Even though New York and Massachusetts have restricted out-of-state commuters from coming back to their pre-pandemic offices to work, they still expect them to pay personal income taxes to the state as if they were working in the state. That is, the two states are taxing nonresidents as if they continued to commute to work every day even if they do not set foot in the state and do all of their work remotely from a home office. Not surprisingly, the home states where those commuters live and (now) work are fighting back against what they see as a money grab by states that do not have any right to the tax revenue.
On October 19, 2020, New Hampshire filed a petition with the U.S. Supreme Court to overturn an April 2020 Massachusetts emergency regulation1 that requires nonresidents who were working in Massachusetts when the pandemic started, many of whom live in New Hampshire, to continue to pay Massachusetts’ personal income tax even though they have not been commuting to Massachusetts since early 2020 and will likely continue to work from home for the foreseeable future. On December 22, 2020, New Jersey—joined by Connecticut, Hawaii, and Iowa—filed an amici curiae brief supporting New Hampshire’s petition. In late January, the Supreme Court asked the Acting Solicitor General to weigh in on the debate.2 A date for argument before the Supreme Court has not yet been set.
The New Hampshire petition asserts that the Massachusetts emergency regulation violates the Commerce and Due Process constitutional provisions by imposing income tax on New Hampshire residents despite the fact that the individuals did not enter Massachusetts to work during the period at issue. Specifically, the Massachusetts regulation requires individuals who were employees performing services in Massachusetts immediately prior to the start of the pandemic to continue to pay Massachusetts personal income tax even if they are now working from home in another state due to the effects and restrictions from the pandemic. This rule could potentially result in an individual who does not enter Massachusetts for a single day in 2021 being considered to have nexus there and to be subject to income tax there, simply because that person once actually conducted the work in Massachusetts.
New Hampshire argues that Massachusetts is effectively eliminating what it has called the “New Hampshire Advantage”—i.e., the fact that a resident of New Hampshire who works in New Hampshire does not have to pay a traditional personal income tax. Thus, New Hampshire claims that Massachusetts is impermissibly interfering with New Hampshire’s right to provide its residents a planned tax benefit from working inside the state.
New Jersey elected to file an amicus brief supporting New Hampshire because it is fighting a similar battle with New York. New York has long required nonresident individuals who work for New York companies but perform their services outside of the state to pay New York personal income tax unless it was a “necessity” that the employee work outside the state. If the individual worked outside the state purely for the employee’s convenience, then the individual was required to continue to pay New York taxes. The New York Department of Taxation and Finance has recently confirmed that nonresidents who are working from home because they cannot return to their New York offices due to COVID-19 must still pay New York income tax unless a bona fide office has been established from which the employee telecommutes.
The problems that result from this taxation of non-residents for states like New Hampshire, which does not impose a personal income tax, and New Jersey, which provides a credit to residents for taxes paid to other states, are slightly different. As noted, New Hampshire claims that Massachusetts is eliminating the advantage of not having to pay an income tax that the New Hampshire legislature has provided to its residents who work in New Hampshire. New Jersey, on the other hand, asserts that it is losing tax revenue to New York on income earned by its residents who are working full time in New Jersey because New Jersey residents receive a credit against taxes owed to New Jersey for taxes they pay to other states.
The issue is an important one for the Supreme Court to resolve. The problem is not likely to go away soon, and residents of New Hampshire and New Jersey who are affected by the Massachusetts and New York provisions, respectively, do not have an adequate state forum in which to protest the imposition of the taxes at issue. Moreover, even if pandemic restrictions end within the next six to twelve months, many people will likely choose to continue to work remotely from their homes in these and other states, and employers will likely support that decision, as they realize that they save money by doing so. If states continue to struggle with declining tax revenues in 2021 and 2022, there will likely be even fiercer competition for those tax revenues between states where the employer and its primary offices are located and those whose residents, prior to the pandemic, regularly commuted to those states for work. ■