New York State Nonresidency
Warning: New York State is aggressively auditing nonresident tax returns and will often go back 3 years (the maximum possible under the statute of limitations). Unless you are a nonresident for federal purposes (filing Form 1040NR) your chances of winning in an audit are slim. I provide the following information for you as a courtesy, but if you need further clarification, an analysis of your own situation, or audit assistance, my time will be billable at the hourly rate of $200.
What is the difference in tax between filing as nonresident vs. resident?
As a resident, you pay state and city tax on all your income. As a non-resident, you only pay tax on New York source income, which includes earnings from work physically performed in New York State, and income from real property. You are not liable for city tax. Generally, if you live in New York City, you will have city tax withheld from each paycheck (as reported on the W-2), which is why you may receive a much larger tax refund (getting all or most of the city tax back) if you file as a nonresident.
How likely is it that I will be audited by New York State?
In the past, very few of my foreign clients' nonresident tax returns were audited. For those few that were, New York accepted a copy of a temporary work visa as proof that they were nonresidents. Now, however, things have changed. I have noticed that since mid-2003, New York State has been aggressively targeting nonresident taxpayers who spent more than 183 days in the state. In fact, they often will also take their prerogative of auditing up to 3 years of returns.
Note: If you spent more than 183 days in the state, but filed as a federal nonresident (Form 1040NR), your claim for state nonresidency will generally be allowed.
If I'm audited, what will New York State be looking for?
New York State will be looking to see if your work falls within the definition of "particular purpose" found in the tax department's audit guide; that is, they will want to see if you are on a specific assignment that has readily ascertainable and specific goals and conclusions, as opposed to a general assignment with general goals and conclusions. To determine this, they will likely send you a letter requesting the following information:
1. A statement detailing the nature of your work assignment.
2. A copy of your employment contract.
3. A statement regarding your visa status and a copy of your visa.
There is no definition of "particular purpose" in the New York State tax law, regulations, or common law. However, New York State Tax Dept. has taken the position described above and is using it to disallow many nonresidency claims even though it is not published anywhere in the literature generally available to the public. See NY Law and Regulations vs. The Audit Guide below.
If my nonresidency is disallowed, what are the consequences?
If your tax return is selected for review before you have been sent your refund for that tax year, and the state decides to disallow your claim for nonresidency, they will simply adjust your refund (lower it), or send you a bill for any additional tax due (plus interest and penalties).
If your tax return is audited after your return has been processed (i.e., you've already received your refund), and your claim is disallowed, you'll owe the difference in tax between the amount computed as a resident vs. a nonresident, plus interest and late payment penalties.
However, if you disagree with the state and think you can strongly argue that you were indeed a nonresident, you may want to appeal the judgment, either through a conciliation conference or in tax court (which is more costly).
Will you help me if I'm audited?
If you are audited, I will provide you with the law and regulations, as well as a form letter which you can edit [inputting your personal information] and mail to the state in defense of your claim for nonresidency. If you need any further assistance, my time will be billable.
What constitutes a particular purpose?
A salesman with years of experience in a particular product line of the company is assigned to New York as the sales manager because New York sales are weak with regard to that product. It is expected that the individual will devote substantial efforts towards improving those sales. However, work performed as a sales manager still constitutes general duties as opposed to a particular purpose, since it is the general goal of every company to sell its products.
Employees for key positions such as the Deputy Manager, General Manager and Controller are sent to the New York office from an out of state office. It is important to the Employer that individuals in these positions understand the philosophy of the Employer and have the necessary contacts with the home office. These are rotational positions. The individuals who staff these jobs remain in New York for only a temporary period.
These employees might be present in New York for a fixed and limited period, provided their stay is reasonably expected to be for three years or less. However, even if that were the case, their presence here is not to accomplish a particular purpose. The duties of being a manager or controller, even in a rotational capacity, do not fit the definition of specific duties to accomplish a particular purpose as previously discussed. Therefore, these individuals will be maintaining a permanent pace of abode in New York.
Employer sends a systems person from the home office to implement the system in the New York office. The employee will return to the home office upon completion of the implementation project. In this situation, the employee would be present in New York for a fixed and limited period if the stay in New York is reasonably expected to last three years or less. In addition, the person would be present for the accomplishment of a particular purpose
since the implementation of a particular system would have a readily ascertainable and specific conclusion. Accordingly, if this person is deemed to be here for a fixed and limited period, the person would be maintaining a temporary place of abode in New York.
Employer sends an employee from an out of state office to learn the way the department functions in the New York office. Once the employee has successfully learned the necessary function he will return to the out of state office. The person would be in New York for a fixed and limited period if the assignment was reasonably expected to last three years or less. In addition, the person would also be present for the accomplishment of a particular purpose if the learning function has a specific conclusion. That is, a measurable level of achievement would trigger the individual's return to the former or new work location. Accordingly, assuming the two conditions have been met, the person would be maintaining a temporary place of abode
in New York.
The same facts as in Situation 3 except that after the employee learns a particular function he is requested to stay for an additional period of time to learn
another function. It is the Department's position that an individual cannot have multiple or consecutive fixed and limited periods nor multiple or consecutive particular purposes [NOTE: This has been disputed in the tax courts]. Therefore, a change in duties would indicate that the individual is no longer here for a fixed and limited period nor for the accomplishment of a particular purpose. However, the fact that the person would be maintaining a permanent place of abode after the duty changes does not negate the fact that the person had a temporary place of abode for the initial duty period. Accordingly, in this situation, and assuming that the individual met the two conditions for the initial period, the individual would be maintaining a temporary place of abode up to the time the first function is completed, and would be maintaining a permanent place of abode from that point forward.
The parent corporation sends an employee to its subsidiary located in New York to develop a particular segment of the market. It is estimated that the employee will remain in New York for 15 months. Since the employer realistically expects that the employee will be present in New York for three years or less, the employee would be here for a fixed and limited period. The question then becomes whether or not the nature of the employee's duties constitute a particular purpose. Whether or not the employee is here to accomplish a particular purpose would be dependent upon what is involved in developing the market. As previously related, sales and market development, even if it involves a specific area of the market, constitutes general duties which do not qualify as a particular purpose. However, if for example, development meant that the individual's duties would be limited to hiring and training the staff needed to develop the market segment, and after the completion of that phase the general duties of directing the sales effort would be left to others, then the hiring and training function would constitute a particular purpose. Accordingly, based upon the actual nature of the duties, the person in this situation may or may not be maintaining a permanent place of abode. It should be pointed out that even where one of the preceding individuals is maintaining a permanent place of abode in New York, such abode pursuant to section 105.20(a) (2) of the personal income tax regulations must be maintained for
substantially all the year for the person to be held a resident of New York State. The Department has interpreted substantially all the year to mean that the abode is maintained for more than 11 months of the tax year. Accordingly, a taxpayer who acquires an abode in New York on March 1 of the year and maintains that abode until the end of the tax year, even if the individual spent more than 183 days of the tax year in the state would not be a statutory resident of New York. Based on this provision, it is possible that the individuals who are held to be maintaining permanent places of abode
in their particular situations would not be residents of New York for the years in which they enter or leave the state.
1. He is not domiciled in this state; and
2. He does not maintain a permanent place of abode in the state.
New York State will generally not contest that a foreigner is not domiciled in the state. What the state has been trying to question recently, however, is whether a permanent place of abode is maintained in New York State.
Section 105.20(e)(1) of New York State's Personal Income Tax Regulations provides that:
"[A] place of abode [apartment or house], whether in New York State or elsewhere, is not deemed permanent if it is maintained only during a temporary stay for the accomplishment of a particular purpose . . .For example, an individual domiciled in another state may be assigned to such individual’s employer’s New York State office for a fixed and limited period, after which such individual is to return to such individual’s permanent location. If such an individual takes an apartment in New York State during this period, such individual is not deemed a resident, even though such individual spends more than 183 days of the taxable year in New York State, because such individual’s place of abode is not permanent."
Generally, someone working in the U.S. on a visa and a temporary employment contract is considered here for a limited time.
Although the NYS Audit Division takes the position that Section 105.20(e)(1) of the regulations contemplates that “temporary” means a stay of a fixed and limited duration, there is in fact no definition of the word “temporary”. The term "fixed and limited period" is not defined in the regulations either. However, in the NY State Dept. of Taxation & Finance Revised Manual for Nonresident Audits, the Audit Division asserts that the term “fixed and limited period” applies to a temporary stay as opposed to a stay of indefinite duration. As such, the Audit Division, and not Section 105.20(e)(1) of the regulations, the takes the following position:
“Accordingly, it is the Department’s position [emphasis added] that an employee will be presumed present in New York State for a fixed and limited period (i.e., the stay in New York is temporary) if the duration of the stay in New York is reasonably expected to last for three years of less, in the absence of facts and circumstances that would indicate otherwise. In the alternative, a stay is of indefinite duration if the stay is realistically expected to last for more than three years, even if it does not actually exceed three years. The employee must determine if the stay will be temporary or indefinite at the time the employee starts work in New York.”
The regulations mention nothing about a three year period. This is only a position of the Audit Department and does not constitute a law or regulation. Cases in tax court have found that stays of more than 3 years qualified as fixed and limited periods.
Section 105.20(e)(1) of New York State's rules and regulations provides that the temporary stay must be for the accomplishment of a particular purpose. The term “particular purpose” is also not defined in the regulations. The only definition of “particular purpose” is found in NY State Dept. of Taxation & Finance Revised Manual for Nonresident Audits, as set forth below:
“It is the Department's position [emphasis added] that the term “particular purpose” means that the individual is present in New York State to accomplish a specific assignment that has readily ascertainable and specific goals and conclusions, as opposed to a general assignment with general goals and conclusions. In general, an assignment to New York for general duties, such as an executive of a company, or a sales manager would not constitute a particular purpose since these positions involve more generalized goals. This would be true even if the individual’s assignment to New York were related to some specialized skill or attributes that the individual may possess. [See more examples of "particular purpose" from the Audit Guide].
As “particular purpose” is not defined in the law and regulations, using Webster’s and Black’s Law Dictionary it could be assumed that particular purpose means a specific aim or intention. There is no indication in the law and regulations that a taxpayer’s particular purpose (specific intention) has to do with his daily job duties. A person can be working with a specific intention that is unrelated to the tasks he performs on a day to day basis. The Audit Guideline’s interpretation, however, is that particular purpose means a specific assignment with specific goals and conclusions, as opposed to a general assignment with general goals and conclusions.
It is important to note that Audit Guidelines do not constitute law and regulations. In my opinion, it is unreasonable for the Audit Division to deny a claim of nonresidency based on its policy and interpretation of the terms fixed and limited (3-year limit) and particular purpose (specific assignment with specific goals). This is exemplified in a May 29, 2003 ruling by NYS Administrative Law Judge Dennis M. Galliher, in the Matter of Laura Kaltenbacher-Ross. Judge Galliher stated the following in his Conclusions of Law:
“ . . . the [Audit] Division has not provided written evidence of such policy in some format clearly shown to have been made available to the public. There is no claim or evidence that petitioner had access to or even knowledge of the Division's audit guidelines or its internal policies concerning domicile and statutory residence under circumstances such as the present. . . . Moreover, as previously noted, such guidelines would not in any event be binding in this forum.”
Furthermore, CCH Incorporated (the leading provider in tax analysis and information), made the following statement in the introduction of New York Residency and Allocation Audit Handbook, Fourth Edition, when discussing issues of residency:
“It is important to note than the Guidelines are just that: Guidelines. They do not have the same authority as laws, regulations or cases. They merely summarize the Tax Department’s current audit policy.”
Please note that regardless of the merits of the case, New York State Tax Department can be a tenacious and difficult adversary.