While COVID-19 has impacted our lives in innumerable ways, one huge impact is on the way we work. Some workers have been fortunate enough to be able to transition from office life to working remote. While that presents its own set of challenges, one thing you may not think about is taxes and how that interacts with your wages. Massachusetts shares a border with five (5) different states and many people may live in one state and work in another. Some people are now working from home in one state, while their company is still “doing business” in another. This leads to a series of State-based tax issues and has resulted in New Hampshire suing Massachusetts over their tax policy.
Before the pandemic, over 80,000 New Hampshire residents commuted into Massachusetts on a normal workday. While New Hampshire has no income tax, New Hampshire residents working in Massachusetts would have to pay Massachusetts state income taxes, and that money would be withheld from their paycheck. However, an issue arises when these New Hampshire residents do their work from their homes in New Hampshire.
Beginning in March 2020, Massachusetts established that those who work out of state for Massachusetts-based companies would continue to be charged income tax in the state to “minimize sudden disruption for employers and employees during the COVID-19 state of emergency,” according to a Massachusetts government release. The regulation was intended to be temporary; however, subsequent changes removed the “temporary” language.
Prior to the COVID-19 pandemic, out-of-state employees could take tax exemptions for days they spent working from home. The new regulation does away with that, with employees being taxed based on the days they would have worked in Massachusetts outside of the pandemic.
However, New Hampshire is one of nine states without an income tax – a feature that New Hampshire Governor Chris Sununu says is part of the “New Hampshire Advantage” and one that is under “direct attack” from Massachusetts’ regulation.
In response, Governor Sununu is filing a lawsuit with the U.S. Supreme Court against Massachusetts over the new regulation finding income tax for those New Hampshire residents working in Massachusetts, even if they now work remotely out of state. Governor Sununu has called it an “unconstitutional attempt” to tax New Hampshire citizens.
Many states do assess income taxes on employees who work remotely, but most of those states have reciprocal agreements, which guarantee that the individual only pays income tax where they live, rather than where they work. For example Connecticut, another border state with Massachusetts, has reciprocal agreements that mean remote workers aren’t paying two income taxes. In other parts of the country, some states offer a credit for residents who work out of state, with payment being made in the state of employment, and a credit appearing for one’s home state.
Governor Sununu said if his state is successful in the lawsuit, he wants New Hampshire workers to get refunds of the taxes withheld, retroactively. It is expected that the states will continue conversation as the lawsuit is pending. Notably, prior court decisions have not taken New Hampshire’s side. New York’s application of its income tax to out-of-state workers was tested in a 2003 case by a law professor working in New York, but who lived in Connecticut. He argued he should pay New York income tax on only half of his earnings, because he spends half his teaching and research time in New York and half at home in Connecticut. However, the New York Court of Appeals ruled the professor owed New York income tax on his entire salary. The U.S. Supreme Court declined to hear the case.