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SALT Business: A Glimpse in the Eye of the Pandemic

Timothy P. Noonan, JD and Doran J. Gittelman
Published Date:
Jan 1, 2021

There has been no shortage of excitement in the State and Local Tax (SALT) world this year. Between state-issued COVID-19 guidance, federal stimulus efforts, and the ever-changing landscape of income sourcing and nexus rules, individuals and multistate businesses are struggling to remain tax compliant. In this article, we will focus on some of the hot topics in state and local tax this year, and touch upon some of the big shifts occurring during the pandemic.  

COVID-19 and SALT. The pandemic has caused many Americans to work remotely, with seemingly no end in sight. For these individuals, this means telecommuting to work from a location outside of the city and/or state where their employer is located. This has massive state tax consequences as many state tax concepts, such as income sourcing and corporate nexus, are based on the location of employees and where their work is performed. The ability to work remotely has also changed the equation for individuals in deciding where to live, or – in tax speak – where they will be a resident. For some, this means moving out of high-tax jurisdictions (where they once resided to ensure a short commute to employer offices) to lower-tax areas. With state budget deficits surmounting, we have been nervously anticipating state legislation targeted at recapturing lost revenue resulting from these changes and have been tracking administrative announcements made thus far.

Here’s what we know so far, and what we suggest you look out for moving forward.

Changing Residency during the Pandemic  

Policy wonks often say, “the evidence of tax-motivated interstate migration is anecdotal.” Anecdotal or not, the exodus from high tax states is real. If you are someone who already made a move during the pandemic, or are considering doing so, there are two components of residency that you should be wary of: domicile, and where applicable, statutory residency. In the majority of states, residency is established by either being domiciled in the state, or by meeting the requirements of a statutory residency rule.[1]

Domicile Residence

To change your domicile, you will have the burden of proving by “clear and convincing evidence” that you have changed the location of your primary residence. Auditors tend to ignore a taxpayer’s self-serving statements. So it is usually necessary for taxpayers to prove their subjective intent to change their domicile with objective facts.

In our experience, the key in domicile change cases is the “leave and land” rule. When presenting your case, it will be critical that you demonstrate to the department that you actually abandoned your former domicile (that you “left”) and that you can support a specific date when you established a new domicile in another jurisdiction (that you “landed”). With so many people leaving their homes during the pandemic, it will be critical that you can support your move with verifiable facts (e.g., address change, family relocation, purchasing or renting new home, etc.) occurring around the date of the claimed move. But most importantly, you must be able to show that the move is permanent. 

Indeed, because the audit of the 2020 tax year will likely occur in 2022 or 2023, we expect that the tax departments are going to take a “20/20 hindsight” approach to many of the moves that occur during the pandemic. If you only stay in your new domicile for a couple of months, or only one or two years, it is very likely an auditor from your former home state will question the permanency of your move. On the other hand, if you are still living in the new state when the audit notice arrives, it will be difficult for an auditor to question your intent. This will be especially true where the change in domicile was to a state where you previously owned a vacation home. In these instances, it will be imperative that you also significantly increase your time in that state to evidence a true change in living patterns.

Statutory Residence

In addition to domicile, many states employ a separate residency test called statutory residency.  The statutory resident rule applies only in states/cities in which you are not domiciled. Under the statutory residency test, you could qualify as a state or city resident if you maintain living quarters in the state or city and spend more than six months (183 days) in the state or city in a given tax year.[2] The statutory resident rule is a bright-line test, meaning that there is no need to resort to questioning one’s motives; you count days and if you exceed 183 days in the jurisdiction you are deemed a resident. If you do not exceed 183 days in the jurisdiction, you are not a resident. Although it is time-consuming to prepare detailed day-count schedules to prove your time spent inside a state, it is a relatively straightforward process.

Nonresident Convenience of the Employer Rules

As a nonresident, you may be required to pay tax on income sourced to a state or other taxing jurisdiction.  Under current law, New York imposes its income tax on nonresidents who earn income from New York sources. Even if you successfully change your domicile and can claim nonresident status in your former home state, if you are working remotely for an employer and are assigned to an office in that state, your wages may nevertheless be taxed by the nonresident state if that state employs a “convenience of the employer” rule. Under the generic convenience rule, income is sourced to the employee’s physical location if she is working remotely by necessity and to the employer’s location if for her own convenience. Only five states—Arkansas, Delaware, Nebraska, New York, and Pennsylvania[3]—apply a traditional convenience type rule, with Connecticut applying it in some circumstances.[4] 

New York derives most of its tax revenue from personal income taxes. Which is why in response to its residents fleeing New York to avoid COVID-19, New York doubled-down on its convenience rule.  On October 19, 2020, New York State released guidance regarding the treatment of days worked while telecommuting during the pandemic for personal income tax purposes. The FAQ includes the following Q&A:

“My primary office is inside New York State, but I am telecommuting from outside of the state due to the COVID-19 pandemic. Do I owe New York taxes on the income I earn while telecommuting?”

If you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state, unless your employer has established a bona fide employer office at your telecommuting location. There are several factors that determine whether your employer has established a bona fide employer office at your telecommuting location. In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe New York State income tax on income earned while telecommuting.”

To understand the importance of this rule, consider the following scenario:

Taxpayer lives and works in New York, but since the onset of the pandemic has decided to give up her New York lease and move to Florida for good. Taxpayer’s employer is based out of New York City and doesn’t have a Florida office. The employer is permitting the taxpayer to work remotely indefinitely and is only requiring occasional visits to the New York City office. Moving forward, the taxpayer will telecommute from her home office in Florida.

In this case, our taxpayer would arguably have a strong domicile case–she gave up her New York lease and acquired a new one in Florida, permanently relocating there. As a result, New York would no longer be able to tax her as a resident, meaning most, if not all, of her investment income would not be subject to tax by New York. However, despite her change in domicile, because she is working remotely for a New York employer, New York’s guidance says she would be required to allocate her wage income to New York State and pay taxes there because her remote work in Florida was for her own convenience.

As you can see in our scenario above, the convenience rule has the impressive ability to pull revenue from residents living and working in other states. The “other states” don’t like this, hence the current feud between Massachusetts and New Hampshire. Massachusetts adopted a temporary convenience income sourcing rule for telecommuters, and on October 29, 2020, the State of New Hampshire brought an action in the U.S. Supreme Court against the Commonwealth of Massachusetts seeking to enjoin Massachusetts from enforcing its new telecommuting regulation against New Hampshire residents. But believe it or not, New Hampshire doesn’t even have it the worst. Because New Hampshire does not impose an income tax, the state’s tax revenues should be unaffected by the Massachusetts convenience rule. Other states may be obligated to provide a credit for taxes paid by its residents to jurisdictions employing a convenience of the employer rule![5] Thus, convenience of the employer rules might result in an actual shift of income tax revenues between states.

Further, because some states follow the convenience rule and others have announced they will not, double taxation could impact telecommuting employees, depending on where they are working. For example, suppose a New York employee permanently moved to Vermont in 2020, but his employer allowed him to continue working remotely on an indefinite basis. Under the convenience rule, unless the taxpayer properly executes one of the convenience rule exceptions described below, the taxpayer’s compensation will remain subject to New York tax. But based on Vermont’s current policy, the taxpayer’s compensation will be taxed there are well without any clear provision for a credit for the New York taxes paid!

The Vermont Department of Taxes issued guidance that stated, “[i]f you are a non-resident but you are temporarily living and working in Vermont, you have an obligation to pay Vermont income taxes on the income earned while you were living and performing work in Vermont. This is true even if you were in Vermont due to the COVID-19 pandemic, and regardless of whether your employer is located inside or outside of Vermont.”[6]

As mentioned in the above-referenced New York FAQ, there is, however, an exception to the convenience rule, at least in New York. The easiest way to avoid application of the convenience rule is for the employer to open an office in the location of the employee’s new domicile and assign the employee to that location. So in our example, the taxpayer’s employer would open an office in Vermont, and our taxpayer would be assigned to work from the Vermont location. Poof—no more convenience rule! Otherwise you will need to make your home office into a “bona fide employer office.”[7] In order to qualify for the New York bona fide office exception, a taxpayer must prove that their duties require the use of special facilities that cannot be made available at the employer’s place of business, but that those facilities are available at or near the employee’s home.[8] If the taxpayer cannot satisfy this requirement, the taxpayer must meet four out of six secondary factors,[9] plus three out of ten “other factors.”[10] In the recently issued FAQ, the tax department pointed specifically to this bona fide office rule as still being applicable, so meeting this safe harbor seems to be a sure-fire way to mitigate the telecommuting problem, at least in New York.

Telecommuting and Corporate Nexus

The migration of the workforce will also have meaningful tax consequences for businesses. Indeed, businesses that once had a small geographical footprint may be finding now that they have employees in multiple states, with little ability to track their whereabouts. The concern here is that having employees located in a state is often an indicium establishing corporate nexus, and once a business has nexus in a state, the state has the right to tax the business. 

Fortunately, many jurisdictions have made it clear that corporate nexus will not be created merely by having an employee telecommuting within the state. As an example, here’s what a District of Columbia’s Office of Tax Revenue tax notice says about telecommuters and corporate nexus: The D.C. Office of Tax and Revenue “will not seek to impose corporation franchise tax or unincorporated business franchise tax nexus solely on the basis of employees or property used to allow employees to work from home (e.g., computers, computer equipment, or similar property) temporarily located in the District during the period of the declared public emergency and public health emergency, including any further extensions by the Mayor.”[11]

We Got You Covered. Keep in mind that these rules are ever-changing. So for your convenience (and ours!) we’ve consolidated some of these rules and updates which we welcome you to follow here:,state-guidance-related-to-covid-19-telecommuting.

Remote Employees and the Business Income Apportionment

The location of a business’s workforce may also change the way the business allocates income to a specific jurisdiction. Depending on the state’s method of allocation, a business may be able to use the location of the employees working remotely to attribute, or allocate, some of the income earned by the business to the state where the services are being performed. A good example of this is the New York City Unincorporated Business Tax (UBT) business allocation percentage computation.[12]

Under the UBT, “Charges for services performed shall be allocated to the city to the extent that the services are performed within the city.”[13] Because there is no convenience rule under these sourcing provisions, the apportionment should be based on where service-performing telecommuters are located.[14] This could present unprecedented tax savings for hedge funds, law firms, accounting firms, and other service providers with now-remote workforces. For example, prior to the pandemic, if a hedge fund investment management partnership had 10 employees who worked from the fund’s New York City office performing investment management services, all income generated from the performance of those services would be sourced to the city for UBT purposes. However, if the same employees were instead telecommuting—four from their apartments in Manhattan, and six from their homes in Connecticut—presumably only 40% of the income generated from those services would be sourced to the city under current UBT rules, resulting in a commensurate reduction in the partnership’s UBT tax liability.

CARES Act and Net Operating Loss Decoupling

In response to COVID-19, the federal government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which among other things, softened the limitations on the carry-back of net operating losses (NOL) formerly restricted under the Tax Cuts and Jobs Act (TCJA).[15] Access to the benefits offered by the CARES Act are however limited in states like New York which introduced an Internal Revenue Code (IRC) fixed-conformity date of March 1, 2020 (for tax years beginning before January 1, 2022), a date prior to the adoption of the CARES Act. While this generally precludes state tax benefits under the CARES Act, at least in New York, NOLs arising out of the deferred federal recognition of an excess business loss, that would have been available federally and in New York under the pre–CARES Act Code, should still be available in 2019, 2020, and 2021.

In calculating the available NOL, both the New York NOL and the Federal NOL that limits the New York NOL that may be claimed, should be determined based on the pre-CARES Act IRC. This requires 2019-2021 New York returns be prepared as if the CARES Act had never been enacted, requiring the preparation of a pro forma federal return based on the IRC as it existed prior to March 1, 2020. Any NOLs not used by a taxpayer before 2022 will be lost, however, when New York’s law re-conforms to the current IRC.

SALT Workaround Update.

One of the most significant changes that came from the TCJA was the federal cap on the SALT deduction. This has severely impacted individuals in high taxing states like New York and California. States including New York that are facing budget deficits and pressure from its residents have been busy developing workarounds to the tax cap. Some of these workarounds include the installation of an Employer Compensation Expense Tax and the creation of state-administered charitable trust funds.[16] New York has even proposed a new unincorporated business tax and filed a lawsuit against the federal government.

Several states have taken it a step further, enacting their own entity-level taxes to serve as a workaround to the lost SALT deduction for individual residents, including Connecticut, Wisconsin, Oklahoma, Louisiana, Rhode Island, and New Jersey have implemented a pass-through entity tax. These are summarized briefly as follows:

Connecticut: Effective 2018, pass-through entities (PTEs) doing business in Connecticut are subject to an entity-level income tax (the “PE tax”) of 6.99%.[17] Partners, members, and S corporation shareholders are, in turn, entitled to Connecticut tax credit equal to 87.5% of their direct or indirect share of the PTE’s PE tax liability. PTEs must have paid the PE tax prior to the owner claiming a credit. There is an open question as to whether New York will give its residents a credit against their share of the PTE paid to CT by the partnerships they own.[18]

Wisconsin: Applicable for S corporations and LLCs taxed as S corporations effective January 1, 2018, and entities taxed as partnerships effective January 1, 2019, entities may elect to be taxed at a 7.9% rate in lieu of passing through their income, loss, or deductions through to their shareholders, partners, or members.[19] The election must be made annually on or before the due date, or the extended due date if applicable, of the entity’s return.

Oklahoma: Effective for tax years 2019 and later, Oklahoma allows PTEs to elect an entity level tax which is calculated by multiplying each PTE owner’s distributive or pro rata share by their applicable tax rate.[20] For purposes of computing the tax, the highest individual marginal rate (currently 5%) is used. Oklahoma income or losses that an electing PTE includes in computing its tax are not allocated to partners, members, or shareholders of the PTE.[21] 

Louisiana: The Louisiana PE tax is an elective, progressive tax effective retroactively to tax years beginning on or after January 1, 2019 and is due by the 15th day of the fourth month after the close of the taxable year.[22] Individuals who are shareholders, partners, or members of electing PTEs will exclude their share of net income or loss from the PTE on their Louisiana individual tax returns.[23]

Rhode Island: The Rhode Island PE Tax is an elective tax imposed at a rate of 6.99%, effective for tax years beginning on or after January 1, 2019.[24] Electing PTEs will supply each of its owners with a copy of Form RI-1099E, showing the share of entity-level tax paid by that owner, which the owner will include in Schedule W of its Rhode Island personal income tax return.[25]

New Jersey: The New Jersey Pass-Through Business Alternative Income Tax is an elective tax effective January 1, 2020.[26]  PTEs in New Jersey can elect to pay tax due on the owner’s share of distributive proceeds. PTEs include partnerships, federal S corporations that have made the New Jersey S election, and LLCs with at least one member who is liable for New Jersey tax on their distributive proceeds. Single Member LLCs and sole proprietorships are not eligible to pay the tax. The owners of the PTEs can claim a refundable tax credit for the amount of tax paid by the PTE on their share of distributive proceeds. Corporate members will be allowed a tax credit against both the corporate business tax and the surtax, but the credit cannot reduce the liability below the statutory minimum tax. Any excess credit may be carried over for a period of up to 20 privilege periods. The election must be made each year by all owners of the PTE or by a designed officer or member.

The viability of these workarounds was given a major boost in November with the IRS announcing forthcoming regulations for the deductibility of payments by partnerships and S corporations for state and local income taxes. IRS Notice 2020-75 indicates that regulations are forthcoming that will permit “Specified Income Tax Payments” to be deducted by partnerships and S corporations that will not be taken into account in calculating the SALT deduction limitation for individual partners or shareholders. The regulations containing these rules will apply to Specified Income Tax Payments made on or after November 9, 2020. These regulations may also permit taxpayers to apply these rules to such payments made in a taxable year of the entity ending after December 31, 2017 and before November 9, 2020, provided that such payment “is made to satisfy the liability for income tax imposed on the partnership or S corporation pursuant to a law enacted prior to November 9, 2020.”[27] This new federal guidance should spur states like New York into action and force them to craft entity-level tax workarounds similar to what we’ve seen in New Jersey and other states.

Timothy P. Noonan, JD, is the practice group leader of Hodgson Russ LLP’s New York Residency Practice, and he is one of the leading practitioners in this area of the law. He has handled some of the most high-profile residency cases in New York over the past decade, including the Gaied case discussed here, one of the first New York residency cases to ever reach New York’s highest court. He also co-authored the 2018 edition of the CCH Residency and Allocation Audit Handbook, and he is often quoted by media outlets, including the Wall Street Journal, New York Times, and Forbes, on residency and other state tax issues. As the “Noonan” in “Noonan’s Notes,” a monthly column in Tax Analysts’ State Tax Notes, Tim is also a nationally recognized author and speaker on state tax issues. He can be reached at 716-848-1265 or

[1] See e.g. N.Y. Tax Law § 605(b); N.J. Stat. Ann. § 54-A:1-2; see also Cal. Rev. and Tax Code § 17016 (creating a presumption of residency in California, where individuals spend in the aggregate more than 9 months of the taxable year in California.)

[2] See e.g. Colo. Rev. Stat. § 39-22-103(8)(a)(Taxpayers will be deemed resident of Colorado if they maintain a permanent place of abode within Colorado and spend in the aggregate more than six months of the taxable year in Colorado.); Regs. Conn. State Agencies § 12-701(a)(1)(B); Pa. Tax Ref. Code § 7301(p)

[3] Conn. Gen. Stat.  § 12-711(b)(2)(C); 30 Del. C. § 1124(b); Delaware Schedule W; Neb. Admin. R. & Regs. § 003.01C; N.Y. TSB-M-06(5)I; 61 Pa. Code § 109.8; Arkansas Revenue Legal Counsel Opinion 1504, 09/14/2011

[4] Connecticut adopted the convenience of the employer test effective for tax years beginning on or after 2019. Unlike the New York convenience rule, Connecticut’s rule is reciprocal, meaning that it only applies regarding residents of states that have adopted their own convenience rules. Conn. Gen. Stat. § 12-711(b)(2)(C)

[5] Consider for example, New Jersey’s resident tax credit rules which provide a proportional credit for taxes which are in part, actually paid. N.J. Rev. Stat. § 54A:4-1(a); N.J. Admin. Code § 18:35-4.1(a)(1)(i); Instructions to Form NJ-1040; New Jersey Form GIT-3B.

[6] VT Dept. of Taxes, Coronavirus (COVID-19) Update: Information for Taxpayers.

[7] N.Y. TSB-M-06(5)I

[8] Id.

[9] Id. Secondary factors include: Home office is a requirement or condition of employment; Employer has a bona fide business purpose for the employee's home office location; Employee performs some core duties at the home office; Employee meets with clients, patients, or customers at the home office; Employer does not provide the employee with office space or regular work accommodations; Employer reimburses expenses for the home office.

[10] Id. Other factors include: Employer maintains a separate telephone line and listing for the home office; Employee's home office address and phone number are on the employer’s business letterhead and/or cards; Employee uses a specific area of the home exclusively for the employer's business; Employee keeps inventory of products or samples in the home office; Employer’s business records are stored at the home office; Employer signage at the home office; Home office is advertised as employer's place of business; Home office covered by a business-related insurance policy; Employee properly claims a deduction for home office expenses for federal income tax purposes; Employee is not an officer of the company.

[11] D.C. OTR, Tax Notice 2020-05, Apr. 10, 2020

[12] NYC Admin. Code § 11-508(c)(3).

[13] NYC Admin. Code § 11-508(c)(3)(C).

[14] Consider also for context New York City’s Finance Letter Ruling #18-4986, issued in August of 2018, which stated that to the extent that to the extent work for a particular client is split between the City and outside the City, the business should allocate the receipts for that client based on the proportion of time spent in the City.

[15]  Public Law 116-136 § 2303.

[16] N.Y. TSB-M-18(1)ECEP, 07/03/2018; Tax Law § 850; Tax Law § 851; Tax Law § 853; see also

[17] Conn. Gen. Stat. § 12-699; Connecticut Special Notice No. 2018(4), 06/06/2018; OCG-6, Connecticut Office of the Commissioner, Regarding the Calculation of the Pass-Through Entity Tax, 08/16/2019.

[18]  Tax Law § 620(d) prohibits the credit for income taxes paid by an S corporation.  And the instructions to New York Form IT-112R assert that a similar rule applies to income taxes paid by partnerships.  There is, however, no statutory authority supporting a limitation on a credit for income taxes paid by partnerships.

[19] Wis. Stat. § 71.21(requiring consent of persons holding more than 50% of interest in the entity); Wis. Stat. § 71.775; Wis. Stat. § 71.365(4m)(a)( requiring consent of persons holding more than 50% of shares in the entity) ; Pass-through Entity Level Tax: Tax-Option (S) Corporations—Common Questions, Wis. Dept. Rev., 01/25/2019; Pass-through Entity Level Tax: Partnerships—Common Questions, Wis. Dept. Rev., 01/25/2019.

[20] Okla. Stat. 68 § 2358(A)(A.11); Okla. Stat. 68 § 2355.1P-3(B).

[21] Oklahoma Tax Commission FAQs.

[22] La. Rev. Stat. Ann. § 47:287.732.2; La. Rev. Stat. Ann. § 47:297.14; La. Admin. Code § 61:I.1001.

[23] Louisiana Revenue Bulletin No. 19-019, 02/05/2020.

[24] R.I. Gen. Laws § 44-11-2.2; R.I. Gen. Laws § 44-11-2.3; FAQs on Entity-Level Tax for Pass-Through Entities, R.I. Div. of Taxation, Publication 2019-04, 12/24/2019.

[25] Rhode Island Department of Revenue Division of Taxation FAQs on entity-level tax for pass-through entities, 12/24/2019.

[26] N.J. Rev. Stat. § 54A:12-3(a); N.J. Rev. Stat. § 54A:12-5; Pass-through Business Alternative Income Tax, 02/07/2020.

[27] IRS Notice 2020-75.

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