Taxing Telecommuters: New Hampshire v. Massachusetts

New Hampshire is suing Massachusetts in the U.S. Supreme Court, filing papers on Monday taking issue with the Bay State’s decision to impose income tax on New Hampshire residents telecommuting for Massachusetts jobs from their New Hampshire homes. New Hampshire Governor Chris Sununu (R) personally announced the lawsuit, calling Massachusetts’s action unconstitutional. “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,” Sununu said. “New Hampshire has no choice but to seek relief in our nation’s highest court.”

Many Americans have been telecommuting for part or all of the pandemic this year, potentially changing tax treatment where it crosses state lines (except for those states that have reciprocity agreements on how to tax such income). Generally, income tax is imposed on the state of residence, but many states also assert the power to tax non-residents who perform work within their state. 123,000 New Hampshire residents working in Massachusetts, despite living in a state with no income tax, have thus been subject to the 5 percent Massachusetts income tax for work they perform while physically in Massachusetts.

In March 2020, Massachusetts (like many other states) directed non-essential employees to work from home due to the pandemic, and a month later, the state issued a temporary rule that compensation received by a nonresident “who, immediately prior to the Massachusetts COVID-19 state of emergency, was an employee engaged in performing such services in Massachusetts” would continue to be treated as Massachusetts income. On October 16, Massachusetts extended this rule until December 31 or 90 days after the end of the emergency, whichever is earlier, over the objection of the New Hampshire Attorney General and New Hampshire Department of Business & Economic Affairs.

New Hampshire characterizes Massachusetts’s action as imposing an income tax on nonresidents for activity outside of the state, with the lawsuit stating: “By reaching across its borders into the wallets of New Hampshire residents, Massachusetts takes direct aim at New Hampshire’s policy choices as a sovereign, and the New Hampshire Advantage [lack of an income tax] that has resulted from those choices.” New Hampshire further notes that even if the regulation was adopted purely for the emergency, its language is very broad and unlimited, applying to any person working from home for any reason. Finally, New Hampshire observes that while one justification for an income tax on nonresidents is that a state like Massachusetts provides services benefiting a commuter while the person is in the state each day, right now New Hampshire is providing all of those services.

The case highlights a trend that NTUF’s Taxpayer Defense Center is tracking: states taxing and regulating beyond their borders, violating principles of tax fairness and impermissibly burdening interstate commerce. Last year, we wrote about California’s “doing business” tax on Arizona residents investing in California LLCs. Maryland is considering a hefty tax on digital companies that sell ads within the state. California again is also in court for imposing retroactive sales tax collection obligations on non-resident sellers with no direct connection to California. 

We earlier noted an Ohio lawsuit over city income taxes on remote workers. In 2004, the U.S. Supreme Court declined to hear an appeal of Zelinsky v. [New York] Tax Appeals Tribunal, where a Connecticut-based tax professor unsuccessfully argued that New York should only be able to tax half his earnings since he worked from home half the time. Zelinsky recently commented that “[m]y litigation in 2003 looks kind of quaint when you see what’s going on today. I think it’s very possible that an awful lot of people are going to get caught in a very messy situation.”

The case is also an example of the rarely-invoked original jurisdiction of the U.S. Supreme Court, where lawsuits directly between two states go immediately to the Court for resolution without having to be litigated in lower courts. New Hampshire must still demonstrate standing, or an injury justifying the lawsuit, and their complaint alleges that by Massachusetts equalizing tax burdens regardless of where someone lives, it harms New Hampshire communities, state government job recruiting, and pandemic response. If the Supreme Court agrees to hear the case, they would likely appoint a prominent attorney as special master to hear evidence and make recommendations as to the outcome.

Remote work taxation issues are unlikely to go away until federal and state tax laws are updated to account for it. Though New Hampshire’s case against Massachusetts is the latest example of a dispute that could be solved with smarter policymaking, it is certainly not the last absent action from legislators.