Read this if you are a New Hampshire resident, or a business owner or manager with telecommuting employees (due to the COVID-19 pandemic).
In late January, the Supreme Court asked the Biden Administration for its views on a not-so-friendly neighborly dispute between the State of New Hampshire and the Commonwealth of Massachusetts. New Hampshire is famous amongst its neighboring states for its lack of sales tax and personal income tax. Because of the tax rules and other alluring features, thousands of employees commute daily from New Hampshire to Massachusetts. Overnight, like so many of us, those commuters were working at home and not crossing state boundaries.
As a result of the pandemic and stay-at-home orders, Massachusetts issued temporary and early guidance, directing employers to maintain the status quo. Keep withholding on your employees in the same manner that you were, even though they may not be physically coming into the state. New Hampshire was against this directive from day one, but the nail in the coffin was an extension of the guidance in October. Within days, New Hampshire filed suit in the Supreme Court.
New Hampshire’s position
In its brief, New Hampshire asserts that the Massachusetts regulations are unconstitutional—in violation of the both the Commerce and Due Process Clauses of the U.S. Constitution. Each clause has historically prohibited a state from taxing outside its borders and limits tax on non-residents. For Massachusetts employers to continue withholding on New Hampshire resident’s wage earnings, New Hampshire argues, Massachusetts is imposing a tax within New Hampshire, contrary to the Constitution.
What makes the New Hampshire situation unique is that it does not impose an income tax on individuals, a “defining feature of its sovereignty”, the state argues. New Hampshire would say that its tax regime creates a competitive advantage in attracting new business and residents. Maine residents, subject to the same Massachusetts rules, would receive a corresponding tax credit on their Maine tax return, making them close to whole between the two states. Because there is no New Hampshire individual income tax, their residents are out of pocket for a tax that they wouldn’t be subject to, but for these regulations.
Massachusetts’ position
Massachusetts' intention behind the temporary regulations was to maintain pre-pandemic status quo to avoid uncertainty for employees and additional compliance burden on employers. This would ensure employers would not be responsible for determining when an employee was working, for example, at their Lake Winnipesaukee camp for a few weeks, or their relative’s home in Rhode Island.
Additionally, states like New York and Connecticut have long had “convenience of the employer” laws on the books which imposed New York tax on telecommuting non-residents. Additionally, Massachusetts provided that a parallel treatment will be given to resident employees with income tax liabilities in other states who have adopted similar sourcing rules, i.e., a Massachusetts resident working for a Maine employer.
Other voices
The U.S. Supreme Court has requested a brief from the Biden administration with no deadline given. It’s assumed, however, to be received in time for the court to makes its decision before the end of term in June. Since the original filing, the States of New Jersey, Connecticut, Hawaii, Iowa, and others have filed briefs, imploring the Court to hear the case due to similar circumstances in their states and the wide ranging precedent Massachusetts and others may be effectuating. Additionally, Pennsylvania and others have released their own status quo guidance, following Massachusetts.
What now?
Right now, it’s wait and see what the Supreme Court decides. For Massachusetts employers specifically, you should review current withholdings and ensure compliance with the temporary regulations. The regulations for non-resident wages and withholding are in effect until 90 days after the state of emergency has lifted. Given that that date keeps moving further away, the rules may still be in effect when the Supreme Court delivers their decision in June. For all employers, it’s important that you review the rules in each state of operation and confirm that the proper withholding is made.
Unwinding from the pandemic is going to be a long road, regardless of what decision the Supreme Court makes. If New Hampshire prevails, it’ll be a long compliance burden for both employers and employees to unwind the withholding and receive refunds. If Massachusetts wins, employers that weren’t following the regulations will have a costly tax exposure to correct.
If you have questions about your specific situation, please contact us. We’re here to help.