New York Eliminates Temporary Stay Residency Exception

Editor: Stephen E. Aponte, CPA

New York is very aggressive in making sure that those who work or live in the state pay their fair share of taxes. Taxpayers who are nonresidents of New York pay taxes only on their share of New York source income; however, taxpayers who are state residents pay taxes on their worldwide income. Because falling under the definition of a New York resident can be very expensive, it is extremely important to understand the rules.

Although much has been written about the change of residency when retiring to another state, a recent change in the New York regulations dealing with the temporary assignment rules will affect workers coming into New York.

Resident Individual Defined

New York defines a resident individual as either:

• A domiciled resident—a New York person domiciled in New York (subject to exceptions not here relevant); or
• A statutory resident—a New York individual (other than an individual in active service in the U.S. Armed Forces) who is not domiciled in New York but who maintains a permanent place of abode in New York and physically spends in the aggregate more than 183 days of the tax year in New York (20 NYCRR §105.20(a)).

A person is deemed domiciled in a place where the individual intends to make his or her permanent home—the place to which that individual intends to return whenever he or she may be away.

A permanent place of abode is a dwelling place suitable for year-round use, containing ordinary dwelling facilities for cooking, bathing, etc., that the taxpayer maintains but need not own. The term also usually includes a dwelling owned or leased by the taxpayer’s spouse. It does not include camps or cottages that are suitable and used only for vacations, or barracks or other construction that do not contain facilities ordinarily found in a dwelling (20 NYCRR §105.20(e)). Therefore, a summer home is not a permanent residence unless it is suitable for year-round habitation. New York regulations provide that a New York nondomiciliary must maintain a permanent place of abode for substantially all of the tax year in order to be taxed as a statutory resident, and New York interprets that to mean a period exceeding 11 months.

Temporary Stay Exception

Historically, New York provided a special “temporary stay exception” to the permanent place of abode rule by providing that a place of abode was not deemed permanent if it was maintained only during a temporary stay. Although New York defined a temporary stay as generally being three years or less, under specific facts and circumstances the state has ruled that a longer period in order to accomplish a particular purpose could still count as a temporary stay. New York

has interpreted the particular purpose requirement to mean that an individual must be present in the state to accomplish a specific assignment with readily ascertainable and specific goals and conclusions, as opposed to a general assignment with general duties having no specified conclusion in order to qualify for the exception. [NY Dep’t of Taxation and Finance, Regulatory Impact Statement, p. 2 (9/30/08)]

New York took the position that this excluded management and sales assignments that were of a general nature and not of a specific purpose. It was important that the original assignment letter or employment agreement detail the limited stay purpose of this temporary assignment because noncontemporaneous support was given less weight. These same rules applied to New York City and Yonkers residency definitions.

For example, if a Texas resident was transferred to his employer’s New York office on a temporary assignment for a fixed and limited period, after which he was to return to Texas, New York would not consider him to be a statutory resident even if he lived in a New York City apartment for 340 days. The Texas resident would be considered to be a New York nonresident and would have to pay New York State taxes (none to New York City) on only his New York source income.

However, if this Texas resident was transferred to his employer’s New York office for an indefinite period of time, the New York City apartment would be deemed a permanent place of abode and the person would be a resident for New York State and City personal income tax purposes because he was in New York City for 340 days. Other beneficiaries of this exception included foreign nationals working with H-1B visas, professional athletes, students attending New York schools, and medical residents.

Over the years, this temporary stay exception was an area of much criticism, controversy, and litigation. As such, New York felt it was too difficult to administer and rationalized that the exception was not consistent with the state law’s definition of statutory resident. After much consideration, and generally contrary to public comment, the state decided to eliminate the exception effective for tax years ending December 31, 2008, and thereafter. In short, New York felt that the elimination of the exception was a better interpretation of the tax law and would provide taxpayers and the state with “clear, objective and easily applied rules for assessing residency status” (Regulatory Impact Statement, p. 2). New York, in discussing the change’s economic impact on foreign nationals, noted that for fiscal year 2009–2010 and thereafter, the estimated economic benefit of this change to New York City would be $30 million and to New York State $15 million. (Under current law, nonresidents of New York City do not pay any taxes to the city.)

Accordingly, under the current rules, a taxpayer will be considered a statutory resident if he or she is maintaining a permanent place of abode in New York (i.e., if he or she meets the physical requirements of a permanent abode and maintains the abode for substantially all of the year (i.e., more than 11 months)) and if he or she spends more than 183 days in New York.

Impact of Rule Change

The net result of this rule change will be that more individuals will be ensnared as statutory residents and will have to pay taxes on their worldwide income. For individuals domiciled in a state such as California, the economic impact might not be as great because they would generally be entitled to take a tax credit against their home state’s income tax so they would not be double taxed. However, individuals from a state where there is no personal income tax, such as Texas or Florida, would be at a real disadvantage. In the above example, the Texas resident would now be forced to pay tax on his non–New York sourced income that he previously would not have had to pay.

Commentators have expressed concern that this change in the law might cause New York employers to be less likely to bring their out-of-state resident employees or foreign nationals into the New York office on temporary assignments, which would hurt the local economy. In the long run, this decision may also provide another reason for a New York employer to move more of its operations out of New York. For more on this, consider a recent article that could lead one to conclude that maintaining a business-friendly environment would be a competitive necessity for states (Simon, “More States Considering Tax Breaks to Woo Jobs,” Wall Street Journal A1 (February 2, 2009)).

Planning Opportunities

Depending on a taxpayer’s facts and circumstances, it is still possible to effectively avoid coming within the definition of a statutory resident by having an 11-month lease and having a temporary abode rather than a permanent abode.

EditorNotes

Stephen Aponte is a senior manager at Holtz Rubenstein Reminick LLP, DFK International/USA, in New York, NY.

Unless otherwise noted, contributors are members of or associated with DFK International/USA.

For additional information about these items, contact Mr. Aponte at (212) 792-4813 or saponte@hrrllp.com.