New York Is Looking More Closely at Employees on International Assignments

by Tony Mortillaro and Bob Mischler, KPMG LLP, New York
(KPMG LLP in the United States is a KPMG International member firm)

International executives, international assignment program managers, and tax practitioners are witnessing (and perhaps experiencing) heightened scrutiny of New York state residency positions by the New York State Department of Taxation and Finance. This increased audit activity means that much more may be at stake when determining whether an inbound or outbound international assignee is a resident of New York.

To gain a better understanding for the basis for New York's position for audit, it is important to be familiar with New York residency rules. This article will briefly discuss the residency rules and share some current tax filing considerations for employers and executives inbound to and outbound from New York, and what may be coming down the pike.¹

Audit Activity – Who Is Getting Audited?

The following circumstances have typically increased the likelihood of New York state audit activity:

• Taxpayers who file nonresident returns in the current year after having filed resident returns in the past
• Taxpayers who filed nonresident returns in the current and prior years and have been identified as having a permanent place of abode in the state
• Taxpayers who have filed nonresident returns in the current and prior years, and have been identified as having no permanent place of abode in the state, but have reported income allocated both to New York and other jurisdictions
• Taxpayers who have not filed any New York return in the current year, have filed either as a resident or nonresident in prior years, and have some connection to New York in the current year
• Taxpayers who have New York City tax withholding and claim nonresident status on their income tax filings (since only New York City residents are subject to New York City tax, withholding can imply residency).

Domicile

Anytime one explores the area of state taxation, among the first things that come to mind is domicile. In general, domicile is the place an individual intends to have as his or her permanent home and the place the individual intends to return to whenever he or she is away. Once a domicile is established, it continues until an individual leaves with no intention to return and establishes a new domicile in another jurisdiction. In many cases, an individual who is domiciled in New York may be considered and treated as resident of New York even though he or she is not currently residing in New York.

International Executives Inbound to State of New York

For the most part, inbound executives on a temporary assignment in New York can disregard the domicile issue, since the nature of a "temporary assignment" would imply an intention to return to a domicile somewhere other than New York at the end of the assignment. For international executives assigned to New York on a temporary basis, domicile is typically not an audit issue; rather, statutory residence is instead being examined in audits.

Statutory residency pushes the domicile concept to the side—in a manner of speaking—and provides that the term "resident" also includes an individual not domiciled in New York but who maintains a permanent place of abode in New York and spends in the aggregate more than 183 days in the taxable year (calendar year) in the state.

It is important to point out that under statutory residency, an individual who maintains a place of abode in New York must maintain such abode "for substantially all of the taxable year." The state's position is that "substantially all of the taxable year means a period exceeding 11 months." That means in the year of arrival and departure, a taxpayer could be treated as a nonresident, even if he or she is present for more than 183 days, so long as he or she does not have a permanent abode available for more than 11 months.

Ideas To Consider for Inbound Assignees

There are a number of things that employers and international executives inbound to New York can consider in respect of their New York assignments, including structuring the short-term assignment so as to keep the executive from spending 183 days in the state.

International executives should retain clear and concise documentation for all presence in the state of New York and New York City generally, and to substantiate such presence upon audit. This is especially important in the years of arrival and departure. Substantiating documentation includes travel itineraries, airline ticket receipts, time and expense reports, corporate and personal credit card receipts and statements, and calendars. The international assignment program manager should consider including language in internal documents specifically referring to the timing of assignments. In addition, it is a good idea to include language in company tax polices and documents communicating that the executive must retain documentation in case of an audit.

What About Middle Years of Assignment?

One might ask: what happens in the middle years of the assignment where inbound executives maintain a place of abode for substantially all of the taxable year, maintain a dwelling in the state, and spend more than 183 days in the state? Do they have resident or nonresident status? In these middle years, it is important to examine the meaning of permanent place of abode and a further exception to the resident rules provided under New York law.

New York defines "permanent place of abode" as a dwelling place permanently maintained by the taxpayer, whether or not owned by the taxpayer. The regulations go on to point out that a place of abode, whether in New York or elsewhere, is not deemed permanent if the stay is only temporary and is for the accomplishment of a particular purpose.

Regulations provide further guidance on the terms "temporary" and "particular purpose":

• Temporary is a fixed and limited period as opposed to a stay of indefinite duration, generally where the assignment is expected to last for three years or less in the absence of facts that would indicate otherwise
• Particular purpose is in relation to accomplishing a specific assignment that has readily ascertainable and specific goals and conclusions as opposed to a general assignment with general goals and conclusions.

Generally, it is the position of the New York audit department that in order for a place of abode not to be permanent, both of the above conditions must be satisfied: the temporary nature of the assignment and the particular purpose. Auditors may request assignment letters as their first source for determining whether the executive's stay meets the temporary or particular purpose criteria. The language in the assignment letters discussing the goals and objectives will be examined closely. Other documentation requests may include employee performance reviews and whether those goals and objectives are consistent with the assignment letters, permanent residency pursuits, and visa applications.

Note, then, that even if a taxpayer is present in New York for the entire year, he or she could be found to be a nonresident if he or she can satisfactorily establish the temporary nature of the assignment and that he or she is present for a specific purpose. New York has issued some guidance relating to how certain fact patterns would stand up against the particular purpose test.

Examples of assignees who would not be considered to be present for a particular purpose include:

• A salesperson with years of experience in a particular product line is assigned to New York to improve weak sales of that product
• Employees for key positions such as Deputy Manager, General Manager, and Comptroller are sent to the New York office from an out-of-state office, as it is important that these employees understand the company philosophy and have the necessary contacts with the home office
• A parent company sends an employee to its subsidiaries located in New York to develop a particular segment of the market. Sales and market development, even if it involves a specific area of the market, constitutes general duties and not for a particular purpose. If, however, the duties were specific and limited to the hiring and training of the staff and after that is accomplished, the assignment is ended, specific purpose may be attainable.

Examples of assignees who would be considered to be present for a particular purpose include:

• An employer sends systems employees from the home office to the New York office to implement the system and upon completion of the implementation the employees will return to the home office
• An employer sends an employee from an out-of-state office to learn the way the department functions in the New York office, and, upon learning the functions, the employee will return to the out-of-state office.

Strategizing Assignment Documentation

Assignment letters should be clear as to the temporary nature of the assignment (i.e., for a fixed and limited time) and the particular purpose. Where the assignment end date is not apparent, the individual may be deemed to have a permanent place of abode and may fall within statutory residence.

Extended temporary assignments should be documented clearly with a new assignment letter or a rider to the original assignment letter to document the continued temporary nature of the assignment and the fixed and limited time. New York auditors have paid particular attention to extensions and multiple and consecutive assignments.

Document the specific assignment goals, objectives, and expected conclusions (for particular purpose) and determine that they coincide with the fixed and limited duration of the assignment period.

International Executives Outbound from State of New York

Generally, New York audits initially focus on whether the assignee retains domicile in the state of New York and New York City, whether the taxpayer qualifies under the statutory resident test, and whether he or she meets one of the exceptions to residency.

Because the domicile issue is based upon intention, which can be subjective in nature, the auditors may focus on whether the taxpayers' actions support their intentions. To do so requires the auditor to request a substantial amount of personal information and documentation to evaluate whether actions taken substantiate a true change in domicile.

Even if deemed a domiciliary of the state, nonresident status may still be available based upon the two exceptions provided by New York tax law. The relevant section of New York regulations provides that any person domiciled in New York is a resident unless they meet all three of the requirements in one of the two categories below:

• Category 1

• Category 2

If Audit Occurs

When the state decides to audit a taxpayer's presence under the 450-out-of-548-day rule, the taxpayer should expect a two- to six-month exercise that may involve the international assignment program managers as well. Substantiating presence in and out of the state of New York (and New York City) under audit can be extremely challenging, requiring the completion of multiple audit questionnaires, as well as a calendar supported by various documentation, which can include time and expense reports, copies of all passports with legible date stamps, corporate and personal credit card statements, travel itineraries, and airline ticket receipts. In addition, it should be noted, the time frame is often short for providing this documentation, which is viewed as critical by the authorities.

Things To Consider

It is important to educate your international executives about the potential for and the requirements of a state tax audit. Help them to understand how essential it is to the company and themselves to maintain proper documentation—and that it should be retained—whether they maintain a home in the state or not. If a home is maintained in New York, it is a good idea to stress the importance of monitoring New York presence at the employer and the employee levels to potentially avoid unnecessary assignment or personal tax costs.

Finally, international assignment program managers should consider adding language to standard documents that refers to tracking the taxpayer's (and his or her family's) presence in the state; also, consider including language setting out the employee's responsibility for helping to contain assignment costs.

Summary

Though most taxpayers are alert to the possibility of audit by the Internal Revenue Service, audits of state income tax returns seem to be of less concern. However, New York has stepped up audits of international executives, taking a critical look at the nature of the assignment, the length of stay in New York, and other factors, in order to determine residency and other issues that may reveal inadequate attention to the rules and potential non-compliance.

While we do not foresee a decrease in New York audit activity, there are steps that multinational companies and their international executives can take to potentially reduce exposure and appropriately prepare for an examination. Needless to say, reducing the number of audits, and streamlining those that occur, can potentially result in a direct reduction of costs. New York residency rules provide certain exceptions that may reduce an international executive's tax burden; however, it is essential that the appropriate documentation exists to support these valid exceptions.

Footnote:

1 For an earlier discussion of the rules and the New York "nonresident position," see C. Cure, "Under the Microscope: New York State and Nonresident Tax Positions," The Expatriate Administrator, vol. 2006-03 (Autumn 2006).

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