NY/MD/NJ tax allocation and difficulty getting New Jersey

[Anonymous]

I am posting this for my daughter who is having difficulty getting a 2020 refund from New Jersey. 

Here are the basic facts:. 

1/1/20 - 2/29/20: She worked for a New York City-based subsidiary of a media company. She worked in their NYC office until mid-February and then began working remotely from her NYC apartment per her employer’s Covid remote work policy.

3/1/20 - 12/31/20: She was re-assigned to a second NYC-based subsidiary of the same media company (the sub has a NYC W2 address) and was assigned to work from an office located in New Jersey. She submitted a NJ W4 per the guidance of her payroll department and her employer began to withhold NJ state (and New York City) taxes. However, per her employer’s Covid policy she continued to work remotely from her NYC apartment. On 3/16/20 she vacated her NYC apartment and moved to Maryland. She continued to work remotely for the remainder of 2020 from Maryland. She never worked in her assigned New Jersey office during 2020.

She filed three 2020 state returns:

1. New Jersey Non-Resident (NJ-1040NR) requesting a full refund of taxes (0 days lived or worked in New Jersey)
2. New York Part-Year Resident (IT-203) for the period she worked/lived in New York (1/1/20 - 3/16/20)
3. Maryland Resident (502) for the period she lived in Maryland (3/17/20 - 12/31/20)

New York and Maryland processed her returns. After a long delay, New Jersey responded and indicated that they will not process the refund until she submits a corrected W-2 or a letter from her employer stating that a) she did not live or work in New Jersey in 2020, b) had New Jersey Income Tax erroneously withheld, and c) is claiming a full refund of the withholding. Her employer is unwilling to issue the letter, claiming that the NJ tax was not erroneously withheld because their policy is to withhold state taxes based on an employee’s assigned work location for employees who would, if not for Covid, be required to work in the office.

I have two questions. First, were we correct in our interpretation of the NY/NJ/MD tax law by allocating her state taxes to only New York and Maryland based on days worked from each state and requesting a full refund from New Jersey? Second, if that was correct, what recourse might we have if the employer is unwilling to issue the requested letter? 

[GeorgeDenseff]

Income is generally taxable based on where the service or employment is performed. However, during the temporary period of the COVID-19 pandemic, the State of New Jersey stated that wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.

[TomD8]

@Anonymous wrote:  "what recourse might we have if the employer is unwilling to issue the requested letter?"

My (unofficial) opinion is that your daughter filed her NJ tax return correctly.  Number one, she never lived in or actually worked in NJ.  In fact, since she continued to work in NY due to her employer's own COVID rules, I think a case could well be made that NY was her de facto "assigned work location."  IMO you're correct that her employer should not have withheld NJ taxes from her pay.

In fact, it's evident from what you were told by NJ that they would issue a refund if they had the necessary documentation from her employer.  So it seems that NJ agrees with your interpretation of the rules.

Unfortunately, since her employer won't cooperate, I think your only recourse is to appeal again to the State of NJ, and describe the whole situation in detail as you've done here.  The letter you received from NJ should contain appeal instructions.

[Anonymous]

@GeorgeDenseff - Thank you for the response and pointer. To my limited ability, I have researched the New Jersey temporary guidance. This is the only relevant update I could locate (posted by NJ Division of Taxation on 03/30/2021):  

Tele-Commuting and Corporate Nexus - As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, the Division will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.

The guidance seems to be focused on waiving nexus for out-of-state employers who have employees who are working at home in New Jersey as a result of closures due to Covid. The guidance to those employers is that they can continue to source the income of those employees based on the laws of the employer’s jurisdiction. This guidance does not seem to relate to my daughter’s situation -- a non-resident who has not lived/worked in New Jersey. From what I can tell, New Jersey tax rules continue to require income to be taxed where an employee does the work and the temporary ruling does not mean that they have adopted a “convenience of the employer rule” to tax non-residents who work outside New Jersey. This seems to be supported by New Jersey having joined the New Hampshire Supreme Court case that challenged the authority of states to tax nonresidents’ income while they’ve been working from home.

Our next steps, I think, are to continue to appeal to my daughter’s employer (for a letter) and/or the NJ Division of Taxation, with the facts (as suggested by @TomD8), perhaps enlisting their taxpayer advocate for assistance. I am not sure she would be successful in amending her Maryland return to claim credit for the New Jersey taxes as Maryland imposes taxes (and a withholding requirement on the employer) for individuals who are domiciled in the state.

[TomD8]

NJ taxes non-residents only on "NJ-source" income.

NJ Statute 54A:5-8a (2) defines NJ-source income as income earned "in connection with a trade, profession, occupation carried on in this State or for the rendition of personal services performed in this State."  (emphasis mine)

https://casetext.com/statute/new-jersey-statutes/title-54a-new-jersey-gross-income-tax-act/chapter-5...

I think NJ simply wants documentation from your daughter's employer that she never actually worked in NJ.