The Multi-Million Dollar Question: How New York and California Determine Tax Residency
By Luke Ryan | October 2025
For high-income individuals with ties to multiple states, few tax issues carry higher financial stakes than residency disputes with New York or California. Both states impose some of the nation's highest income tax rates and maintain vigorous audit programs targeting individuals who claim to have moved elsewhere. Recent cases demonstrate that even taxpayers who take extensive steps to establish residency in lower-tax jurisdictions can face sustained challenges—and multi-million-dollar assessments—if their actions fail to meet the strict legal standards these states apply.
I. Why States Fight Over Residency
The revenue implications are substantial. New York's top marginal income tax rate reaches 10.9 percent (including New York City tax), while California's tops out at 13.3 percent. For a taxpayer earning $10 million annually, the difference between being taxed as a resident versus a nonresident can exceed $1 million per year.
Both New York and California have responded to outward migration by ramping up enforcement. New York alone conducts approximately 3,000 residency audits annually and has collected over $1 billion since 2010 from individuals who claimed nonresident status but could not prove they had actually left. California's Franchise Tax Board (FTB) has similarly expanded its residency audit program, particularly targeting individuals who claim Nevada, Texas, or Florida residency after years of living in California.
The burden of proof in these audits falls heavily on the taxpayer, who must demonstrate by "clear and convincing evidence" that they abandoned their prior domicile and established a new one elsewhere—a far higher standard than the "preponderance of the evidence" typically required in civil tax disputes.
II. New York's Two-Pronged Residency Test
New York uses two independent tests to determine whether an individual is a resident for tax purposes: the domicile test and the statutory residency test. A taxpayer can be deemed a New York resident under either test.
a. Domicile Test
A person's domicile is their permanent home—the place they intend to return to whenever absent. Under New York law, once established, a domicile continues until the individual abandons it and establishes a new domicile elsewhere. The burden is on the taxpayer to prove the change by clear and convincing evidence.
New York evaluates domicile using five primary factors, with no single factor being dispositive:
Home – Where does the taxpayer maintain their primary residence? Size, quality, and use of the property matter. Keeping a large, fully furnished home in New York while claiming a smaller residence elsewhere undermines a domicile change claim.
Active Business Involvement – Where does the taxpayer conduct business? Continuing to operate or actively manage a New York-based business suggests ongoing New York domicile.
Time – Where does the taxpayer actually spend their days? This is often the most critical factor. Cell phone records, E-ZPass data, credit card transactions, and even social media posts are routinely subpoenaed to verify physical presence.
Items Near and Dear – Where are the taxpayer's personal belongings, family heirlooms, pets, and vehicles? Leaving prized possessions in New York suggests an intent to return.
Family Connections – Where do the taxpayer's spouse and minor children reside? Where do they attend school, worship, and maintain social ties?
In Matter of Hoff (N.Y. Tax Appeals Tribunal, Jan. 9, 2025), the Tribunal rejected a couple's claim that they had changed their domicile from upstate New York to Florida despite their having purchased a Florida home, obtained Florida driver's licenses, and registered to vote in Florida. The Tribunal found that the taxpayers spent more days in New York than Florida during the audit years (186 days in New York versus 131 in Florida in 2018, and 164 versus 153.5 in 2019). Most critically, the taxpayer continued to earn substantial salary from his New York business and traveled regularly on behalf of that business. The Tribunal concluded that formal declarations of domicile—like voter registration and driver's licenses—had "lost their importance" in recent years, and that the court would "follow the money" when evaluating domicile claims.
b. Statutory Residency Test
Even if a taxpayer is not domiciled in New York, they can still be deemed a statutory resident if they meet both of the following conditions:
They maintain a "permanent place of abode" in New York for substantially all of the tax year (defined as more than 11 months); and
They spend more than 183 days in New York during the tax year.
A "permanent place of abode" is a residential dwelling that the taxpayer maintains—whether owned or rented—and that is suitable for year-round use. Notably, the taxpayer need not actually use the dwelling; they need only maintain it and have the right to use it.
Any part of a day spent in New York counts as a full day for purposes of the 183-day test, regardless of the reason for presence (business, personal, or in transit).
The statutory residency test has been the subject of significant recent litigation. In Matter of Obus v. New York State Tax Appeals Tribunal, a landmark 2024 decision, the Court of Appeals held that to qualify as a "permanent place of abode," the property must reflect the taxpayer's "residential interest"—a subjective inquiry into whether the taxpayer uses or intends to use the property as a residence. This decision marked a major shift from prior case law, which had treated the statutory residency test as largely mechanical.
III. California's "Temporary or Transitory Purpose" Framework
California's residency rules differ structurally from New York's but are equally vigorous in application. Under California law, an individual is a resident if:
They are in California for other than a temporary or transitory purpose; or
They are domiciled in California but outside the state for a temporary or transitory purpose.
The key legal question in California residency disputes is whether the taxpayer's presence in (or absence from) California was "temporary or transitory." This determination is highly fact-intensive and depends on the totality of circumstances.
a. The "Temporary or Transitory" Standard
California regulations provide that an individual is in California for a temporary or transitory purpose if they are:
Passing through on the way to another state or country
Present for a brief rest or vacation
Present to complete a particular transaction, perform a contract, or fulfill an engagement requiring only a short period
Conversely, an individual is not in California for a temporary or transitory purpose—and is therefore a resident—if they are present:
To recuperate from injury or illness for a relatively long or indefinite period
For business purposes requiring a long or indefinite period
For employment that is not temporary
California applies a "closest connections" test when the temporary/transitory analysis is ambiguous. This test examines where the taxpayer has the most substantial ties, considering factors such as:
Time spent in California versus elsewhere
Location of spouse and children
Location of principal residence
Driver's license and vehicle registrations
Location of professional licenses and business activities
Location of bank accounts and financial assets
Social, religious, and professional associations
b. Domicile vs. Residency in California
California distinguishes between domicile (permanent home) and residency (physical presence for other than temporary purposes). A taxpayer can be a California resident without being domiciled there if their extended stay is for business, employment, or other long-term purposes.
In In the Matter of the Appeal of Q. Tran and R. Medina (Cal. Office of Tax Appeals, Case No. 21088364, 2025), the OTA upheld the FTB's determination that the taxpayers remained California residents despite having moved to Nevada, obtained Nevada driver's licenses, registered vehicles in Nevada, and eventually registered to vote there. The OTA found that the taxpayers' strongest connections remained with California: they maintained ownership of a California LLC, their professional and business activities were centered in California, and they maintained significant personal associations in the state. The OTA concluded that their time in Nevada was "for a temporary and transitory purpose" and that formal changes in registration were insufficient to overcome the objective evidence of ongoing California ties.
c. The Safe Harbor Rule
California provides a narrow safe harbor for individuals domiciled in California who leave the state under an employment-related contract for an uninterrupted period of at least 546 consecutive days. Such individuals are deemed nonresidents during that period, provided they do not return to California for more than 45 days during the contract period and earn less than $200,000 in intangible income (e.g., investment income) each year.
This safe harbor is difficult to qualify for and does not apply to self-employed individuals or business owners.
IV. How States Build Their Cases
Both New York and California employ sophisticated audit techniques to verify taxpayer claims of nonresidency.
a. Cell Phone Records
Tax authorities routinely subpoena cell phone records from carriers like Verizon and AT&T. These records show which cell towers a phone connected to and when, allowing auditors to reconstruct a taxpayer's daily location with considerable precision. In the Hoff case, New York used Verizon records to establish that the taxpayers spent 186 days in New York during the first audit year.
b. Credit Card and Bank Transactions
Geographic data from credit card purchases, ATM withdrawals, and debit card transactions provide a detailed trail of where taxpayers actually spend their time and money. Frequent purchases at New York or California merchants undermine claims of out-of-state residence.
c. E-ZPass and Toll Records
Electronic toll collection systems like E-ZPass create time-stamped records of vehicle movements across bridges, tunnels, and toll roads. These records are frequently subpoenaed in residency audits.
d. Social Media and Email
Geotagged photos, social media check-ins, and calendar invitations sent via email can all reveal a taxpayer's location on specific dates. Auditors increasingly review social media accounts and email metadata during residency examinations.
e. Property Records and Utility Bills
Auditors examine property tax records, utility bills, and maintenance contracts to determine whether a taxpayer is actively using and maintaining a residence. High utility usage in a purported "former" home suggests ongoing occupancy.
V. Common Pitfalls in Residency Changes
Taxpayers attempting to change residency frequently make errors that prove fatal in audits:
a. Insufficient Time in the New State
Spending more days in the old state than the new state—particularly in the year of the claimed move—virtually guarantees an adverse audit result. Time is often the most critical factor.
b. Continuing Business Ties
Remaining actively involved in a business based in the old state, particularly as an owner or officer, creates a strong inference that domicile has not changed. In Hoff, the taxpayer's ongoing salary and business travel on behalf of his New York company was decisive.
c. Retaining the Primary Residence
Keeping a large, well-maintained home in the old state while claiming residency based on a smaller property elsewhere is problematic. If the old home is larger, nicer, and contains most of the taxpayer's possessions, auditors will conclude the taxpayer has not truly moved.
d. Family Remaining Behind
If a taxpayer's spouse and minor children remain in the old state—attending school, maintaining medical providers, and participating in community activities—the claim that the taxpayer has established a new domicile elsewhere faces an uphill battle.
e. Premature Income Recognition
Selling a business, exercising stock options, or recognizing other substantial income shortly before or immediately after a claimed move to a lower-tax state is a red flag that triggers audit scrutiny. Auditors will examine whether the move was genuine or merely tax-motivated timing.
VI. What the Cases Teach
The recent decisions in Hoff and Tran & Medina underscore several critical principles:
Formal steps are necessary but not sufficient. Obtaining a driver's license, registering to vote, and filing declarations of domicile in the new state are important, but they do not prove a change in domicile if objective facts point in the opposite direction.
Courts follow the money. Active business involvement, income sources, and financial activities in the old state are powerful evidence of ongoing domicile, even when a taxpayer has taken formal steps to establish residency elsewhere.
Physical presence is paramount. Spending more time in the old state than the new state—or even spending roughly equal time in both—severely undermines a domicile change claim.
Intent is judged by actions, not statements. What matters is not what the taxpayer says they intended, but what their conduct demonstrates about where they consider home.
Audits are sophisticated and data-driven. States have access to cell phone records, credit card data, E-ZPass records, and social media activity. Taxpayers cannot rely on vague recollections or incomplete records to defend their positions.
VII. Conclusion
Residency audits by New York and California are high-stakes disputes where millions of dollars can turn on where a taxpayer spent their time and maintained their closest connections. The recent cases in Hoff and Tran & Medina demonstrate that even diligent taxpayers who take formal steps to change their domicile can face adverse determinations if their conduct does not align with their stated intent.
The key to prevailing in a residency audit—or avoiding one altogether—is to ensure that a move is real, complete, and supported by objective evidence. Time spent in the new state, severance of business and personal ties to the old state, and documentary proof of the change are all essential. For taxpayers considering a move to reduce state income tax liability, careful planning and meticulous record-keeping are not optional—they are the difference between success and a multi-million-dollar assessment.
