Establishing In-State Residency
Generally a nonresident is taxed only on income derived from the state. Conversely a resident is generally taxed on all income. A resident may obtain a tax credit for income taxes paid to nonresident states.
People tend to flee high-tax states like New York, California, Connecticut, New Jersey and Illinois, and move to low or no-income tax states such as Florida, Arizona, Wyoming, Texas, Nevada and the territory of Puerto Rico. Those high-tax states are losing a significant amount of tax revenue and the trend is for those states to be more and more aggressive with their rules for domicile, residency vs. non-residency, definition for sources of revenue and allocations between multiple states.
Domicile and statutory residency together are often used to determine if a taxpayer meets the tests to be taxed as a resident of a state. Rarely it is possible to be deemed a resident of more than one state, with no offsetting tax credit for income tax paid to the other state which is not a nonresident state.
Statutory residency generally is established by spending 183 or more nights in the state during a calendar year.
This can be established with:
- airplane tickets showing transportation into and out of the state
- gasoline and road toll receipts showing the path of transportation into and out of the state
- electric, water and heating bills indicating an increase of activity during the time the taxpayer is in the state
- land-line telephone bills indicating an increase of activity during the time the taxpayer is in the state
- cellphone GPS location tracking service, such as https://monaeo.com/
- cellphone records as provided by your cellphone carrier, which show the location of the cellular antennae used during the call
- annual receipts of weekly religious offerings
- employee access records, such as a pass card used to gain access to the offices
Domicile generally is established by determining where the taxpayer calls “home.” Where the taxpayer returns to when he comes “home.”
This can be established with:
- location of the primary residence, the more established and more expensive property…
New York City Rules:
If you, or your spouse if married filing jointly, maintained or had use of an apartment or living quarters in New York City during any part of 20XX (whether or not you personally used those living quarters for any part of the year), you must mark an X in the Yes box on line E(1) and enter the number of days (not necessarily evenings or nights) you were in New York City, even if on personal business, on
line E(2). (Married filing jointly? If both spouses spent days in New York City, enter the higher number of days on line E(2).) Do
not count days traveled through New York City to use a common carrier such as an airplane, train, or bus.
Living quarters include a house, apartment, co-op, or any other dwelling that is suitable for year-round use, that you or your spouse maintain or pay for, or that is maintained for your primary use by another person, family member, or employer. For example, if a company were to lease an apartment for the use of the company’s president or chief executive officer, and the dwelling was principally available to that individual, the individual would be considered as maintaining living quarters in New York even though others might use the apartment on an occasional basis.
Note: If you marked the Yes box on line E(1) and you spent 184 days or more (any part of a day is a day for this purpose) in New
York City, you may be considered a resident for New York City income tax purposes. The determination of residency is based
on the facts and circumstances of your own situation. See the definitions of Resident, Nonresident, and Part-year resident
in these instructions, and the Nonresident Audit Guidelines available on our website. If you meet the definition, complete the
New York City resident taxes and credits lines (47 through 53, 64, and 69 through 70a) on Form IT-201. See the instructions on
pages 22 through 24, and 28 through 30.
Note: If you maintain a permanent place of abode in New York State but are claiming to be a nonresident for tax purposes,
you must be able to provide adequate records to substantiate that you did not spend more than 183 days of the tax year in New York State
Domicile
In general, your domicile is the place you intend to have as your permanent home. Your domicile is, in effect, where your
permanent home is located. It is the place you intend to return to after being away (as on vacation abroad, business assignment,
educational leave, or military assignment).
You can have only one domicile. Your New York domicile does not change until you can demonstrate that you have abandoned your New York domicile and established a new permanent domicile outside New York State.
A change of domicile must be clear and convincing. Easily controlled factors such as where you vote, where your driver’s license and registration are issued, or where your will is located are not primary factors in establishing domicile. To determine whether you have, in fact, changed your domicile, you should compare (1) the size, value, and nature of use of your first residence to the size, value, and nature of use of your newly acquired residence; (2) your employment and/or business connections in both locations; (3) the amount of time spent in both locations; (4) the physical location of items that have significant sentimental value to you in both locations; and (5) your close family ties in both locations. A change of domicile is clear and convincing only when your primary ties are clearly greater in the new location. When weighing your primary ties, keep in mind that some may weigh more heavily than others, depending upon your overall lifestyle. If required by the Tax Department, it is the taxpayer’s responsibility to produce documentation showing the necessary intention to effect a change of domicile.
If you move to a new location but intend to stay there only for a limited amount of time (no matter how long), your domicile
does not change. For example, Mr. Green of ABC Electronics in Newburgh, New York, was temporarily assigned to the Atlanta,
Georgia branch office for two years. After his stay in Atlanta, he returned to his job in New York. His domicile did not change
during his stay in Georgia; it remained New York State.
If your domicile is in New York State and you go to a foreign country because of a business assignment by your employer, or for study, research or any other purpose, your domicile does not change unless you show that you definitely do not intend to return to New York.
Resident
You are a New York State resident for income tax purposes if:
• Your domicile is not New York State but you maintain a permanent place of abode in New York State for more than 11 months of the year and spend 184 days or more (a part of a day is a day for this purpose) in New York State during the taxable year.
Note: If you maintain a permanent place of abode in New York State but are claiming to be a nonresident for tax purposes, you must be able to provide adequate records to substantiate that you did not spend more than 183 days of the tax year in New York State.
https://www.tax.ny.gov/pdf/current_forms/it/it201i.pdf
New York non-resident rules:
An employee must either satisfy the “Primary” Factor, or must meet both four of the enumerated “Secondary” Factors plus three of the “Other” Factors.
The Primary Factor requires that the home office contains or is near specialized facilities that cannot be made available at the employer’s place of business (such as a test track to test new cars). If the employee is unable to satisfy this test then the Secondary and Other Factors need to be reviewed to see if the employee satisfies the rules.
The Secondary Factors are:
The home office is a requirement or condition of employment. Although in theory this could be incorporated into an employment contract, it is unlikely to be respected while the employer continues to maintain headquarters in New York City with office space sufficient to provide the employee with an office. Case law has held against employees where they could not establish that an office could not have been set up for them with adequate space in their employer’s facilities; see for example Matter of Simms v. Procaccino and Matter of Page v State Tax Commission. It is anticipated that many employees will fight any assessment by New York State on the ground that no office in New York State could be provided for them during the pandemic so by necessity they had to work from home to continue their employment, and thus they believe they should satisfy this requirement.
ii) The employer has a bona fide business purpose for the employee’s home office location. As many employees can now perform their work anywhere via a cellphone and computer, it will be difficult to formulate a specific business purpose for establishing an office in the home of each employee. It is unclear whether purposes such as employee retention and reduction of office costs could satisfy this requirement as “business purposes,” or if something more specific is required. The example provided in the Bulletin is of an engineer who needs to be near several projects in his home state that he must visit regularly to meet project deadlines as a proper business purpose for the home office.
iii) The employee performs some of the core duties of his or her employment at the home office. This factor should be easily satisfied when the employee is performing all of his or her duties at the home office via phone and computer.
iv) The employee physically meets or deals with clients, patients or customers on a regular and continuous basis at the home office. Many employees never meet with clients, patients or customers, so they could certainly not be meeting with them in their home offices and thus will not be able to satisfy this requirement.
v) The employer does not provide the employee with designated office space or other regular work accommodations at one of its regular places of business. This could be satisfied if the Corporation closed or downsized its New York office and only provided a temporary “visitor’s” cubicle for the employee to use. Similar to factor i) above, it is expected that taxpayer’s will argue that the forced closures during the pandemic prevented the employer from providing employees with any designated office space and/or other regular work accommodations at one of its regular places of business.
vi) Employer reimbursement of expenses for the home office. The employer must reimburse substantially all of the expenses related to the home office, which for this purpose means 80% of more of the home office expenses. These expenses include utilities and insurance or a fair rental value, plus reimbursement for all the supplies and equipment used by the employee. It is possible that certain employers have reimbursed employees for these expenses during the year.
The employee must also meet three of the following Other Factors:
i) The employer maintains a separate telephone line and listing for the home office. This could be satisfied with a dedicated phone line in the employee’s home office if the employer was willing, although most people likely use a cellphone these days.
ii) The employee’s home office address and phone number is listed on the business letterhead and/or business cards of the employer. It is unlikely that either the employer or the employee would desire this.
iii) The employee uses a specific area of the home exclusively to conduct the business of the employer that is separate from the living area. This factor should be able to be satisfied by many employees.
iv) The employer’s business is selling products at wholesale or retail and the employee keeps an inventory of the products or product samples in the home office for use in the employer’s business. This factor will not apply to many employers or employees.
v) Business records of the employer are stored at the employee’s home office. This factor could potentially be satisfied by business records that are stored electronically on the home computer.
vi) The home office location has a sign indicating a place of business of the employer. It is unlikely that either the employer or the employee would desire to satisfy this factor.
vii) Advertising for the employer shows the employee’s home office as one of the employer’s places of business. It is unlikely that either the employer or the employee would desire to satisfy this factor.
viii) The home office is covered by a business insurance policy or by a business rider to the employee’s homeowner insurance policy. The employer or the employee should be able to satisfy this factor.
ix) The employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes. At this time this factor can not be met since the federal deduction has been temporarily eliminated.
x) The employee is not an officer of the company. This factor may be satisfied by many employees.
California Rules:
California Office of Tax Appeals decision In the Matter of Blair S. Bindley, OTA Case No. 18032402 (May 30, 2019). Here, a nonresident sole proprietor performed all of his services outside of California. However, some of his customers were located in California.
The state determined that whether a nonresident is subject to California’s rules for apportioning income depends on : (1) whether the taxpayer is carrying on a trade or business within California, outside of California, or a combination thereof; (2) the type of entity conducting the business; and (3) whether the business is unitary.
“Residence” is the place where you have the closest ties.
“Domicile” is the place where you voluntarily establish yourself and your family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed and permanent home and principal establishment. It is the place where, whenever you are absent or away, you intend to return. Get FTB Pub. 1031
The term “domicile” has a special legal definition that is not the same as residence. While many states consider domicile and residence to be the same, California makes a distinction and views them as two separate concepts, even though they may often overlap. For instance, you may be domiciled in California but not be a California resident or you may be domiciled in another state but be a California resident for income tax purposes. Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where, whenever you are absent, you intend to return. The maintenance of a marital abode in California is a significant factor in establishing domicile in California. Change of Domicile You can have only one domicile at a time. Once you acquire a domicile, you retain that domicile until you acquire another.
A change of domicile requires all of the following:
- Abandonment of your prior domicile.
- Physically moving to and residing in the new locality.
- Intent to remain in the new locality permanently or indefinitely as demonstrated by your actions.
The underlying theory of residency is that you are a resident of the place where you have the closest connections.
The following list shows some of the factors you can use to help determine your residency status. Since your residence is usually the place where you have the closest ties, you should compare your ties to California with your ties elsewhere. In using these factors, it is the strength of your ties, not just the number of ties, that determines your residency. This is only a partial list of the factors to consider. No one factor is determinative. Consider all the facts of your particular situation to determine your residency status.
Factors to consider are as follows:
- Amount of time you spend in California versus amount of time you spend outside California.
- Location of your spouse/RDP and children.
- Location of your principal residence.
- State that issued your driver’s license.
- State where your vehicles are registered.
- State where you maintain your professional licenses.
- State where you are registered to vote.
- Location of the banks where you maintain accounts. (customer mailing address, not necessarily bank’s location)
- The origination point of your financial transactions. (trading from home in California?)
- Location of your medical professionals and other healthcare providers (doctors, dentists etc.),
- Location of your accountants, and attorneys. (other than for California, this generally might mean the address where bills are sent, not necessarily the professional’s office location)
- Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
- Location of your real property and investments.
- Permanence of your work assignments in California.
Residency and Sourcing Technical Manual – Table of Contents
If you have an out-of-state corporation or LLC but have headquarters or any office or “presence” (telephone number, home office, P.O. Box, etc.) in California, you have to register that LLC or corporation as an out-of-state entity with the State of California – and the filing fees and minimum annual tax are the same as if you set up the entity in California. Given the additional costs of setting up an out-of-state entity, frequently going that route is more expensive that simply using a California entity in the first place.
In short, unless you plan on meeting the test to NOT be a California resident, you usually aren’t going to save any money by setting up an out-of-state entity – and it may well cost you more than setting up a corporation or LLC in California.
Setting Up Out-of-State Entities if You Are Based in California