Which state gets to tax your income may come down to where your dog lives if you relocated. That's what it took for Gregory Blatt, the former CEO of Match.com.
New York claimed Blatt owed $430,065 in income taxes, plus interest and a penalty, for 2009 and 2010 after he took the position. While the company was headquartered in Dallas, Blatt first remained in the Big Apple and traveled to Texas when needed. But eventually he moved to Dallas, leasing an apartment there, buying a Porsche, and dating in the area.
But New York disagreed. The state viewed Blatt's connection with Manhattan and the fact he still had an apartment in the city as proof that he remained domiciled in the state.
"All the facts were 50-50. They fell on a knife's edge," Edvin Givargis, a certified public accountant and state and local tax partner at SAX LLP, told Yahoo Finance. "The deciding factor that caused the tribunal to rule in the taxpayer's favor was the fact that he took his dog with him.”
According to court documents, Blatt testified that moving his cherished senior-rescue dog was at first difficult due to its size, advanced age, and the Dallas area's humidity and extreme heat. The fact that he eventually relocated the dog to be with him satisfied the "near and dear" rule to establish his domicile in Texas.
Blatt’s case — while unique — could be more pertinent after three years of the pandemic and the rise of work-from-home opened up where people could live and earn money — especially as state residency rules stayed the same.
"It is basically the same residency law — it is very old. In most states, it's about 100 years old," Givargis said. "COVID didn't change anything."
And as people relocate to low-tax states like Texas, Florida, and Tennessee, higher-cost states like New York and California can aggressively chase after former residents for taxes long after taxpayers have moved out and on. (These are some of the states that have also sought double taxation on remote workers.)
The states, especially New York, have established an unfriendly reputation for challenging taxpayers on residency statuses. Although New York state ruled in favor of the taxpayer in a rare instance in June, it is still ‘‘too early to assume New York is taking a more measured approach,” said Jared Walczak, vice president of state projects at the Tax Foundation.
Residency vs domicile
In general, residency is where you choose to live at the moment, while domicile is where you call your permanent home base. For most people, these two are the same. But for digital nomads or those who get to work from home, this situation can get more complicated.
"[Domicile] is the location where you have the strongest roots. It is a place that whenever you are absent from, you always, always have the intent to return to," Givargis said. "You could be a resident in 10 states, but you can only have one domicile."
Although almost every state has its rules to approach each case, most states will look at taxpayers' residents and domiciles.
Every state determines residency status differently. If you have lived in New York for more than six months, you are automatically a state resident. But if you are in California for four to eight months, you could or could not be a resident depending on circumstances. And if you surrender your former license or live in Texas for 30 days, you are a resident. So if you did all three in one year, you are subject to all three states' tax rules as you were considered that state's resident at one point or another.
In Blatt's court case, the state got very intrusive in residency audits. For instance, Blatt's dating history was publicly documented and used as a defense in court. It ultimately was his strong roots with his dog that tipped the case where his domicile was.
Establishing domicile
Experts recommend following the state's rules, including moving your most cherished possessions to make your case to establish domicile. Still, the chances of states coming after regular taxpayers is not high because the audit costs often outweigh the benefits, Givargis said.
"If you are like me and you were regular people, we pack up our stuff and we leave," he said. "Only thing you need to do is genuinely leave, establish your new domicile, your new living place in the new state and call your employer for new state withholding purposes."
But if you live in a high-tax state and own massive amounts of stock that you want to sell next year, for example, your move is a bigger deal.
That’s like saying: "Hey California, I was going to sell $500 million of stock, and I know you have a 13.3% tax on that, which is over $50 million. I am not going to pay that. So before I sell my stocks, I am going to move to Florida," Givargis said.
"Now you've got a residency issue.”
Rebecca is a reporter for Yahoo Finance.
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