3 No. 8
In the Matter of Thomas L.
Huckaby,
Appellant, v. New York State Division of Tax
Appeals, Tax Appeals Tribunal,
et al.,
Respondents.
2005 NY Int. 51
March 29, 2005
This opinion is uncorrected and subject to revision before
publication in the New York Reports.
Peter L. Faber, for appellant. Julie S. Mereson, for respondents.
READ, J.:
This appeal revisits New York's "convenience of the
employer" test, which provides that when a nonresident is
employed by a New York employer, income derived from work in
another state is taxable by New York unless performed out of
state for the necessity of the employer. Here, the taxpayer, a
Tennessee resident who works for a New York employer, contends
that the convenience test violates the statute that it implements
as well as the Due Process and Equal Protection Clauses of the
Fourteenth Amendment to the United States Constitution. We
disagree, and uphold the challenged tax as applied to this
taxpayer. I. Until 1991, petitioner Thomas L. Huckaby, a Tennessee
resident, worked as a computer programmer for Multi-User Computer
Solutions (MCS), a Tennessee employer engaged in the business of
developing and selling computer software. In 1991, MCS underwent
a reorganization, and petitioner's employment was terminated as a
result. He was subsequently hired by the National Organization
of Industrial Trade Unions (NOITU), an organization based in
Jamaica, New York. NOITU had been an MCS client, and Huckaby had
worked on NOITU matters while he was employed by MCS. NOITU is an umbrella organization of industrial trade
unions, which provides administrative services for its members.
Petitioner's duties included supporting the software programs
that MCS had developed for NOITU; assisting the computer
department's manager in selecting new information technology;
and, in general, meeting NOITU's programming needs. NOITU and petitioner agreed that he would work
primarily from his home in Tennessee, and would travel to the New
York office only as needed to "gather guidelines for revision of
existing or creation of new computer programs, and to instruct
NOITU's New York personnel in their use." NOITU set up a long-
distance data line to connect its Jamaica office to petitioner's
Tennessee home office, where he also maintained a dedicated voice
telephone line for business purposes and two computer terminals,
which were eventually replaced with a personal computer and a
printer. NOITU reimbursed petitioner monthly for office
expenses, including telephone bills and supplies. Petitioner concedes that he performed the bulk of his
work for NOITU in Tennessee rather than in New York solely for
personal reasons; NOITU did not require him to perform any work
in Tennessee and would not have objected if he had worked out of
its New York office. In 1994, petitioner split his time between
NOITU's New York office, where he worked 56 days, and his
Tennessee home office, where he worked 187 days. In 1995, he
worked in NOITU's New York office for 62 days and in his
Tennessee home office for 180 days. Thus, over this two-year
period, petitioner spent roughly 25% of his workdays in New York
and 75% of his workdays in Tennessee. He did not work in 1994 or
1995 for any person or any entity other than NOITU as either an
employee or an independent contractor. Petitioner timely filed 1994 and 1995 nonresident
income tax returns with New York. He allocated his income
between New York and Tennessee based on the number of days he
worked in each state relative to the total number of days he
worked in each tax year. Upon subsequently auditing petitioner's 1994 and 1995
returns, the New York State Department of Taxation and Finance
allocated 100% of his income to New York State and New York City
and issued notices of deficiency. The Department explained that
"[a]ny allowance claimed for days worked outside of New York must
be based on the performance of services which, because of the
necessity of the employer, obligate the employee to out-of-state
duties in the service of his employer. Such duties are those
which, by their very nature, cannot be performed at the
employer's place of business."
Petitioner paid the deficiencies under protest. After
a conciliation conferee sustained the assessments, he took an
administrative appeal seeking a refund. An administrative law
judge sustained the notices of deficiency, and the Tax Appeals
Tribunal affirmed. Petitioner then commenced this Article 78
proceeding in the Appellate Division pursuant to Tax Law § 2016.
The Appellate Division confirmed the administrative determination
and dismissed the petition (6 AD3d 988 [3d Dept 2004]). II. Tax Law § 601(e) imposes a tax on "income which is
derived from sources in this state of every nonresident"
(emphasis added). Section 631(a)(1) of the Tax Law defines the
"New York source income of a nonresident individual" as including
"[t]he net amount of items of income, gain, loss and deduction
entering into his federal adjusted gross income, as defined in
the laws of the United States for the taxable year, derived from
or connected with New York sources" (emphasis added). Tax Law §
631(b)(1)(B), in turn, provides that "[i]tems of income, gain,
loss and deduction derived from or connected with New York
sources shall be those items attributable to: . . . (B) a
business, trade, profession or occupation carried on in this
state" (emphasis added). The "carried on" language first appeared in the Tax Law
in 1919, the year New York adopted an income tax ( see L 1919, c
627). The 1919 law imposed a tax on "the entire net income and
net capital gain . . . from all property owned and from every
business, trade, profession or occupation carried on in this
state by natural persons not residents of the state" (former Tax Law § 351). The 1919 law also provided that "[i]n the case of
taxpayers other than residents, gross income includes only the
gross income from sources within the state" (former Tax Law §
359[3]). Other sections provided for deductions (former Tax Law § 360), exemptions (former Tax Law § 362) and credits (former Tax Law § 363) for nonresidents. The United States Supreme Court in
Travis v Yale & Towne Mfg. Co. (252 US 60 [1920]) vindicated New
York's nonresident income tax from charges that it violated the
Commerce, Due Process and Equal Protection Clauses.[1]Petitioner contends that sections 601 and 631 of the
Tax Law preclude New York from taxing income attributable to work
that he carried out for his New York employer in his Tennessee
home office. Nothing in the Tax Law's legislative history,
however, indicates whether the Legislature intended business
"carried on in this state" and "sources in this state" to refer
to the location of the employee or of the employer. Petitioner's
assumption that these phrases signify the employee's place of
performance traces to a 1919 opinion of the Attorney General
construing the phrase "sources [of income] within the State"
(1919 Report of Atty Gen 301). Attorney General Charles D.
Newton opined that "[i]t seems to me that the work done, rather
than the person paying for it, should be regarded as the 'source'
of the income" ( id.). He went on to conclude that "[w]here
services are rendered partially within and partially without the
State, the income therefrom should be divided pro rata into
income from sources within and without the State" ( id.). In 1960, the Tax Law was recodified and reconfigured so
as to allow taxpayers to use federal figures for their state
returns (Message of the Governor, 1960 McKinney's Session Laws of
NY, at 2026). Sections 601 and 631 were added and mirror, to a
large extent, the language found in the predecessor statutes.
Importantly, however, new language was folded into section 631 as
subdivision (c). This subdivision, referring to New York source
income of nonresidents, states that
"[i]f a business, trade, profession or
occupation is carried on partly within and
partly without this state, as determined
under regulations of the tax commission, the
items of income, gain, loss and deduction
derived from or connected with New York
sources shall be determined by apportionment
and allocation under such regulations."
The Legislature thus recognized the complexities of administering
an income tax for a nonresident who works both within and without
the state, and left it up to the State Tax Commission, whose
functions and duties in this regard were subsequently transferred
to the Commissioner of Taxation and Finance ( see L 1986, c 282),
to develop a rule for apportionment and allocation. This rule, the convenience of the employer test,
provides that
"[i]f a nonresident employee . . . performs services
for his employer both within and without New York
State, his income derived from New York State sources
includes that proportion of his total compensation for
services rendered as an employee which the total number
of working days employed within New York State bears to
the total number of working days employed both within
and without New York State. . . . However, 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" (20 NYCRR 132.18[a]).
When the convenience test first came into use is obscure;
however, it was embodied in regulation by 1960, the tax year at
issue in Matter of Speno v Gallman (, 35 NY2d 256 [1974]).[2]In Speno, we addressed the language "sources within the
state" (former Tax Law § 632) in relation to the taxation of the
income of the nonresident president of a company with offices in
New York and abroad. We endorsed a "refinement" of the Attorney
General's 1919 "place of performance" opinion. That is, we
accepted the Department's interpretation of the Tax Law in the
convenience test, and held that "sources within the state" does
not simply mean "place of performance." Rather, it calls for a
more complicated analysis that takes into consideration why work
is performed out of state. Our recent decision in Matter of
Zelinsky v Tax Appeals Trib. (1 3 85 [2003], cert denied541 US 1009), which rejected challenges to the convenience test on
federal due process and Commerce Clause grounds, was premised on
our conclusion in Speno that the convenience test is a valid
interpretation of the Tax Law. Petitioner contends that while the convenience test as
applied in Speno and Zelinsky may have comported with the Tax
Law, his circumstances are different because he was not seeking
to avoid or evade taxes. But our decisions in Speno and Zelinsky
did not rest on any notion that these taxpayers were motivated to
work at home to sidestep New York income tax liability. Further,
although petitioner may not be in a position to commute
physically into New York State each day to work,[3]
he is the one
who chose to accept employment from a New York employer (with the
advantages of a New York salary and fringe benefits) while
maintaining his residence in Tennessee, some 900 miles and a two-
hour plane trip distant from his New York employer's office. In short, the statute facially evidences the
Legislature's intent to tax nonresidents on all New York source
income, and to task the Commissioner to develop a workable rule
for apportioning and allocating the taxable income of
nonresidents who work both within and without the State. The
Commissioner has carried out his statutory responsibility by
adopting the convenience of the employer test. III. Petitioner's due process challenge to the convenience
test relies principally on Supreme Court cases involving taxes on
interstate businesses ( see e.g. Wisconsin v J. C. Penney Co.,
311 US 435, 441 [1940] [upholding from due process challenge tax
on the "privilege of declaring and receiving dividends, out of
income derived from property located and business transacted in
(Wisconsin)"]; Moorman Mfg. Co. v Bair, 437 US 267 1978]
[upholding from due process challenge Iowa's "single-factor"
formula for allocating interstate business income for tax
purposes]; Hans Rees' Sons v North Carolina, 283 US 123 1931]
[invalidating under Commerce Clause tax on 84% of corporation's
income where only 17% was sourced in North Carolina]). In Matter
of British Land v Tax Appeals Trib. (85 2 139 [1995]), we
summarized this multistate business case law as follows:
"[A] formula-based tax on income may be struck down if
the income attributed to the State is in fact out of
all appropriate proportions to the business transacted
[by the taxpayer] in that State or if application of
the apportionment formula has lead to a grossly
distorted result. The taxpayer bears the burden of
showing by clear and cogent evidence that [application
of the formula] results in extraterritorial values
being taxed ( id. at 146 [internal quotations omitted]). While instructive, these cases are not directly
relevant to this appeal. Income derived from a business's
interstate activities differs from income a nonresident earns
from a New York employer -- nonresidents do not implicate
themselves or their employers in interstate commerce merely by
working from home ( see Zelinsky, 1 NY3d at 92-93), while
interstate businesses are, by definition, engaged in interstate
commerce. In order for these interstate business precedents to
bear on petitioner's due process challenge to the convenience
rule, we must tease out their Commerce Clause implications.[4]The dormant Commerce Clause "prohibits state taxation,
or regulation, that discriminates against or unduly burdens
interstate commerce and thereby imped[es] free private trade in
the national marketplace" ( GMC v Tracy, 519 US 278, 287 1997]
[citations omitted]). A four-pronged test has developed over the
course of the Supreme Court's Commerce Clause jurisprudence. A
state tax on interstate commerce violates the dormant Commerce
Clause unless it "is applied to an activity with a substantial
nexus with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly related
to the services provided by the State" ( Complete Auto Transit v
Brady, 430 US 274, 279 [1977] [upholding under Commerce Clause "a
state tax for the privilege of carrying on, within a state,
certain activities related to a corporation's operation of an
interstate business"]). The Commerce Clause's requirement of fair apportionment
has been said to be a "principle of fair share . . . which is
threatened whenever one State's act of overreaching combines with
the possibility that another State will claim its fair share of
the value taxed" ( Oklahoma Tax Commn. v Jefferson Lines, 514 US 175, 184 [1995] [holding superseded by statute]). "[T]he central
purpose behind the apportionment requirement is to ensure that
each State taxes only its fair share of an interstate
transaction" ( Goldberg v Sweet, 488 US 252, 260-61 [1989]).[5] Shaffer v Carter (252 US 37 [1920]) is the Supreme
Court's last decisive statement on a state's ability to tax the
income of a nonresident as opposed to a business engaged in
interstate commerce. There, the Court held that "just as a State
may impose general income taxes upon its own citizens and
residents whose persons are subject to its control, it may, as a
necessary consequence, levy a duty of like character, and not
more onerous in its effect, upon incomes accruing to
non-residents from their property or business within the State,
or their occupations carried on therein" ( id. at 52). Petitioner contends that the convenience rule violates
due process because he is taxed out of all proportion to the
benefits that he receives from New York. Accordingly, he asks us
to engraft a proportionality requirement upon existing due
process precedent. The Supreme Court, however, has established
distinct Commerce Clause and due process restraints in its state
taxation rules. Specifically, the Court has stated that the
dormant Commerce Clause is "a means for limiting state burdens on
interstate commerce" ( Quill Corp. v North Dakota, 504 US 298, 313
[1992]). It is in this context that the apportionment standard
was developed. If a State overreaches by taxing an activity that
another state is also justified in taxing, the burden placed on
interstate commerce is too great to withstand constitutional
scrutiny. Due process, on the other hand, is "a proxy for notice"
( id.) and looks to the connection that must be present between
the taxpayer and the taxing state before the state has authority
to impose its power to tax ( see Northwestern States Portland
Cement Co. v Minnesota, 358 US 450 [1959]; Quill, 504 US 298,
supra). All that is required to satisfy due process is some
"minimal connection" between the taxpayer and the state, and that
the income the state seeks to tax be "rationally related to
values connected with" the state ( see Moorman Mfg. Co.). As the Commissioner argues, the convenience test is, in
effect, a surrogate for interstate commerce. Where work is
performed out of state of necessity for the employer, the
employer creates a nexus with the foreign state and essentially
establishes itself as a business entity in the foreign state.
This nexus is often enough to expose the employer to corporate
and sales and use taxes in the foreign state ( see e.g. Amerada
Hess Corp. v Director, Div. of Taxation, New Jersey Dept. of the
Treasury, 490 US 66 [1989] [finding substantial nexus between
state and income from oil company's oil production which occurred
entirely without the state because oil company had some
operations in state and was a "unitary business"]). The
convenience test stands for the proposition that New York will
not tax a nonresident's income derived from a New York employer's
participation in interstate commerce because in such a case, the
nonresident's income would not be derived from a New York source. In Zelinsky, we found the minimal connection called for
by due process on account of the taxpayer's "physical presence in
New York and because he . . . purposefully availed himself of the
benefits of an economic market in" New York ( Zelinsky, 1 NY3d at
97 [quotations omitted]). Here, petitioner objects that, read
and applied literally, the convenience of the employer test would
allow New York to tax 100% of the income of a nonresident who
worked out of his employer's place of business in New York just
one day a year. He argues that due process demands
proportionality in order to prevent this presumed overreaching.
Whether due process would countenance this particular result --
taxation of 100% of the income of a nonresident who spends a
trivial amount of time working in New York -- is simply not
before us. We conclude that the minimal connection required by
due process plainly exists in this case where petitioner accepted
employment from a New York employer and worked in his employer's
New York office approximately 25% of the time annually.
Moreover, the amount of time that petitioner spent working in New
York -- 25% -- is significant enough to satisfy any rough
proportionality requirement called for by due process. As to whether New York's taxation of 100% of the
nonresident's income was "rationally related" to values connected
with the State, in Zelinsky we noted the "host of tangible and
intangible protections, benefits and values" New York provided to
the taxpayer and his employer, and that these benefits were
provided every day, regardless of whether the taxpayer chose to
absent himself from New York ( id. at 95). "New York may require
contributions from [the taxpayer] because he thus realized
current pecuniary benefits under the protection of the
government, and the tax imposed need not bear an exact relation
to the services actually provided to the individual taxpayer"
( id. [emphasis added] [quoting Matter of Tamagni v Tax Appeals
Trib., , 91 NY2d 530, 544 (1998)]). Certainly, the same may be
said of petitioner. Under the convenience of the employer test, New York
taxes a nonresident employee's income from a New York employer
except to the extent the income is connected with the employer's
participation in interstate commerce. By taxing only income
sourced to New York, the convenience test is rationally related
to values connected with New York because New York has the right
to tax 100% of a nonresident employee's income derived from New
York sources. Where a nonresident employee must perform work out
of state for the employer's necessity, a nexus is created between
the employer and the foreign state. New York does not tax the
nonresident employee's income derived from these activities,
which are properly sourced to the foreign state. Thus, the
convenience test constitutes an across-the-board standard
designed to comply with both due process and the Commerce
Clause.[6]IV. Nordlinger v Hahn (505 US 1 [1992]) established the
equal protection standard for tax cases:
"the Equal Protection Clause is satisfied so
long as there is a plausible policy reason
for the classification, the legislative facts
on which the classification is apparently
based rationally may have been considered to
be true by the governmental decisionmaker,
and the relationship of the classification to
its goal is not so attenuated as to render
the distinction arbitrary or irrational" ( id.
at 11-12 [citations omitted]).
Further, "[a]bsolute equality is impracticable in taxation, and
is not required by the equal protection clause . . . .
[I]nequalities that result not from hostile discrimination, but
occasionally and incidentally in the application of a system that
is not arbitrary in its classification, are not sufficient to
defeat the law" ( Maxwell v Bugbee, 250 US 525, 543 [1919]). Petitioner argues that the convenience test
impermissibly discriminates between those employees who work out
of state for personal convenience and those who work out of state
as a necessity. New York distinguishes between these two classes
of nonresidents because by doing so, it properly taxes
nonresidents only on income sourced to New York, and,
concomitantly, avoids taxing income derived from interstate
commerce. This classification, which is designed to comply with
both the Commerce Clause and the Due Process Clause, is therefore
rational in every respect. Petitioner criticizes the convenience test as unfair
and unsound as a matter of tax policy and a discouragement to
telecommuting. 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. For all the reasons
given, we conclude that the convenience test as applied to
petitioner complies with the requirements of due process and
equal protection. Finally, we agree with the Appellate Division that
petitioner is not a prevailing party entitled to recover
litigation and administrative costs pursuant to Tax Law § 3030.
Accordingly, the judgment of the Appellate Division should be
affirmed, with costs.
Matter of Huckaby v New York State Division of Tax Appeals, Tax
Appeals Tribunal, et al. No. 8
R. S. Smith, J. (dissenting):
The issue here is to what extent the salary paid by a
New York employer to a resident of another state who works most
of his time outside, and beyond commuting distance from, New York
is subject to New York State income tax. The majority holds that
100 percent of the employee's income is taxable in New York, so
long as (1) any significant part of the employee's work is
performed in New York and (2) the employer does not require the
employee to work outside New York. I dissent, because I believe
that the application of this rule to this case is contrary to the
Tax Law, and that the Tax Law as interpreted by the majority
violates the Due Process Clause of the United States
Constitution.
I
Tax Law § 601 (e) imposes a tax on "the taxable income
which is derived from sources in this state" of nonresident
individuals. Tax Law § 631 uses the words "New York source
income," "income from New York sources" and "income . . . derived
from . . . New York sources" to identify the same concept. These
interchangeable terms are defined by Tax Law § 631 (b) (1), which
lists four categories of "New York source income"; only one of
the four is relevant to this case. Tax Law § 631 (b) (1) (B)
includes as "New York source income" that income which is
"attributable to . . . a business, trade, profession or
occupation carried on in this state." The statutory issue in
this case is how much of Thomas Huckaby's income is in that
category. Huckaby argues that, since only 25 percent of his
"business, trade, profession or occupation" is "carried on in
this state," only 25 percent of his income is subject to tax
under the Tax Law. The Commissioner seeks to tax 100 percent of
it, relying on the "convenience" regulation (20 NYCRR 132.18),
which provides that income will be allocated to New York in
proportion to the days worked there, but that "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, obligated the employee to out-of-state duties
in the service of his employer." I think the convenience rule as
applied to Huckaby is inconsistent with the Tax Law, because the
rule does not here, as it does in other cases, serve the
legitimate purpose of avoiding manipulation or fraud; and because
there is no other good reason for attributing the part of
Huckaby's income that is earned in Tennessee to "a business,
trade, profession or occupation carried on in this state." Thus,
I would hold that Huckaby is correct in asserting that only 25
percent of his income is taxable in New York. We have previously upheld the application of the
Commissioner's convenience rule to permit New York to tax income
paid for work done outside New York ( Matter of Speno v Gallman
[, 35 NY2d 256 (1974)]; Matter of Zelinsky v Tax Appeals Tribunal
[1 NY3d 85 (2003)]). Speno and Zelinsky rest, however, on the
proposition that an employee's discretionary decision to do work
at home rather than in the office should not have significant tax
consequences; if the rule were otherwise, the door would be open
to abuse. This rationale does not support the application of the
Commissioner's rule to Huckaby. The taxpayer in Speno, Frank Speno, Jr., was employed
as president of the Frank Speno Railroad Ballast Cleaning Co.,
Inc., which had its principal office in Ithaca, New York. He
lived in Summit, New Jersey. In his 1960 and 1961 tax returns,
he claimed to have worked 106 days at his home in 1960, and 174
days in 1961. We observed that "the work performed at home in
New Jersey consisted essentially of making phone calls. No
business calls were received on the unlisted New Jersey number,
and Mr. Speno entertained no business contacts in New Jersey"
(35 2 at 258). In upholding the application of the
"convenience" test to reject Speno's allocation of income to his
days worked in New Jersey, we explained:
"The policy justification for the
'convenience of the employer' test lies in
the fact that since a New York State 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."
( Id. at 259.)
In Zelinsky, the taxpayer was a professor at Cardozo
Law School who did all his teaching in New York City, and
commuted there from his Connecticut home three days a week. On
the other two days, "he stayed at home, where he prepared
examinations, wrote student recommendations, and conducted
scholarly research and writing" (1 3 at 89). He also "worked
exclusively at home" when school was not in session, and when he
was on sabbatical leave ( id.). In rejecting his attempt to
allocate much of his law school salary to work done outside New
York, we noted that a contrary ruling would allow the taxpayer to
manipulate the system. We said:
"The convenience test was originally adopted
to prevent abuses arising from commuters who
spent an hour working at home every Saturday
and Sunday and then claimed that two sevenths
of their work days were non-New York days and
that two sevenths of their income was thus
non-New York income, and either free of tax
(if the state of their residence had no
income tax) or subject to a lower rate than
New York's. In the present case, the
taxpayer's efforts to reduce the amount of
tax owed to New York on his New York source
income earned during the work week raise
similar concerns."
( Id. at 92 [footnotes omitted].)
Although there was no suggestion in either Speno or
Zelinsky that the taxpayer was not telling the truth, of course
not all taxpayers are so scrupulous. We noted in Zelinsky that
"in the absence of the convenience test, opportunities for fraud
are great and administrative difficulties in verifying whether an
employee has actually performed a full day's work while at home
are readily apparent" ( id. n 4). We also remarked that "the
test 'serves to protect the integrity of the apportionment scheme
by including income as taxable' when the income results from
services derived from New York sources performed out-of-state 'to
effect a subterfuge' ( Matter of Colleary v Tully, 69 AD2d 922,
923 [3d Dept 1979])" ( Zelinsky, 1 NY3d at 92 n 5). In short, in Speno and Zelinsky, we justified the
application of the "convenience" test on the ground that not to
apply the rule would facilitate tax avoidance or evasion. That
is not true here. Huckaby does not work in Tennessee to avoid
New York taxes; he works there because that is where he lives.
There is no undue difficulty in verifying his claim that three
quarters of his working days are spent in Tennessee. While it
might be said that he chooses to work in Tennessee for his own
"convenience" in the sense that he could, if he wished, uproot
his family and move to or near New York, a choice based on that
sort of "convenience" is not subject to the sort of manipulation
about which we expressed concern in Speno and Zelinsky. Thus, the Commissioner cannot prevail here unless he
offers some justification other than the prevention of abuse for
treating 100 percent of Huckaby's income as "New York source
income." He has not succeeded in finding such a justification. The Commissioner argues that Huckaby's income comes
from "a business, trade, profession or occupation carried on in
this state" and is therefore "New York source income" on the
ground that the business of Huckaby's employer is "carried on" in
New York. The majority artfully avoids either embracing or
rejecting this argument; it raises, but does not answer, the
question of whether "the Legislature intended business 'carried
on in this State' . . . to refer to the location of the employee
or of the employer" (Opinion at 6). I think the Commissioner's
argument is completely untenable. The natural and obvious reading of the words in Tax Law § 631 (b) (1) (B), "a business, trade, profession or occupation
carried on in this state," is "a business, trade, profession or
occupation" that is "carried on" by the taxpayer. As the
majority notes (Opinion at 6), these words were so read in an
Attorney General's opinion contemporaneous with the enactment of
the statute in 1919 (1919 Report Atty Gen 301 ["(T)he work done,
rather than the person paying for it, should be regarded as the
'source' of the income"]). We endorsed this reading in Matter of
Oxnard v Murphy (, 15 NY2d 593 [1964], affg un op below 19 AD2d
138, 140 [3d Dept 1963]). See also Matter of Linsley v Gallman,
(38 2 367, 370 [3d Dept 1972], affd, , 33 NY2d 863 1973]);
Matter of Hayes v State Tax Commission (61 2 62, 63 [3d Dept
1978]). Yet the Commissioner, without citing authority, and
ignoring our decision in Oxnard, asserts that "in determining
whether a nonresident employee who works both inside and outside
New York is earning income from New York sources, the business
'carried on' in New York refers to the business of the employer"
(emphasis added). The Commissioner does not dispute that, as to
non-employees -- i.e., independent contractors -- the location of
the taxpayer's work is dispositive. The Commissioner's theory
not only contradicts the apparent meaning of the statute and our
prior interpretation of it; it is riddled with logical flaws.
First, what language in the statute even hints at a
distinction between employee taxpayers and others of the kind the
Commissioner advocates? Secondly, what indication is there in
the background or legislative history of the statute that the
Legislature had any such intention? Thirdly, if the relevant
location is that of the employer and not the employee, why does
the Commissioner's own regulation make the place of performance
of the employee's duties the governing factor, as a general rule
to which the "convenience" test is an exception? And finally, if
he really believes his reading of the statute is sound, why does
the Commissioner not carry it to its logical conclusion, by
trying to tax the salaries of all out-of-state employees of New
York-based firms?
The Commissioner attempts to answer only the last of
these questions, and his answer to that one is completely
unpersuasive. He suggests that taxing employees who work out of
state for reasons other than convenience might violate the
Commerce Clause, but he does not support this suggestion with
either reasoning or authority. (The majority, in dealing with
the constitutional issue in this case, adopts a version of the
Commissioner's "Commerce Clause" theory, which I discuss below.)
In short, the view that "carried on in this state"
means "carried on by the taxpayer's employer" is without merit.
Thus, the only two possible rationales for treating all of
Huckaby's income as "New York source income" within the meaning
of the statute -- the "avoidance of abuse" rationale and the
"location of the employer" rationale -- clearly fail. The
majority upholds the Commissioner's position here without
approving either of these two rationales for it, and without
suggesting a third one. The majority makes no attempt to offer
any justification, in the words of the statute or in the policy
underlying it, for holding that 100 percent of Huckaby's income
is taxable in New York. The majority's sole ground for holding that Huckaby's
income is "New York source income" is that the Commissioner says
it is. The majority says that the Legislature "recognized the
complexities" of taxing those who work both within and outside
the State (Opinion at 7), and "task[ed] the Commissioner to
develop a workable rule" (Opinion at 9). No doubt. But the
Commissioner's rule is still supposed to make sense ( New York
State Assn. of Counties v Axelrod, , 78 NY2d 158, 166 [1991] [a
state regulation should be upheld only if it has a rational basis
and is not unreasonable, arbitrary, capricious or contrary to the
statute under which it was promulgated]; Jones v Berman, , 37 NY2d 42, 53 [1975] ["(a)dministrative agencies can only promulgate
rules to further the implementation of the law as it exists; they
have no authority to create a rule out of harmony with the
statute"]). As applied to Huckaby, the Commissioner's
convenience rule does not make sense. I would hold that only 25 percent of Huckaby's income
is "New York source income" within the meaning of the Tax Law.
II
Since the majority holds that the Tax Law permits New
York to tax the 75 percent of Huckaby's income that he earned by
work done in Tennessee, the Court must decide whether the Tax
Law, as so interpreted, is valid under the Due Process Clause. I
would hold that it is not, and I therefore dissent on
constitutional as well as on statutory gounds.
The basic due process limitation on a state's taxing
power is that jurisdiction to tax is limited by the state's
borders. To take a simple example, it would be an obvious
violation of the Due Process Clause if New York sought to levy a
real property tax on the Tennessee home in which Huckaby lives.
Or, to move a step closer to this case, if Huckaby owned four
parcels of real property -- one in New York and three in
Tennessee -- due process would permit New York to collect real
property tax only on the New York property, not on the other
three. Huckaby's argument is, essentially, that an income tax on
his salary is subject to a similar limitation, and that New York
is free to tax only the one quarter of his salary that he earns
in New York. I believe this argument is correct. As we noted in Zelinsky, under the Due Process Clause
"[a] state . . . may not tax value earned outside its borders" (1
3 at 96, citing Allied-Signal, Inc v Director, Division of
Taxation, 504 US 768, 777 [1992]). This general principle has
been implemented by a two-part test, which we summarized in
Zelinsky as follows:
"The Due Process Clause places two
restrictions on a state's power to tax income
generated by interstate activities. First,
it 'requires some definite link, some minimum
connection, between a state and the person,
property or transaction it seeks to tax'
( Quill Corp. v North Dakota, 504 US 298, 306
[1992] [citation omitted]). Second, the
'income attributed to the State for tax
purposes must be rationally related to values
connected with the taxing State' ( Moorman
[ Mfg. Co. v Bair], 437 US[267] at 273 [1978]
[citation and internal quotation marks
omitted])."
(1 3 at 96.)
The first part of the two-part test is met here.
Huckaby works one quarter of his time in New York, and therefore
has a "minimum connection" to the State. Huckaby does not
challenge New York's power to tax him. Rather, relying on the
second part of the test, he challenges the State's power to tax
more than the one quarter of his income earned in New York. He
argues that a tax on 100 percent of his income is not "rationally
related to" the 25 percent of his time spent working in the
state. United States Supreme Court precedent, and our own,
establish that a tax is not "rationally related to values
connected with the taxing state" unless it bears some reasonable
proportion to those values. Thus in Hans Rees' Sons, Inc v North
Carolina (283 US 123 [1931]), the Supreme Court held that North
Carolina's income tax was invalid under the Due Process Clause as
applied to a particular taxpayer because the state taxed as much
as 85 percent of the taxpayer's income, of which only some 17
percent was attributable to that state. The Supreme Court said:
"It is sufficient to say that, in any aspect
of the evidence, and upon the assumption made
by the state court with respect to the facts
shown, the statutory method, as applied to
the appellant's business for the years in
question operated unreasonably and
arbitrarily, in attributing to North Carolina
a percentage of income out of all appropriate
proportion to the business transacted by the
appellant in that state. In this view, the
taxes as laid were beyond the state's
authority. Shaffer v. Carter, 252 US 37,
52, 53, 57, 40 S. Ct. 221, 64 L. Ed. 445."
(283 US at 135 [emphasis added].)
The existence of a proportionality requirement under
the Due Process Clause was reaffirmed in Moorman Mfg. Co. v Bair
(437 US 267 [1978]). The court upheld the tax in that case,
noting that "the States have wide latitude in the selection of
apportionment formulas," but, quoting from Hans Rees' Sons, said
that a tax is invalid under the Due Process Clause where "the
income attributed to the State is in fact 'out of all appropriate
proportion to the business transacted . . . in that State' . . .
." (437 US at 274 [emphasis added]). ( See also Zelinsky, 1 NY3d
at 97 [incorporating by reference into Due Process Clause
analysis aspects of our analysis under the Commerce Clause]).
Thus I see no basis for the majority's suggestion that the Due
Process Clause does not require proportionality ( see Opinion at
12 [Huckaby "asks us to engraft a proportionality requirement
upon existing due process precedent"]; 14 ["any rough
proportionality requirement called for by due process"]). It also seems to me beyond question that the tax in
this case -- applied to 100 percent of Huckaby's income -- is out
of all proportion to the time he spent working in New York -- 25
percent. Again, I see no basis for the majority's view that,
while it might be disproportionate to tax 100 percent of
Huckaby's income if he spent only a "trivial" percentage of his
time in New York, "the amount of time that petitioner spent
working in New York -- 25% -- is significant enough to satisfy
any rough proportionality requirement . . . ." (Opinion at 14).
I do not think it can plausibly be argued that, while one percent
would not be close enough to 100 percent to be "proportional," 25
percent is close enough. Even if this proposition were not
indefensible on its face, it is surely inconsistent with the
Supreme Court's holding in Hans Rees' Sons that 17 percent was
not close enough to 85 percent. As I read the majority opinion, it does not rely
primarily on the unsupportable argument that the Due Process
clause's requirement of proportionality is either non-existent or
so weak that 25 percent can be called roughly equivalent to 100
percent. The main basis for the majority's holding that a tax on
100 percent of Huckaby's income is "rationally related to values
connected with" New York is the majority's theory that the entity
that pays Huckaby's salary, his employer, is a "value" on which
jurisdiction to tax may be based, and this "value" is located 100
percent in New York. This theory, unsupported by any precedent,
is a radical departure from long-accepted limits on the powers of
states to tax nonresidents. Since state income taxes on nonresidents were first
upheld in Shaffer v Carter (252 US 37 [1920]), such taxes have
been levied on income derived either from work done within the
state, or from property located in, or sent into, the state.
I am aware of no case in which it has been held, or even argued,
that an in-state source of payment for services done outside the
state is a constitutionally valid basis for taxing the recipient
of the payment. Nor am I aware of any state statute -- other
than New York's Tax Law as interpreted by the majority in today's
decision -- that attempts to levy nonresident income tax on this
basis. This obviously does not reflect any reticence by states
in seeking to collect taxes; they are not reticent. A statement
issued by the Multi-State Tax Commission contains the
unsurprising assertion: "It is the policy of the state
signatories hereto to impose their net income tax, subject to
state and federal legislative limitations, to the fullest extent
constitutionally permissible" (Statement of Information
Concerning Practices of Multistate Tax Commission and Signatory
States under Public Law 86-272 (July 29, 1994), J. Hellerstein
and W. Hellerstein, State Taxation at App D-1). Until today's decision, it has been universally assumed
that an in-state entity that pays a taxpayer's salary is not, in
itself, in-state "value" for due process purposes. The
majority's departure from this assumption has potentially
troubling consequences. If the location of a taxpayer's employer
is 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. And
other states can return the compliment, applying their own income
taxes to New York residents who work for firms headquartered in
California or Massachusetts. The result could be "an inequitable
and perhaps ruinously overlapping scramble" for tax dollars ( see American Insurance Association v Lewis, , 50 NY2d 617, 624 1980]).
The majority, perhaps aware of this danger, seemingly
feels a need to limit the implications of its holding that an
employee is subject to income tax in the state where his employer
is located. Thus the majority, if I am correctly interpreting
its opinion, comes up with a novel Commerce Clause theory as a
companion to its novel due process theory. The Commerce Clause,
the majority seems to be saying, will prevent states from taxing
in-state companies' out-of-state employees -- except those
employees who, like Huckaby, work outside the state for their own
"convenience." In other words, the majority advances a rule of
constitutional law that is identical to the Commissioner's
convenience regulation. As the majority puts it, "the
convenience test is, in effect, a surrogate for interstate
commerce" (Opinion at 13). The majority cites no authority at all, and offers no
persuasive reason, in support of this new interpretation of the
Commerce Clause. It may be true that, "[w]here work is performed
out of state of necessity for the employer, the employer creates
a nexus with the foreign state," which may be "enough to expose
the employer corporate sales and use tax in the foreign state"
(Opinion at 13). But why should this have any impact on the
power of the employer's home state to levy income tax on
nonresident employees? What is the source of, or the reason for,
a rule that says, in effect: "If Tennessee can tax a New York
company, New York loses the right to tax that company's Tennessee
employees"? It is simply not true that, as the majority
suggests, "in such a case, the nonresident's income would not be
derived from a New York source" (Opinion at 14). On the
contrary, the majority's assumption that the New York company is
involved in interstate commerce would if anything support the
argument that the company's Tennessee employees are getting
income from a New York source. The word "interstate" seems to
imply a source in one state and a recipient in another. 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. I see
no other basis for rules of constitutional law to the effect that
(1) due process permits a state to tax income earned out of state
by nonresident employees of local employers, but (2) the Commerce
Clause forbids such taxation except where the employee works out
of state for his own convenience. I believe the majority errs in
adopting these rules.
III
Accordingly, I would reverse the order of the Appellate
Division and hold that the Commissioner may not tax that portion
of Huckaby's salary earned outside the State of New York.
Footnotes
1 The Court, however, held that an exemption that discriminated against
nonresidents violated the Privileges and Immunities Clause (252 US at 80).
2 The convenience test was formerly found at 20 NYCRR 131.16 ( see Speno).
The policy, if not the regulation, appears to have been in place since at
least 1951, the tax year considered in Burke v Bragalini (10 AD2d 654 [3d Dept
1960]).
3 The taxpayer in Speno was arguably also unable to commute physically to
his employer's New York workplace daily; he lived in Summit, New Jersey and
his company's New York offices were located upstate in Ithaca and Syracuse.
The taxpayer in Zelinsky lived in Connecticut and commuted to work in
Manhattan.
4 We note that petitioner does not claim that application of the
convenience rule in his case violates the Commerce Clause.
5 The "threat" of misapportionment is measured by two factors -- internal
and external consistency. "Internal consistency is preserved when the
imposition of a tax identical to the one in question by every other State
would add no burden to interstate commerce that intrastate commerce would not
also bear" ( Oklahoma Tax Commn., 514 US at 185). External consistency looks
to "the economic justification for the State's claim upon the value taxed, to
discover whether a State's tax reaches beyond that portion of value that is
fairly attributable to economic activity within the taxing State" ( id.). The
external consistency test asks "whether the State has taxed only that portion
of the revenues from the interstate activity which reasonably reflects the
instate component of the activity being taxed" ( Goldberg, 488 US at 261).
6 The dissent fails to acknowledge the two factors that drive our
analysis and our conclusion that due process is not offended when New York
taxes all of petitioner's income from his New York employer. First,
nonresident individuals are simply not the same as interstate businesses, and
these differences must be taken into account when considering whether a tax
meets with due process. Second, the purposes and scope of the Due Process and
Commerce Clauses are not coextensive and, as the Supreme Court has held, a tax
can burden interstate commerce without violating due process ( see Quill).