issue regulations, clarifying that state and local income taxes imposed on and paid by a partnership or S corporation, e.g., pass-through entities, are allowed as a deduction by the entity in computing its taxable income or loss for the year of the payment.

In other words, the entity-level tax payments are not taken into account in applying the SALT cap limitation to any individual who is a partner or shareholder in the pass-through entity. This is true regardless of whether the pass-through entity tax is the result of an election by the entity — every state, except Connecticut, with a current pass-through entity tax has made the tax elective.

Similarly, the IRS determined it is immaterial whether the partners or shareholders of the pass-through entity receive a partial or full deduction, exclusion, credit or other state-level tax benefit based on their share of the amount of tax paid.

This recent guidance could trigger a flurry of state legislative activity by states seeking to help in-state business owners get around the deduction cap as states now have much less uncertainty about how the IRS will treat the workaround. This includes a renewed focus on New York state's proposed unincorporated business tax.

In fact, the only reason I see for states not to pursue this approach is the continuing uncertainty surrounding just how much benefit the workaround could provide given that President-elect Joe Biden has discussed replacing the $10,000 SALT cap with a 28% limit on all itemized deductions for those earning more than $400,000.

This change could eliminate the usefulness of pass-through entity taxes. Either way, owners of pass-through entities, especially those that operate solely in a single state, should be very pleased by this news.

Fire, But No Smoke

One new source of revenue that many practitioners expected to be able to announce this past year was legalized recreational cannabis tax. But there has yet to be any smoke to this fire. This could change soon, however, as New York Senate Majority Leader Andrea Stewart-Cousins has said recently, it isn't a question of if, but when and how New York lawmakers approve the taxation and legalization of recreational cannabis.

New York's senate democratic leader predicted at a news conference in December that Democrats in the state senate will have grown their majority into a veto-proof supermajority once tallies of the final 2020 votes are complete.

And a Democratic supermajority opens a clear path for 2021 being the year when New York finally legalizes cannabis for adult use, especially in the wake of COVID-19's budgetary crisis and the need for additional revenue streams.

Other recent reports, however, caution that New Yorkers shouldn't expect potential marijuana tax revenues to solve all the state's fiscal woes. The Citizens Budget Commission, for example, released a November report arguing that New York should be hesitant about relying on potential revenues from the legalization of recreational marijuana as a way to quickly close gaps in the state's budget.

The report notes that states which have already legalized recreational marijuana aren't realizing consistent tax revenues until, on average, three to four years after the fact, which does little to address New York's immediate need for significant amounts of additional revenue.

New York Continues Updates to Draft Corporate Tax Reform Regulations

Since at least early 2016, the New York State Department of Taxation and Finance has regularly provided draft updates and amendments to the state's Article 9-A Business Corporation Franchise Tax Regulations.[12] The updates are meant to incorporate the changes made by New York's corporate tax reform legislation, which was contained in the 2014-2015 and 2015-2016 New York state budgets.

Because these are draft regulations, New York rightfully instructs taxpayers that the "draft regulatory amendments are not final and should not be relied upon." In practice, however, it can be very helpful for taxpayers to review the draft regulations in search of useful guidance. In other words, there's no need to look a gift horse in the mouth!

The 2020 updates included draft regulations regarding basic definitions;[13] net operating losses;[14] credits against tax;[15] updated rules for imposing the metropolitan transportation business tax surcharge;[16] and the taxation of special entities, including corporate partners, New York S corporations, real estate investment trusts, regulated investment companies and domestic international sales companies, and qualified New York manufacturers.[17]

Earlier versions of the draft regulations touch on the other significant changes made under New York's corporate tax reform, including:

• Adoption of an economic presence nexus standard;
  
  
• Implementation of a mandatory combined unitary reporting requirement;
  
  
• Adoption of a single receipts factor for all New York taxpayers in apportioning business income and capital; and
  
  
• Adoption, for apportionment purposes, of customer-based sourcing and a special qualified financial instrument election for some financial instruments.

The due dates for public comment on most of the state's draft regulations have passed, but the department's website says: "Comments submitted after the due date may still be considered."

And as the end of 2020 approaches, the department has yet to submit any of its proposed regulations to the State Administrative Procedures Act process for formal adoption. So if you're looking to pass some time this holiday season, take a look and share your thoughts.

Trump's New York Tax Fights Drag On

Back in late 2019, President Donald Trump announced, on Twitter of course, that he was changing his personal tax residence from New York to Florida.[18] According to Trump's tweets,  he will always "cherish" the people of New York, but "unfortunately," the president claimed, "despite the fact that I pay millions of dollars in city, state and local taxes each year, I have been treated very badly by the political leaders of both the city and state."

The president therefore announced that it was "best for all concerned" for him to leave New York and make Florida his new home. If only posting a tweet were all that taxpayers needed to do to legally change their tax residency!

The past year, however, has proven that Trump's disputes with New York tax authorities are anything but a thing of the past. We saw, for example, the U.S. Supreme Court issue two opinions over access to Trump's state and federal tax returns.[19]

First, in Trump v. Vance,[20] the court held that presidential immunity didn't apply to a criminal investigation by the New York County district attorney's office, in which the district attorney's office issued a subpoena to Mazars USA LLP, Trump's longtime personal accountants, seeking Trump's tax returns and related schedules.

Second, in Trump v. Mazars USA LLP,[21] the court held that the U.S. Court of Appeals for the D.C. Circuit and the U.S. Court of Appeals for the Second Circuit had failed to adequately consider the separation of powers issues presented by congressional subpoenas issued to Trump's longtime accountants for his financial records and to two banks for his, his family's, and his entities' financial information.

The court's decision in Mazars vacated two lower court rulings that upheld the subpoenas and remanded the issue back to the circuit courts to more fully consider the separation of powers issues involved.

Separately, the New York Attorney General's Office continues its civil investigation into whether the Trump Organization Inc. inflated the value of a 200-acre Westchester County estate in order to claim a $21.1 million federal tax deduction in 2015 related to the donation of a 158-acre conservation easement.

The case, New York v. Trump Organization et al.,[22] is currently before the New York Supreme Court in New York County, as the court considers procedural arguments over which subpoenaed documents can be shielded under attorney-client privilege.[23]

So while Trump may be looking ahead to sunnier tax days at Mar-a-Lago, 2020 showed us that New York's interest in the President's tax filings aren't going away any time soon.

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K. Craig Reilly is a senior associate at Hodgson Russ LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc. or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.governor.ny.gov/news/governor-cuomo-mayor-de-blasio-senate-majority-leader-stewart-cousins-speaker-heastie-and-new.

[2] https://www.tax.ny.gov/pit/file/nonresident-faqs.htm#telecommuting.

[3] https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf.

[4] 20 NYCRR 132.18(a).

[5] 830 CMR 62.5A.3(3)(a).

[6] https://www.nj.com/opinion/2020/08/working-from-home-and-still-paying-a-bundle-in-taxes-to-ny-lets-end-that-opinion.html.

[7] NYC Admin Code 11-508(c)(3)(C).

[8] https://ibo.nyc.ny.us/iboreports/revenue-options-revising-the-property-and-related-taxes-2020.pdf.

[9] https://www.nysenate.gov/legislation/bills/2019/s44/amendment/b and https://www.nysenate.gov/legislation/bills/2019/a4540/amendment/b.

[10] https://www.tax.ny.gov/pdf/stats/stat_pit/pit/unincorporated-business-tax-discussion-draft-summary.pdf.

[11] https://www.irs.gov/pub/irs-drop/n-20-75.pdf.

[12] https://www.tax.ny.gov/bus/ct/corp_tax_reform_draft_regs.htm.

[13] https://www.tax.ny.gov/pdf/bus/ct/definitions-regulation-February-2020-draft.pdf.

[14] https://www.tax.ny.gov/pdf/bus/ct/nol-draft-july-2020.pdf.

[15] https://www.tax.ny.gov/pdf/bus/ct/credits-part-5-march-2020-draft.pdf.

[16] https://www.tax.ny.gov/pdf/bus/ct/mta-revisions-draft-9-10-20.pdf.

[17] https://www.tax.ny.gov/pdf/bus/ct/special-entities-may-2020-draft2.pdf.

[18] https://www.law360.com/articles/1217142. 

[19] https://www.law360.com/articles/1312927.

[20] Trump v. Vance, No. 19-635 (S. Ct. 2020).

[21] Trump v. Mazars USA LLP, No. 19-715; No. 19-760 (S. Ct. 2020).

[22] New York v. Trump Organization et al., Case No. 451685/2020.

[23] https://www.law360.com/tax-authority/state-local/articles/1335712/trump-org-opposes-new-subpoena-args-in-ny-ag-s-probe?nl_pk=3ca94db0-87a5-494b-a063-aed73de89ab4&utm_source=newsletter&utm_medium=email&utm_campaign=tax-authority/state-local.

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