On October 19, 2020, New Hampshire filed a lawsuit in the U.S. Supreme Court against Massachusetts over the adoption of a temporary rule which taxes the wages of telecommuters who immediately prior to the pandemic were engaged in performing services in Massachusetts and are now working in New Hampshire due to the COVID state of emergency. This rule, adopted as a temporary measure by Massachusetts on April 21, 2020 and applied retroactively to March 10, 2020, is similar to other states’ “convenience of the employer” rules. These rules, which have been permanently adopted in six other states, provide that an employee who chooses to work from home in State A while maintaining a primary work location at the employer located in State B, will still be subject to tax in State B for days worked in State A. If State A is New Hampshire which does not impose an individual income tax, a resident employee would not receive the tax-free advantage because wages for days worked in State A are subject to tax in State B.
New Hampshire claims the Massachusetts rule violates the state’s sovereignty and competitive advantage toward attracting residents and businesses. New Hampshire does not impose an individual income tax on wages or a general sales tax. Only one other state in the union, Alaska, has this tax structure.
With telecommuting quickly turning into a permanent arrangement for many employees beyond the COVID pandemic of 2020, the taxation of nonresidents based on their workplace prior to the pandemic to which they no longer commute or physically work could be viewed as placing an undue burden on interstate commerce. Other states and cities, including, for example, New York, the Ohio cities St. Louis, Missouri and Wilmington, Delaware, have attempted to tax non-residents who were commuting to offices in their jurisdiction prior to the pandemic. Fourteen states have filed amicus (“friend of the court”) briefs in support of New Hampshire. The briefs highlight the national significance of this case.. The amicus briefs also emphasize the mandatory nature for this case to be heard before the Supreme Court because it is the only forum for resolving interstate disputes. New Jersey, Connecticut, Hawaii and Iowa’s amicus brief support the state’s legal standing to sue and the unconstitutionality of the Massachusetts rule, arguing the rule does not fairly apportion income, does not reflect how income is actually generated, and results in double taxation.
A U.S. Supreme Court decision striking down the extraterritorial taxation of nonresidents could have far reaching consequences. But not so fast…the first hurdle is for this case to be heard. About a year ago, the U.S. Supreme Court decided not to hear a tax case between two other states, Arizona and California, over the constitutionality of California’s $800 minimum franchise tax on commercial activity. Since less than 2% of the more than 7,000 cases that petition the U.S. Supreme Court for review each year are heard, the chances are slim despite the weighty tax consequences. Without relief in the near term, taxpayers impacted by these rules will want to consider ways to mitigate their taxes.
Posting provided by Iris Chung of the SALT Team.
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