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Telecommute Taxation: States Take Sides Over Out-of-State Income Tax Dispute

January 13, 2021 by Reece Nations

CONCORD, N.H. — A collection of 14 states have now signed amicus briefs backing New Hampshire in the state’s appeal to the U.S. Supreme Court to determine whether jurisdictions may tax the income of remote workers who cannot commute to their workplaces. 

In October, New Hampshire sued Massachusetts over a dispute regarding a temporary provision that imposes a 5% income tax on employees of Massachusetts companies residing in other states who work remotely. The provision, enacted during the first weeks of the novel coronavirus pandemic, limited the amount of out-of-state income residents can deduct on their income taxes while working remotely for Massachusetts-based entities. 

“Massachusetts cannot balance its budget on the backs of our citizens, punish our workers for making the decision to work from home and keep themselves and their families and those around them safe,” New Hampshire Gov. Chris Sununu said during a press conference. “New Hampshire has no choice but to seek relief in our nation’s highest court.” 

Sununu continued, “We are going to fight this unconstitutional attempt to tax our citizens every step of the way, and we are going to win.” 

The states backing New Hampshire’s lawsuit are listed as follows: Ohio, Arkansas, Indiana, Kentucky, Louisiana, Missouri, Nebraska, Oklahoma, Texas, Utah, New Jersey, Connecticut, Hawaii and Iowa. In contrast, Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania had established rules predating the pandemic that taxed workers based on the location of their workplace. 

Massachusetts was the only state to adopt measures that continued taxing wages of workers residing out-of-state amid the pandemic. In October, Massachusetts Gov. Charlie Baker extended the measure until 90 days after the end of the pandemic period. 

“In the middle of a global pandemic, Massachusetts has taken deliberate aim at the New Hampshire advantage [sic] by purporting to impose Massachusetts income tax on New Hampshire residents for income earned while working within New Hampshire,” the text of New Hampshire’s filed complaint read. “Upending decades of consistent practice, Massachusetts now taxes income earned entirely outside its borders. Through its unprecedented action, Massachusetts has unilaterally imposed an income tax within New Hampshire that New Hampshire, in its sovereign discretion, has deliberately chosen not to impose.” 

States in the past have taken action to avoid “double taxation” by providing credits that offset resident’s tax liability to two locales and by establishing reciprocity agreements that prevent income from being taxed twice. 

In March, Ohio implemented a state law deeming remote work due to COVID-19 protocols to be taking place in the worker’s “principal place of business,” regardless of the city they reside in. However, this was contested in July by the Buckeye Institute in a suit challenging the law’s constitutionality. 

“As attorney general, it is my highest duty to protect the people of New Hampshire and our collective interest as a sovereign state,” New Hampshire Attorney General Gordon MacDonald said in a statement. “That is exactly what we are doing today by commencing an action against the Commonwealth of Massachusetts.” 

MacDonald continued, “Massachusetts has radically redefined what constitutes Massachusetts-sourced income in order to tax earnings for work performed entirely outside its borders. This does not maintain the status quo. It upends it.” 

New Hampshire’s basis for the complaint involves invoking the original jurisdiction of the Supreme Court, meaning lawsuits between two states go immediately to the Court for resolution without having to be litigated in lower courts. In order to do so, the state must demonstrate standing or an injury justifying the lawsuit. 

The complaint alleges Massachusetts’ equalizing of tax burdens regardless of where someone lives unfairly harms New Hampshire communities, state government job recruiting and pandemic response. The Supreme Court has yet to indicate when or if the matter will be brought up for a ruling. 

“While New Hampshire complains that Massachusetts is ‘reaching across its borders’ to tax New Hampshire residents newly telecommuting to their jobs in Massachusetts, Massachusetts has always taxed the Massachusetts-source income of nonresidents who work at Massachusetts businesses, just as other states in turn tax Massachusetts residents’ income from those states,” Massachusetts Attorney General Maura Healy wrote in a brief filed in opposition to the complaint. 

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