New York Attempts to Impose Non-Resident Income Tax

Last week, the New York Division of Tax Appeals ruled that the New York Division of Taxation did not have the right to impose a non-resident income tax. This income tax against Patrick J. Carr, a nonresident lawyer, was voided because he is licensed to practice in New York. In the case, the Court ruled that Patrick J. Carr was not required to pay a $68,260 tax bill from the NY Division of Taxation.

The Division of Taxation imposes hefty non-resident income tax bill

The NY Division of Taxation aggressively enforces residency income audits on non-residents to ensure that they have properly changed their domicile. However, a recent case against the Florida-based lawyer, Patrick J. Carr, may result in the Division of Taxation changing its auditing rules regarding a non-resident income tax.

Carr was licensed to practice law in New York and New Jersey, but had retired to Florida. However, the NY Division of Taxation took exception to the fact that he continued to practice in Florida. This caused the Division of Taxation to audit Carr’s residency to determine if he had legally changed his domicile. Then, after conducting the audit, the Division of Taxation concluded that since Carr’s income was attributable to his licensure in New York state under Tax Law article 22, Section 631, all of his income was subject to New York income tax.

Court rejects NY Division of Taxation’s claim

Although Carr is not licensed to practice law in the State of Florida, he was admitted pro hac vice in the Circuit Court of the 12th Judicial Circuit in Sarasota County, Florida. This pro hac vice status meant that Carr was given special permission to provide legal services on a specific case, despite the fact that he was not licensed in the state. Therefore, in the ruling, Administrative Law Judge Barbara J. Russo explained that the Division of Taxation could not “assert tax merely based on a New York license,” deeming the claim meritless and inconsistent with New York state tax regulations and judiciary laws.

Non-residents exempt from NY state income tax

The ruling was significant because it established a precedent for all nonresidents of New York state. Russo explained that non-residents who do not earn revenue or perform work or services in New York state, are not subject to state income tax, even if their profession is attributable to the state of New York.

What is unclear is whether other states will use the decision to tax the income in their state because it is not taxable in New York.  Florida, which does not have an individual income tax, may not benefit from the decision but others states, facing deficits, may be more aggressive. Taxpayers should recognize that states may have different rules to source the place where income is earned. The two most common rules are the place of performance of services (e.g. contract research) or where the recipient obtaining the benefit of the service is located.