As a follow-up to my recent posting of my article “Domicile is Like an Inertia,” I received an interesting article discussing New York’s Statutory Residence Rule in the Tax Analysts Special Report dated April 4, 2011. The article written by Peter L. Faber criticizes the statutory residence test and argues that it should be repealed. In his article, the author points out that New York State taxes residents on all their world wide income, regardless of whether it has any connection to New York. A person who is not legally domiciled in New York is treated as a resident for income tax purposes if he maintains a permanent place of abode in New York and is present in the state for more than 183 days during the tax year. This individual is known as a “statutory residence.” The statutory residence rule only applies for personal income taxes.
In the article, the author points out that the statutory residence test was conceived as an objective surrogate for the domicile test. It was intended to avoid the complex inquiry that goes into determining a person’s domicile and to ensure that a person who really lived in New York could not avoid resident status by arguing that his “state of mind” placed primary loyalty elsewhere.
The article points out that the New York Department of Taxation has taken an expansive view of the statutory language. The Department views the word “permanent” as relating to the nature of the residence and not the taxpayer’s use of it. The only structural exclusion is “for a mere camp or cottage, which is suitable and used only for vacations.” 20 NYCRR, Section 105.20(e)(1). Therefore, a house or apartment that is not a camp or cottage is treated as a permanent place of abode even if it is in fact used only for vacations or for that matter not at all.
The author goes on to discuss a number of cases involving individuals who clearly were not New York residents but because of the statutory residence test were required to litigate the issue as to whether they were New York residents and therefore to count days. The problem with counting days is that typically taxpayers do not maintain good records of their whereabouts. Certainly the taxpayer has the burden of proof in determining whether he or she does or does not meet the 183-day test. The result is that invariably taxpayers have trouble proving that they were not in New York for more than 183 days during a tax year. Proving a negative is always hard, and proving that a person was not in New York for any part of a given day as the author points out can be extremely difficult.
The advice given is to keep contemporaneous records including a diary every day and any part of every day. The author goes on to recommend that the individual maintain a separate folder for each day and insert in the folder copies of any documentation that they have showing there whereabouts on that day. Still all in all the taxpayer will in all likelihood have a difficult time proving that they are not a New York resident. The author points out that the audit process is time consuming and expensive and can go on for many years. Most taxpayers do not have the time or money to spend on such an audit. The author argues that the statutory residence rule should be repealed and replaced by the domicile test for income tax purposes. Indeed, that would eliminate counting days and refocus the incidence of taxation only on those individuals who are truly domiciled in New York and should bear the burden of the state’s income tax.