WASHINGTON—Remote work during the COVID-19 pandemic has become a standard practice for many companies, although it has prompted a new interstate conflict over taxing Americans who work from home in a different state.
A legal battle between New Hampshire and Massachusetts has erupted that could have broader implications for shaping state tax policies throughout the country.
New Hampshire Gov. Chris Sununu, a Republican, on Oct. 19 filed a lawsuit against Massachusetts in the U.S. Supreme Court over its cross-border tax collection policies during the pandemic.
New Hampshire is home to many residents who commute to neighboring Massachusetts for work. During the pandemic, most of these New Hampshire residents started working from their homes.
Massachusetts adopted a policy to continue imposing income taxes on nonresidents working in another state, a policy it extended through the end of the year.
According to the lawsuit, more than 103,000 New Hampshire residents—15 percent of the state’s labor force—work for Massachusetts-based companies.
“This is one of the biggest areas of emergent state tax policy fights over the next year because of the future of work,” Jonathan Williams, chief economist at the American Legislative Exchange Council, a conservative, nonprofit organization, told The Epoch Times.
Williams reckons there would be more states that reach across their borders and tax nonresidents who aren’t coming into their states but work remotely due to the pandemic. Forgoing tax income from nonresidents would worsen their budget problem, he said.
“This is a big battle between states over who has the right to tax that income.”
Some states offer credit for taxes paid by their citizens to other states on income earned in those states. But there is no opportunity to offset in New Hampshire because the state doesn’t have an income tax.
“Massachusetts cannot balance its budget on the backs of our citizens and punish our workers for working from home to keep themselves, their families, and those around them safe,” Sununu said in a statement.
“We are going to fight this unconstitutional attempt to tax our citizens every step of the way, and we are going to win.”
Even before the pandemic, six states—Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania—had already implemented so-called “convenience rules” that required an employee to pay income tax to the state where his or her job is based.
Massachusetts, which didn’t previously have such a rule, adopted a temporary income sourcing policy with the same effect in response to the pandemic.
“States can tax your income where you live and where you work—but a growing number of states may also seek to tax your income even if you neither live nor work there,” a report by Tax Foundation stated.
“New Hampshire wants to put a stop to it. Federal lawmakers are also considering offering some relief from the practice, either permanently or as a pandemic-specific measure.”
The Tax Foundation warned that if there’s no federal solution to the problem, many taxpayers could face an unpleasant surprise when their income taxes come due.
A new survey by the Harris Poll on behalf of the American Institute of CPAs found that many taxpayers were unaware of state tax rules related to working remotely.
The survey revealed that 55 percent of respondents who have worked remotely during the pandemic weren’t aware of the necessity to change their state income tax withholding to avoid tax consequences.
“Working remotely can have tax implications that vary from state to state,” Eileen Sherr, director at the American Institute of CPAs said in a statement.
“The sudden and unplanned increase of many employees working remotely due to the pandemic has left many of them unaware of their current state tax liabilities and any additional steps they need to take now and at tax filing time.”
The survey also found that more than half of respondents didn’t know that the number of days worked out of the state where their jobs are based may also affect the amount of state taxes owed.
Revenue generated from nonresidents is significant for states such as New York and Massachusetts.
New York state particularly faces now the worst fiscal crisis in decades due to the pandemic. And nonresidents contribute almost $700 million a month to New York’s budget, accounting for about a fifth of the state’s income tax revenue, according to a Bloomberg analysis.
Tax lawyers believe this tax revenue from nonresidents could be at stake if working from home becomes a “necessity” rather than “convenience.”