SALT Blawg – State and Local Tax Blog
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The U.S. Supreme Court has declined to hear the case of New Hampshire v. Massachusetts, but this is not the last we will hear of the underlying issue. During October 2020, Massachusetts adopted an emergency regulation addressing remote workers’ tax obligations. The emergency regulation adopted a “status quo” approach, whereby Massachusetts treated employees who had been working in Massachusetts before the pandemic, but were now working remotely, as if they were still working in Massachusetts. The tax implication of that policy was that nonresidents working entirely out of state were still subjected to Massachusetts’ income tax. In response, New Hampshire filed suit in the U.S. Supreme Court pursuant to the Court’s original jurisdiction. New Hampshire argued that Massachusetts’s policy violated the Commerce Clause and the Due Process Clause of the U.S. Constitution.
SCOTUS asked the U.S. Solicitor General to weigh in on the case. Generally speaking, the U.S. Supreme Court tends to follow the Solicitor General’s advice as to whether a case should be heard. In this case, the Solicitor General advised against granting cert, so it is not too surprising that the Court ultimately declined to take the case. The Solicitor General raised two main arguments as to why the Court should not grant cert: (1) New Hampshire suffers no direct injury from Massachusetts’ policy; and (2) there is an adequate forum for residents to resolve the issue in Massachusetts courts.
While the Court may have declined cert in this case, the issue is not going away. Massachusetts’ position is not unique; there are six other states that have a similar “convenience of the employer” rule – in addition to some cities, like Philadelphia. While Massachusetts’ position is temporary, the convenience of the employer rules imposed by certain states and localities are permanent. Convenience of the employer rules state that where an employee works from home in another state for their own convenience (versus the convenience of the employer), the employee’s compensation is treated as if earned at the employer’s location instead of at the location of the employee. States with residents working across the border in these convenience of the employer states are going to be increasingly granting credits for taxes paid to states in which their residents were not physically working full-time, resulting in the loss of valuable tax revenue.
One of the alleged problems with New Hampshire bringing suit against Massachusetts was the question of harm. Since New Hampshire does not have an income tax, there is not a clear-cut harm to the state; the harm is more abstract. New York is one state with a permanent convenience of the employer rule. Unlike New Hampshire, states like New Jersey have income taxes and credit income tax to residents for taxes paid to New York. States like New Jersey suffer a measurable harm – because they can point to the tax revenue that is lost on an annual basis because of the credit, they may stand a better shot at bringing a similar case before the high court.
If a state were to sue another state and the Supreme Court were to exercise its original jurisdiction to take the case, that would be the fastest way to resolve the issue. The slower path is for an employee to challenge the tax in Massachusetts or one of the convenience of the employer rule state courts. The problem with that approach is it takes time and money. Practically speaking, an individual taxpayer either needs to have enough money at stake on their own, or a group of taxpayers needs to be established to make the cost-benefit worthwhile. Moreover, it could be years until the case reaches the U.S. Supreme Court – assuming the court were to grant cert, which it has not done in the past when given the opportunity. The Court of Appeals in New York has repeatedly rejected appeals brought by Connecticut and New Jersey residents working remotely for New York employers, and SCOTUS has denied cert on each one.
However, times are different. Thanks to the pandemic, more employees began working remotely than ever before and many employers plan to maintain a remote workforce post-pandemic, whether on a permanent or hybrid basis. Therefore, the impact of remote work is not going away and is likely to increase in the years to come. It is all but certain that the courts will need to address the issue again in the future.