State of New Hampshire v. Commonwealth of Massachusetts
By Samuel Brown, Senior, Tax & Business Services
New Hampshire is suing Massachusetts over its practice of taxing nonresidents who worked in Massachusetts prior to the COVID-19 pandemic, but now work remotely from their resident state of New Hampshire. State of New Hampshire v. Commonwealth of Massachusetts may reach the United States Supreme Court.
The case began in October of 2020, when Massachusetts passed an emergency regulation regarding taxation of remote workers during the pandemic. The commonwealth decided to continue enforcing its existing tax policies for both employees and employers, even if employees were working remotely out-of-state during the pandemic. For example, if a nonresident worked in Massachusetts five days a week prior to the pandemic but worked from home in New Hampshire five days a week during the pandemic, that individual would be taxed as if he or she had been working in Massachusetts. The taxation of non-resident employees of an in-state (e.g., Massachusetts) company is commonly known as the “convenience of the employer” rule (COTE rule). In this case, employers would withhold Massachusetts state taxes from employee wages, despite the employee working remotely in New Hampshire.
In State of New Hampshire v. Commonwealth of Massachusetts, New Hampshire argues that this regulation violates the United States Constitution, specifically the Commerce Clause and Due Process Clause. The Commerce Clause gives Congress authority to regulate commerce while restricting states’ powers of regulation. The Due Process Clause guarantees “due process of law” before the government and prohibits the government from depriving life, liberty, or property unless authorized by law. In this case, New Hampshire argues that the state benefits its residents by not imposing income tax, which gives the state a competitive advantage in attracting new residents. Massachusetts upholds its right to tax workers employed by Massachusetts companies, and notes that the emergency regulation explicitly states that Massachusetts will not adopt this policy permanently.
If SCOTUS ultimately rules on this case, it will affect other states that currently have a convenience of the employer rule. These include Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania. The Supreme Court has not yet agreed to take the case, and the Biden Administration has publicly sided with the state of Massachusetts. As the workforce paradigm continues shifting to include remote work, employees and employers should keep an eye on the outcome of this case and its ramifications.