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Fight Over Income Tax Nexus Brewing in the States

Posted on Aug. 11, 2020

A battle over who gets to collect income taxes has broken out in New England and may soon spread, prompted by work-from-home edicts that show no sign of ending as the COVID-19 pandemic rages on.

New Hampshire Gov. Chris Sununu (R) has directed the state attorney general to investigate whether a recent Massachusetts income tax regulation results in the improper taxation of New Hampshire residents. 

Although the investigation was prompted by the Massachusetts Department of Revenue's adoption of an emergency regulation clarifying that nonresidents who worked in the state but are now working remotely because of COVID-19 will continue to pay Massachusetts state income taxes, Sununu said on August 5 that the attorney general will examine Department of Revenue actions in all states. 

"We will take immediate steps to stop any attempts to impose income taxes on Granite Staters in a manner that violates the law, the New Hampshire Constitution, or the United States Constitution," Sununu added.

“That’s essentially what we’re looking at,” James Boffetti, senior assistant attorney general and chief of the state Department of Justice's Consumer Protection Bureau, told Tax Notes August 7. “The attorney general has assigned a team of lawyers to look at the whole issue, do the legal analysis and provide conclusions.”

Federal lawmakers are also attempting to address the income tax ramifications of teleworking.

Reps. Chris Pappas, D-N.H., and James A. Himes, D-Conn., announced on August 7 that they had reintroduced the Multi-State Worker Tax Fairness Act, which would establish a physical presence rule for income tax purposes. The bill was initially introduced in 2016.

Similarly, the Mobile Workforce State Income Tax Simplification Act, reintroduced in January, would create a 30-day safe harbor for employees who work in other states.

Massachusetts Regulation

Under the emergency regulation adopted July 21, nonresidents who worked in the state but are now working remotely because of the Massachusetts state of emergency, medical guidance, or work policy related to COVID-19 will continue to pay Massachusetts state income taxes. 

The regulation also clarifies that residents who usually work for a company in another state and are currently working remotely in-state will be eligible for a credit for taxes paid to that other state. New Hampshire doesn’t have an income tax.

Under normal circumstances, New Hampshire residents who work in Massachusetts part of the week and telecommute from home during other parts of the week are generally allowed to apportion their income based on the number of days they work in Massachusetts.

The Massachusetts regulation is effective July 21 and will expire either December 31 or 90 days after the governor announces that the state of emergency is no longer in force, whichever occurs first.

In response to the question of whether a New Hampshire resident would be able to apportion their income to either state depending on the number of days worked in the state, the Massachusetts DOR said that the employee’s tax apportionment before COVID-19 work-from-home orders would stay the same. Employees who worked for an employer in the state for part of the week and from an out-of-state home for the rest of the week will apportion their income in the same manner, with Massachusetts continuing to tax the portion of the employee’s income that previously was earned in-state.

The impact of the guidance would be outsized in New Hampshire, which has the third largest number of residents who commute out of state, behind the District of Columbia and Rhode Island. Approximately 97,321 New Hampshire residents commuted into Massachusetts before pandemic lockdowns went into effect, according to data from the New Hampshire Employment Security, Economic and Labor Market Information Bureau.

Boffetti said his office has received a large number of calls from residents who are working remotely in New Hampshire and being assessed income tax in Massachusetts. “I’m actually surprised by the influx of calls we’ve received,” he said.

The move by Massachusetts has prompted calls from New Hampshire legislators to reverse the regulation. Senate Finance Committee Chair Lou D’Allesandro (D) and Sen. Dan Feltes (D), who is currently running for governor, argued in a letter to the Massachusetts DOR that New Hampshire residents are typically exempt when working outside the state. 

“It is completely unfair to charge New Hampshire workers the Massachusetts income tax while they are not working in Massachusetts,” Feltes said. “These workers are acting in everyone’s best interest when it comes to public health and safety and should not be penalized for their actions. I strongly encourage the Massachusetts Department of Revenue to withdraw this anti-worker tax rule change.”

The senators received a response from the Massachusetts DOR stating that their comments would be added to the regulation file.

The DOR also issued a proposed regulation identical to the emergency regulation; a public hearing is scheduled for August 27, and comments may be emailed to the department.

Other State Responses

The taxation of nonresidents telecommuting during COVID-19 has become a hot-button issue. Some states and jurisdictions, including Rhode Island, have issued guidance clarifying that income tax nexus won't be triggered by employees who are temporarily working from home. However, many of those localities have also advised employers to continue withholding taxes for employees who normally work within their jurisdictions.

New York, on the other hand, has maintained that under its "convenience of the employer" rule it can tax nonresidents who are telecommuting. Similarly, Vermont issued an FAQ clarifying that nonresident workers temporarily working and living in Vermont are subject to the state’s income tax on income earned in the state.

“Obviously Massachusetts and New Hampshire is one of the more stark examples, where you have a state without a personal income tax [and one with a personal income tax], but it’s by no means limited to that small handful of states,” Andrew Moylan, executive vice president of the National Taxpayers Union, told Tax Notes. “It’s something that we’ve been concerned about for some time and why we think congressional action is necessary here.”

The union released a white paper August 6 on the need for congressional action, which cited its previous paper estimating that over 2 million individuals who previously commuted over state lines shifted to remote work because of the pandemic.

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