New Jersey aims to change how commuters are taxed

New Jersey is set to begin a standoff with neighboring New York over income taxes paid by telecommuting residents.

Under a new bipartisan proposal unveiled last week, the Garden State would adopt a rule that would tax out-of-state residents who work for New Jersey companies — even if they never cross the state’s boundaries — while providing some tax relief to New Jerseyans who face the same burden from other states.

“This makes a lot of sense given the shift in the workforce. It makes sense because it’s fair,” said Sen. Joe Lagana (D-Bergen). “We have an opportunity here to actually do something to help our residents, so why not seize it when we have the political will?”

Numerous states, including neighboring New York and Pennsylvania, tax out-of-state workers even if the workers never cross their borders, but changes to office use have spurred New Jersey lawmakers to claim the state and their constituents are being short-changed.

New Jersey and Pennsylvania have a reciprocal agreement that sees workers taxed in their state of residence —meaning Pennsylvania residents working in New Jersey won’t be taxed under the proposal — but the Garden State has no such deal with New York, where courts have a history of strictly enforcing rules that put taxes collected from New Jersey commuters into New York coffers.

New Jersey’s tax laws consider income to be taxable in the jurisdiction where the work is actually performed, meaning a New Jerseyan working from home for a New-York based company faces taxes from both states, though New Jersey provides a generous tax credit for taxes paid to other states.

The state waived its regular rules and used the company’s location as the source of income for a portion of the pandemic, but that waiver expired last October. Changing its laws to mirror New York’s could bring more tax revenue to New Jersey without burdening the state’s residents, but it’s not clear how much those collections would actually boost state coffers.

Open Weaver Banks, a partner and state tax attorney at Hodgson Russ LLP, noted Connecticut does something similar.

“They have a convenience rule that’s only aimed at New York, basically, and I don’t know that it’s made much of a difference,” Weaver Banks said. “I don’t know that there’s that many reverse commuters. To be honest, I think that’s part of the issue.”

Office occupancy in NYC

New York’s rules surrounding out-of-state workers are long-standing, but the issue undertook a new dimension with the rise of telecommuting spurred by the pandemic.

Office occupancy in New York City hovered around 95% before the pandemic but fell precipitously amid shutdown orders issued in response to the virus.

On Aug. 31, that measure was just 35%, down from a post-pandemic high of 43% reached in June, according to Kastle Systems, a Philadelphia-based security company that tracks office occupancy in major U.S. cities.

Republican lawmakers have called on Gov. Phil Murphy and Democratic legislators to head off New York’s telecommuting taxation since the earliest months of the pandemic. While they welcomed the new proposal, they had some issues with the timing.

“I’m glad they did it, but all these steps could have been done a long time ago,” said Sen. Steve Oroho (R-Sussex), his party’s leader in that chamber.

Oroho noted the Senate unanimously passed a bipartisan bill requiring the state Treasury to study the one-sided tax in 2020. The measure stalled in the Assembly.

The legislation proposed last week, which has yet to be formally introduced, would also allow New Jerseyans taxed by New York to keep up to 50% of taxed dollars they recover from New York through a tax suit. Without such a provision, that money would be taxed normally under New Jersey’s income tax.

While Weaver Banks said that approach was “extremely creative,” she added it appeared beyond the reach of most residents.

“I can’t really imagine a taxpayer that’s really going to want to be out of their pocket for the litigation cost because this is all premised on you convincing a New York court that you get your money back,” she said.

New Jersey’s final offering — a $10 million tax incentive pilot program for businesses that move New Jersey residents to offices in New Jersey — could also provide some relief for New Jersey’s taxpayers, but it isn’t without its own uncertainties.

While it would work well for companies that have or buy office space in New Jersey, those that attempt to have their workers’ homes classified as bona fide workplaces could run afoul of New York’s strict rules for home offices — which include a requirement that an office contain or be near specialized facilities — potentially exposing themselves and their workers to interest and penalties.

“It almost looked like they were leaving the door open to say maybe the assignment could be your home office,” Weaver Banks said. “It’s a little harder to know you’re going to be able to stand up to a New York audit if you’re relying on just a home office.”