New Hampshire v. Massachusetts: Potential for Remote Working Tax Uniformity

As the coronavirus (COVID-19) pandemic wears on, many companies that adopted emergency work-from-home or work-from-anywhere policies are considering allowing employees to work remotely permanently, even after the threat of the pandemic has subsided. Many states addressed the personal income tax implications for employees who commuted across state lines pre-pandemic by adopting temporary COVID-19 tax policies; however, states generally have not yet announced how they will treat for tax purposes the expected shift to a post-pandemic remote workforce.

Some states’ temporary COVID-19 policies provided that employees would continue to have personal income tax obligations where their offices are located (Office States), even if they worked exclusively from a different state during the pandemic (Work State) and even if they were forced to do so pursuant to lockdown orders. However, many of these measures were adopted on an emergency basis with no expectation that the restrictions on employees’ ability to commute would last so long or that the pandemic would provide the final push in some sectors toward long-term work-from-anywhere policies. As a result, it now appears that some of these measures may create significant future challenges: (1) arguably, policies like these violate constitutional principles by imposing tax obligations on nonresidents who are no longer performing services in the Office State; (2) from a policy perspective, these kinds of policies run the risk of double-taxing nonresidents (i.e., by subjecting them to income tax on the same income—in both the Office State and the Work State); and (3) the Work State could lose certain benefits to which it may be entitled because of the Office State’s policies, resulting in possible harm to the Work State’s economy or robbing the Work State of tax revenue that may rightly be due to the Work State. 

In an attempt to seek definitive guidance on the constitutionality of certain taxes on remote workers, New Hampshire filed a claim in the Supreme Court of the United States (SCOTUS) to challenge Massachusetts’ COVID-19 policy of imposing Massachusetts income tax on New Hampshire residents who worked at offices in Massachusetts pre-pandemic but have been working remotely in New Hampshire during the pandemic.¹ New Hampshire asserts that SCOTUS has original jurisdiction over the dispute.² Although SCOTUS has not yet agreed to hear the case, SCOTUS requested a brief from the U.S. Solicitor General.³ If SCOTUS exercises original jurisdiction over the case, the decision could address the constitutionality of “convenience of the employer” rules (COTE rules) that certain states implemented prior to the COVID-19 pandemic. 

New Hampshire v. Massachusetts 

In mid-October, Massachusetts adopted an emergency regulation setting forth its COVID-19 tax policies regarding remote workers.⁴ The regulation features a “status quo” approach designed not to impose new tax obligations on employers or employees solely as a result of COVID-19 remote work policies but to continue enforcing the same obligations on both employers and employees as existed pre-pandemic.⁵ Though some may view Massachusetts’ “status quo” formulation as a simple solution for employers and employees, New Hampshire asserts that Massachusetts’ policy is unconstitutional even as an emergency regulation and would have ongoing detrimental impacts on New Hampshire and its residents if Massachusetts adopts the approach permanently.⁶

New Hampshire argues that Massachusetts’ emergency regulation violates both the Commerce Clause and the Due Process Clause of the U.S. Constitution.⁷ Further, New Hampshire asserts that the emergency regulation harms the state of New Hampshire because New Hampshire does not impose an income tax on its residents.⁸ Rather, New Hampshire explains that it derives certain benefits from not imposing an income tax on its residents, which include “on average, higher per capita income, lower unemployment, and a competitive edge in attracting new businesses and residents.”⁹ Not surprisingly, Massachusetts rejects New Hampshire’s claims that Massachusetts’ emergency regulation is unconstitutional. Massachusetts argues that it maintained the status quo regarding tax obligations and thereby avoided uncertainty and spared employers the additional compliance burdens that would have come from deciphering complicated new requirements in the midst of the pandemic.¹⁰ Further, the emergency regulation explicitly states that Massachusetts does not adopt its policies permanently.¹¹

Several amicus briefs have been filed on behalf of New Hampshire supporting both its substantive claims as well as its request that SCOTUS exercise original jurisdiction in the case.¹²

Convenience of the Employer Rules

If SCOTUS decides to rule on the substantive issues in New Hampshire v. Massachusetts, its ruling may have implications not only on Massachusetts’ emergency regulation but also on states that have implemented COTE rules.¹³ States that have adopted such rules generally impose income tax on nonresidents who would be subject to the state’s income tax if working from their employer’s office but who are instead working remotely, such as at a Work State, for convenience rather than out of necessity.¹⁴ Although COTE rules existed in several states prior to the COVID-19 pandemic, the practical effect of COTE rules may cause increasing concern in light of the challenges and the paradigm shift toward remote work that the pandemic has caused, particularly in respect of the impact such rules can have on their neighboring states.¹⁵

New Jersey, Connecticut, Hawaii, and Iowa, in an amicus brief, generally agree with New Hampshire’s position that Massachusetts’ emergency regulation is unconstitutional. Further, they assert that such emergency regulation essentially emulates a COTE rule, which they argue is also unconstitutional because imposing COTE rules may cause a Work State to either (1) lose significant revenue streams as a result of granting a credit for its residents against taxes paid to other states (including Office States), or (2) force the Work State to double-tax the same income to avoid losing tax revenue to which the Work State is entitled.¹⁶ Thus, such aggressive policies impact not only Work States that, like New Hampshire, do not impose income taxes on their residents, but also Work States that do impose income taxes and that stand to lose revenue to neighboring Office States.¹⁷