States Fight Over Remote Workers Tax Revenue
Since the case began last year many states have contributed their own legal briefs to weigh in on thepetition that New Hampshire filed in October. The petition says Massachusetts doesn’t have the right to tax the income of New Hampshire residents who previously commuted to their jobs in Massachusetts but now work from home. The Supreme Court justices have not decide whether they will grant a hearing (The fiscal implications of changing the taxation rules run in the billions of dollars).
The U.S. Congress to date has not set clear rules for interstate taxation disputes. The U.S. Supreme Court has original jurisdiction over disputes between two or more states.
New Jersey, Connecticut, Iowa and Hawaii submitted a brief Tuesday urging the court to take up New Hampshire’s petition. On Monday, Ohio, Texas and eight other states with Republican attorneys general also weighed in on behalf of New Hampshire.
“The Massachusetts v. New Hampshire issue is no isolated border skirmish between those states. It raises a fundamental national issue that has been festering for decades,” said Edward Zelinsky, who teaches tax law at Yeshiva University’s Cardozo Law School in New York City (Zelinsky has filed his own brief supporting New Hampshire).
Federal courts previously held states may tax the income of nonresidents when:
the employees have a substantial link to the taxing state
the taxes are fairly related to services provided by that state
- a tax is apportioned fairly and doesn’t discriminate against interstate commerce
Massachusetts normally apportions the amount of income it taxes based on the number of days commuters are working in the state, but the commonwealth issued a rule earlier this year stating it would treat income paid to nonresidents who have stopped traveling to the state because of the pandemic as though they were still commuting.
New Hampshire, which has no income tax, said in its petition that Massachusetts’ rule infringed on its sovereignty, as well as undermined “an incentive for businesses to locate capital and jobs in New Hampshire, a motivation for families to relocate to New Hampshire’s communities, and the State’s ability to pay for public services by reducing economic growth.”
Massachusetts has made the argument that the Supreme Court didn’t have jurisdiction to hear New Hampshire’s challenge because taxpayers who feel they are being unfairly charged could make their case in Massachusetts courts.
For more than a year 6 states adhered to the “convenience rule” for taxing income paid to residents of other states (States like Omaha, Neb., and New York regularly draw commuters across state lines).
Under the rule, work for a New York-based company performed remotely is still taxable in New York if the telecommuting took place for the convenience of the employee, tax lawyers said.
Mr. Zelinsky who lives in another state but works in NYC has unsuccessfully challenged this practice in New York courts ( he thinks the convenience rule is not supported by the U.S. Constitution).
New Jersey officials argue that New York is taking more than its fair share by taxing nonresidents who are generating income outside their borders as they work from home.
“They’re not relying on New York public services, they’re not relying on a transit system,” Parimal Garg, chief counsel to New Jersey Gov. Phil Murphy, a Democrat, said of the state’s residents who are no longer commuting to their jobs in New York. “A ruling here could help mitigate the fiscal impact of the pandemic on New Jersey.”
In 2018, around 434,000 New Jersey residents paid $3.7 billion in New York income taxes, according to the New York State Department of Taxation and Finance. Almost 87,000 Connecticut residents paid New York an additional $1.3 billion in 2018; those two states’ residents account for about 10% of all the income tax New York collected that year.
It estimated that between 44% and 58% of people are now working from home.
Both New Jersey ($100 million to $400 million of its annual credits were for work performed at home for New York companies) and Connecticut ($339 million and $444.5 million in New York income taxes and between $48.2 million and $63.2 million in income taxes paid to Massachusetts) offer their residents a credit on their home-state returns for income taxes paid to other states. That figure has increased to between $929 million and $1.2 billion because of the public-health crisis, the office said.