New York In Defense of Statutory Residence Rule

On August 23, 2019, the New York State Department of Taxation and Finance filed an opposition brief asking the U.S. Supreme Court to deny certiorari in Chamberlain vs. New York State Department of Taxation.

In Chamberlain, two taxpayers are challenging whether New York’s personal income tax scheme (in particular New York’s statutory resident rule) is consistent with the dormant Commerce Clause and with the U.S. Supreme Court’s decision in Comptroller of Treasury of Md. v. Wynne, 135 S. Ct. 1787 (2015), when New York provides its residents with a tax credit for personal income taxes paid to another State on income earned in that State, but not for taxes paid to another State on intangible income (intangible income includes investment income, such as interest, dividends, and gains from the sale of intangible assets such as stocks.) not derived from economic activities in the other taxing State. This failure to provide a credit can result in double state taxation of income from intangible assets. In Comptroller of Treasury of Md. v. Wynne, the U.S. Supreme Court held that Maryland’s personal income tax violated the U.S. Constitution’s dormant Commerce Clause because Maryland failed to give its residents a full credit against Maryland’s income tax for taxes paid to other States on income earned in those States.

In prior proceedings, the New York Court of Appeals dismissed the appeals of two taxpayers, which were seeking to further challenge two state appellate court decisions that held that New York’s Statutory Residence rule was constitutionally valid. These taxpayer thereafter sought certiorari to ask the U.S. Supreme Court to hear the case.

By way of background, New York defines a resident to include either a person domiciled in New York or one who maintains a permanent place of abode in New York (for example, an apartment, house, condominium, etc…) and spends in the aggregate more than 183 days of the taxable year in New York. N.Y. Tax Law § 605(b)(1)(B). Among States with income taxes, many have some form of statutory residence, and the most common approach is New York’s. Residents, whether domiciliaries or statutory residents, are taxed on their income no matter where earned. N.Y. Tax Law § 612(a).

New York has sought to distinguish Comptroller of Treasury of Md. v. Wynne on the grounds that unlike the income in that case, the intangible income in Chamberlain for which no credit is provided is not directly attributable to another state. To the extent it is, a credit is provided. It is unclear whether the U.S. Supreme Court will accept certiorari and agree to hear the case. If it doesn’t, then taxpayers can consider the issue settled, at least for the near term. Even if the U.S. Supreme Court elects to consider the case and ruled that New York’s statutory resident scheme violates the constitution, New York should be able to simply reformulate its rules by providing a tax credit for any taxes paid in other states on intangible income.

Unless and until this rule is invalidated by the U.S. Supreme Court, taxpayers with intangible income that is not directly attributable to another state should try to avoid becoming statutory residents of New York if possible to avoid double taxation on their intangible income. The safest way to do that is for taxpayers to make sure that they do not spend more than 183 days in New York during any calendar year and be able to produce sufficient evidence and records to establish that. For assistance in tracking tax days in New York and other states, use the Domicile365 app to automatically monitor day counts.

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