Welcome (?) to NY
The Tax Foundation recently issued its annual State Business Tax Climate Index. The 2019 Index compares the fifty States across five major areas of taxation: corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes; it then adds the results to generate a final, overall ranking. According to the Index, the individual income tax component accounts for approximately 30% of a State’s total score.
After finding itself in 49th place during 2016, 2017, and 2018, it appears that New York is making a move to improve its standing in the business community – the 2019 Index has New York ranked in – patience, wait for it, wait for it – 48th place with respect to individual income taxes, and 48th overall. Woo hoo! Way to go team.[i]
“You Can Never Leave” [ii]
Of course, New York’s high personal income, estate, sales and property tax rates are all too familiar to those who reside, or used to reside, in the State. However, the State’s appetite for challenging a former resident’s assertion of a change of domicile is notorious, as is its penchant for taxing certain nondomiciliaries as so-called “statutory residents.”
The anxiety that this engenders among many informed taxpayers is understandable,[iii] though it may push some to borderline paranoia – or is it? – as illustrated by a recent advisory opinion issued by the Office of Counsel for New York’s Department of Taxation and Finance.[iv]
“Where [You] Lay [Your] Head is Home?” [v] Hopefully Not?
Taxpayer was domiciled in Washington, D.C. He was an executive with an investment management firm that maintained New York offices. Taxpayer was responsible for overseeing the firm’s daily trading activity for several funds that traded in domestic and foreign markets. He was required to work during the night and consult with the firm’s traders during overseas trading hours. Because of his work duties, the firm allowed him to stay overnight in his New York office, but only when the markets in which the firm traded were open. Otherwise, Taxpayer was required to vacate the office at the end of the work day. The firm advised him in writing of these restrictions, noting that overnight stays were limited to those nights needed for work purposes, and that the office building was neither zoned nor insured for residential use.
Taxpayer typically travelled from Washington to the firm’s New York office on Monday mornings, stayed in New York on Monday, Tuesday and Wednesday nights, and returned to Washington on Thursday evenings.[vi] He did not own or rent any abode in New York. When Taxpayer was in New York overnight, he slept on a “murphy bed” in the office. The office was approximately 330 square feet[vii] and did not include any cooking facilities, bathing facilities, or a separate bathroom within its four walls. However, Taxpayer had access to common restrooms and an on-site gymnasium with showering facilities, both of which were available to all firm employees. In addition, the firm’s space had a kitchen area; however, the kitchen was intended for use by the firm’s kitchen staff and not for employees’ personal use. When taxpayer was in New York, he ordered meals from local restaurants and did not use cooking facilities in the building.[viii] Taxpayer was not required to provide any consideration, contribution, or reimbursement to the firm for the sleeping arrangement. He was prohibited from having overnight guests. Also, Taxpayer did not receive any personal mail at the office. He did maintain a small closet of work clothes in the office, along with some toiletries, but otherwise maintained his personal effects in Washington.
The Department’s Analysis
An individual is a resident of New York for a taxable year if such individual maintains a permanent place of abode in New York for substantially all of the taxable year and spends more than 183 days of the taxable year in the State.[ix]
It is not necessary that the individual actually stayed at, or even visited, the permanent place of abode for more than 183 days during the taxable year; it is only necessary that the individual could have done so while they were spending time in New York.
Thus, an individual who is domiciled in New Jersey, who owns a small studio pied-a-terre on the Upper West Side of Manhattan that they use occasionally on a Friday or Saturday, and who commutes to work Downtown on weekdays, is a statutory resident of both New York State and New York City.[x]
The term “permanent place of abode” means a dwelling place of a permanent nature maintained by an individual, whether or not owned by such individual.[xi] In general, a construction that does not contain facilities ordinarily found in a dwelling, such as facilities for cooking, bathing etc., will not be considered a permanent place of abode for tax purposes.
In order to qualify as a permanent place of abode, “there must be some basis to conclude that a dwelling is utilized as the taxpayer’s residence.”[xii] Case law and the Department’s Income Tax Nonresident Audit Guidelines (June 2014) have identified certain factors to consider when determining whether a dwelling satisfies the requisite relationship. These factors include, but are not limited to, the physical attributes of the dwelling and the relationship of the individual to the dwelling, such as ownership, property rights, maintenance, the relationship to co-habitants, personal items, and access.
Whether or not an individual has free and continuous access to a place of abode is a primary consideration in determining whether they maintain a permanent place of abode. For example, an individual maintains a permanent place of abode when they have an unrestricted right to use a room (despite the fact that they have no legal right to the property), contribute to the household expenses, have exclusive use of the room, provide their own furnishings and personal effects, regularly use the residence for a long-standing period of time to access their full-time job, and have unlimited access to the room. However, an individual does not maintain a permanent place of abode where they have intermittent access to an apartment rented and maintained by another individual, cannot access the apartment without prior notice, do not maintain clothing, personal articles or furniture in the apartment, do not have a dedicated room to which they have free and continuous access, do not use the residence for daily attendance at their full-time job, and do not share in the expenses of maintaining the apartment.
According to the Department, the facts and circumstances in the present case indicated that Taxpayer’s arrangement did not provide unfettered access to a dwelling. His use of the office space was restricted to work nights when overseas markets were open and Taxpayer was required by his position to consult with firm traders of those markets. Furthermore, Taxpayer was prohibited from staying at the office overnight except on those nights when specifically allowed or required.
In addition to the absence of unfettered access, the Department found that Taxpayer’s arrangement lacked other necessary characteristics to be considered a permanent place of abode; these factors included the absence of bathing or kitchen facilities in the office that are ordinarily found in a dwelling, as well as other physical attributes of an abode.
Other relevant factors included the fact that: the building was not permitted by zoning laws to be used as a residence; Taxpayer did not contribute any money or other consideration to maintain the dwelling; the personal items kept in the office generally were work clothes; Taxpayer did not use the office address on any registrations, such as a driver’s license, voter registration, car registration, etc.; and he did not receive personal mail or maintain any other personal items at his office.
Considering the foregoing factors, the Department concluded that Taxpayer’s office did not constitute a permanent place of abode; consequently, the Taxpayer’s days spent in New York would not result in his being treated as a statutory resident.
I questioned earlier whether the Taxpayer was crazy to have requested the foregoing ruling. I don’t think so.
Some of you may be thinking, “C’mon Lou, the guy slept in a murphy bed in his office. He had no expectation of privacy there. He couldn’t just walk around in his skivvies, and isn’t that the ultimate indication of a place of abode? Oh, and by the way, many of us keep extra clothes in the office[xiii], plus a toothbrush; some of us have a refrigerator or microwave.[xiv] Don’t some firms provide showers for their employees? How can the State ever claim that this guy maintained a permanent place of abode in New York?”
To which I respond, “Why, then, did the Department feel compelled to go through the foregoing analysis? Hmm? Why bother with the exercise of considering the absence of a bathroom or of kitchen facilities within the office itself?[xv] Or the fact that Taxpayer didn’t pay his employer for the use of his office? Seriously? And why would a resident of Washington, D.C. include his New York office address on his license or registration?”
Indeed, couldn’t the Department have simply stated – relying upon the decision of the Court of Appeals in Gaied – that Taxpayer had no “residential interest” in his office – period, case closed?
Clearly, the Department decided not to go in that direction because it believed that Taxpayer did utilize his office as a residence – there was a reason that Taxpayer felt compelled to request this ruling in the first place. Thus, the Department had to establish that this particular office, in the circumstances described above, was not a permanent place of abode.
With that, did the Department leave open the possibility that a slightly larger office (say, the size of a small studio, perhaps with its own bathroom, a murphy bed or pull-out couch – maybe even a wet bar[xvi]) may constitute a permanent place of abode? And might the occupant of such an office – who is an owner of the tenant business that occupies the space – have a “residential interest” therein, such that they may be treated as a statutory resident notwithstanding that they commute to their domicile almost every night?
I don’t like it.
[i] “Every journey begins with a single step.” Lao Tsu.
[ii] Apologies to The Eagles. Speaking of California, its 2019 Index overall ranking is 49th.
[iii] Ignorance may be bliss, but I hate surprises.
[iv] An advisory opinion is issued at the request of a taxpayer – thus my statement about paranoia, or not. The opinion is limited to its facts, and is binding on the State only with respect to the taxpayer to whom it is issued.
[v] Apologies to Metallica (“Where I Lay My Head is Home”). I often answer my office phone with “Vlahos residence,” and it’s not entirely facetious.
[vi] Thus, he was “present” in New York four days per week.
[vii] There are many studios of this size in downtown Manhattan.
[viii] My kinda guy.
[ix] N.Y. Tax Law Sec. 605(b)(1)(B). This is referred to as “statutory residence,” as distinguished from “domicile,” which involves a much more subjective determination based upon the taxpayer’s intent or the objective manifestations of such intent. Under either characterization, the taxpayer’s worldwide income would be subject to New York’s personal income tax.
[x] And is subject to State and City income taxes at 8.82% and 3.876%, respectively.
[xi] 20 NYCRR Sec. 105.20(e)(1).
[xii] Matter of Gaied v. Tax Appeals Trib., 22 N.Y.3d 592, 594 (2014). It’s unfortunate that the State pays lip service to the holding in Gaied but practically limits the application of the decision to its facts.
[xiii] In today’s “dress-down” business environment, how does one distinguish between work and non-work clothes?
[xiv] That is neither an admission nor a Christmas wish list – I’m simply giving an example.
[xv] Does the Department realize that there are still a few boarding houses in Manhattan? Yes, rooms without bathrooms, and where residents eat in a common area. Would anyone seriously claim that these are not “permanent places of abode?”
[xvi] A guy can dream, can’t he?