State Square Off Taxation of remote workers’ income

The case has not yet been scheduled for a private conference between Supreme Court judges, who will decide whether to grant it a hearing. A ruling would have significant budgetary implications for states that lost billions of dollars in tax revenue during the pandemic and could set a precedent for the taxation of fired workers who are surviving the coronavirus crisis.

The US Congress has discussed for years establishing clearer rules for interstate tax disputes, but has not passed any legislation. New Hampshire has taken its complaint directly to the US Supreme Court, which has initial jurisdiction over disputes between two or more states.

New Jersey, Connecticut, Iowa and Hawaii filed a brief petition in court on Tuesday to accept the New Hampshire petition. On Monday, Ohio, Texas and eight other states with Republican attorneys general also weighed in on behalf of New Hampshire.

“The issue of Massachusetts v. New Hampshire is not an isolated border battle between these states. There is a fundamental national issue that has been raging for decades, ”said Edward Zelinsky, who teaches tax law at Cardozo Law School at Yeshiva University in New York.

Mr Zelinsky has filed a court friendship file in support of New Hampshire.

Federal courts have held that states can tax the income of non-residents as long as employees have a substantial connection with the tax state, the taxes are equitably related to the services provided by that state, and a tax is equitably distributed and does not discriminate between states. .

Massachusetts normally allocates the amount of income it taxes based on the number of days commuters work in the state, especially to companies in and around Boston, he said in a lawsuit. But the Commonwealth issued a rule earlier this year saying it would treat income paid to non-residents who have stopped traveling in the state due to the pandemic as if they were still commuting.

New Hampshire, which has no income tax, said in its petition that the Massachusetts rule violated its sovereignty, and undermined “an incentive for companies to locate capital and jobs in New Hampshire, a motivation for families to moving to New Hampshire communities. and the state’s ability to pay for public services by reducing economic growth. “

In its own lawsuit, Massachusetts argued that its rules maintained the status quo to prevent taxpayer disruption. The Commonwealth also said the Supreme Court has no jurisdiction to hear the challenge in New Hampshire, because taxpayers who feel they are being wrongfully accused could take their case to Massachusetts courts.

Prior to the pandemic, six states followed what is known as the “convenience rule” for taxing income paid to residents of other states. This is especially important in large cities that regularly attract commuters along state lines such as Omaha, Neb. And New York City.

According to the rule, work for a remote New York company is still taxable in New York if the telecommunications service took place for the employee’s convenience, tax attorneys said. That means someone like Mr. Zelinsky, who does research and writing from his Connecticut home one or two days a week during the school year, is taxed by the state of New York with all his salary, because Yeshiva University is located in Manhattan.

Mr Zelinsky has unsuccessfully challenged the practice in New York courts and said in an interview that he did not believe the convenience rule was upheld by the US Constitution.

New Jersey officials agree. In their summary, they argued that New York takes more than its fair share by taxing non-residents who generate income outside their borders while working from home.

“It’s not based on New York’s public services, it’s not based on a transit system,” said Parimal Garg, chief adviser to New Jersey Gov. Phil Murphy, a Democrat, about people who no longer commute to places. their work in New York. “A ruling here could help mitigate the fiscal impact of the pandemic on New Jersey.”

New York officials did not respond to requests for comment.

The tax implications of changing tax rules are billions of dollars, according to budget officials in several states. In 2018, about 434,000 New Jersey residents paid $ 3.7 billion in income taxes in New York, according to the New York State Department of Taxation and Finance. Nearly 87,000 Connecticut residents paid New York another $ 1.3 billion in 2018; residents of the two states accounted for about 10% of the total income tax collected by New York that year.

Both New Jersey and Connecticut provide their residents with a home state credit for income taxes paid to other states. The New Jersey Bureau of Revenue and Economic Analysis estimated this month that between $ 100 million and $ 400 million of its annual loans were for work done at home for New York companies before the pandemic.

That number rose to $ 929 million and $ 1.2 billion due to the public health crisis, the office said. It is estimated that between 44% and 58% of people now work from home.

Connecticut officials, working with the same telecommunications rates, projected residents will send between $ 339 and $ 444.5 million less in New York income tax and $ 48.2 million and $ 63.2 million less in income taxes. income paid Massachusetts.

—Jess Bravin, Richard Rubin and Laura Saunders contributed to this article.

Write to Jimmy Vielkind at [email protected]