On June 24, 2021, the United States Supreme Court held a conference to review New Hampshire’s motion for leave that challenged Massachusetts’ taxation of wages earned by nonresident remote workers during the Covid-19 period. This morning, the Supreme Court denied New Hampshire’s motion. Because the Supreme Court declined to address the issues raised by New Hampshire, multistate employers will continue to face withholding and other state tax issues created by remote work arrangements.
Background. At the start of the Covid-19 pandemic, Massachusetts issued an emergency regulation providing that nonresident employees who worked in Massachusetts before the state’s state of emergency must source their wages to Massachusetts in the same proportion as immediately before the pandemic, regardless of the location from which these employees telecommuted to Massachusetts.[1] Following criticism from Governor Sununu, the New Hampshire Department of Justice filed a motion for leave with the Supreme Court on October 19, 2020, requesting that the Supreme Court enjoin Massachusetts from enforcing the regulation.[2] New Hampshire argued that the Massachusetts emergency regulation was unconstitutional as applied to New Hampshire teleworkers.[3] Over the last few months, a number of amici curiae filed briefs supporting one state or the other, with slightly more briefs filed in in support of New Hampshire’s motion for leave.
| Eversheds Sutherland Observation: The Massachusetts rule, in effect, is a temporary “convenience of the employer” test. A number of other states, such as Rhode Island, adopted similar polices during the Covid-19 pandemic, whether to maintain pre-pandemic tax bases or mitigate employers’ withholding compliance obligations. Further, the so-called convenience test has been adopted by a number of states on a “permanent” basis, i.e., prior to and unrelated to Covid-19 work-from-home mandates. Most notably, New York has administratively adopted a convenience test for nearly half a century, requiring that a teleworking employee’s wages for days worked out-of-state be sourced to the state of the employee’s primary office unless it is necessary for the employee’s job that the employee work out-of-state for the day (or days). The New York Court of Appeals has upheld this test as constitutional for decades[4], and most recently in the early 2000s[5], but the Supreme Court has declined to grant certiorari to hear those cases. In October 2020, the New York State Department of Taxation and Finance issued FAQs stating that telecommuting from outside New York, which was due to an employer’s or the state’s mandatory work-from-home order as a result of Covid-19, did not constitute non-New York days for personal income tax sourcing purposes.[6] Variations of a convenience test have been adopted by Connecticut, Delaware, Nebraska, and Pennsylvania. Recently, Arkansas’ version of the test was legislatively overturned during the 2021 session.[7] |
The procedural history and arguments. On December 11, 2020, Massachusetts filed its opposition to New Hampshire’s motion for leave to file a complaint with the Supreme Court.[8] Massachusetts argued that the Supreme Court should not exercise its discretionary original jurisdiction to review the case, as the Supreme Court has recognized that its original jurisdiction should not encompass “a collectivity of private suits . . . for taxes withheld from private parties.”[9] Massachusetts also argued that New Hampshire does not have standing to bring the suit[10], and the emergency regulation passes constitutional muster under the Commerce[11] and Due Process Clauses.[12]
On December 22, 2020, New Hampshire filed its reply in support of its motion for leave to file a complaint with the Supreme Court.[13] New Hampshire argued that: (1) the seriousness of the dispute warrants the Supreme Court’s original jurisdiction because the tax rule invades New Hampshire’s sovereign interests and no alternative forum exists; (2) New Hampshire has standing; and (3) this dispute presents serious claims on the merits.[14]
On January 25, 2021, the Supreme Court invited acting US Solicitor General Elizabeth Prelogar to file a brief expressing the views of the United States regarding New Hampshire’s motion for leave to file a complaint. In an amicus brief filed May 25, 2021, Prelogar stated that the motion for leave to file a complaint should be denied. The Solicitor General argued that: (1) New Hampshire did not invoke the types of interests that would warrant exercising its original jurisdiction; (2) the issues New Hampshire seeks to present can adequately be raised and litigated by New Hampshire residents who are subject to the Massachusetts income tax; and (3) the constitutional claims would more appropriately be considered on developed factual records concerning affected individuals and with the benefit of authoritative interpretations of the relevant tax provisions by Massachusetts courts.[15]
In a supplemental brief filed on June 7, 2021, New Hampshire countered that the United States’ brief “minimizes New Hampshire’s sovereign interests” and “greatly overestimates the likelihood that individual taxpayers will file such cases.”[16] In a supplemental brief filed on June 15, 2021, Massachusetts stated that the “Governor’s declaration of an end to the [Covid-19 state of] emergency triggers the sunset of the pandemic-related tax regulation that New Hampshire seeks to challenge” and argued that the regulation’s “sunset . . . underscores the arguments why this dispute fails to rise to the level of grave importance warranting exercise of the [Supreme] Court’s original jurisdiction . . . and why any disputes over application of the temporary regulation to taxpayers should be addressed through the ordinary course of state proceedings in the first instance. . . .”[17]
On June 17, 2021, the Massachusetts Department of Revenue informed taxpayers that the “telecommuting rules that were put in place to minimize disruption for employers and employees during the Massachusetts Covid-19 state of emergency, will cease to be in effect as of September 13, 2021.”[18] By its terms, the Massachusetts temporary rule will terminate 90 days after the governor lifts state’s emergency declaration, which occurred on June 15.[19]
The Supreme Court’s order on New Hampshire’s motion. In its order today, the Supreme Court declined to exercise original jurisdiction over suits between states, without reasons. The Supreme Court recently came to a similar conclusion in Texas v. Pennsylvania[20], where it concluded that its original jurisdiction is discretionary and found the plaintiff state (Texas) did not have standing. As is the case here, Justices Thomas and Alito would have granted the motions. The Justices noted in their dissent in Texas v. Pennsylvania, the Court “[does] not have discretion to deny the filing of a bill of complaint in a case that falls within our original jurisdiction.”[21]
Eversheds Sutherland Observation: As suggested in the Solicitor General’s brief, we anticipate that New Hampshire residents affected by Massachusetts’ temporary rule will file suit under ordinary refund (or administrative assessment and protest) procedures available to individual taxpayers under Massachusetts law. As with other tax cases, this process likely will take years to resolve. Moreover, there likely will be several cases brought in other jurisdictions given the temporary rules and guidance states have issued as a result of the Covid-19 pandemic. And, as noted above, remote workers affected by the permanent convenience tests, especially New York’s, likely will need to file refund claims under state administrative procedures or await assessment from the relevant state tax agencies, thereby exhausting administrative remedies for the 2020 and 2021 tax years.
Multistate implications. States have taken different approaches to sourcing wages during the Covid-19 pandemic, which has caused concern and confusion for many employers and employees. However, as the U.S. moves from work arrangements and tax administration dominated by Covid-19 emergency declarations and toward the expected increase in remote work arrangements (whether full-time or hybrid), employers and employees must evaluate the patchwork of state withholding/personal income tax laws that impact those arrangements. Those arrangements will also impact other obligations, such as employer nexus and corporate income tax obligations, unemployment insurance contributions, and non-tax issues related to wage/hour and employment laws. Barring federal legislation (e.g., the Multi-State Worker Tax Fairness Act, H.R. 7968) or a relevant Supreme Court decision, employers will continue to face tax complexities related to multistate remote employees.
[1] 830 Code Mass. Regs. 62.5A.3, available at https://www.mass.gov/regulations/830-CMR-625a3-massachusetts-source-income-of-non-residents-telecommuting-due-to-the (accessed June 21, 2021); see also Kearns, “SALT@Work: Give Me Convenience or Give Me Federal Preemption,” 30 JMT 7 (Oct. 2020); see also Charlie Kearns, Chelsea Marmor, “Covid-19 State Employment Tax Considerations – Part I: Employer Withholding,” 61 Tax Mgmt. Mem. (BNA) No. 11, at 9 (May 25, 2020), available at https://us.eversheds-sutherland.com/portalresource/lookup/poid/Z1tOl9NPluKPtDNIqLMRV56Pab6TfzcRXncKbDtRr9tObDdEqSJCo03!/fileUpload.name=/Kearns_TMM_Article%20PDF.pdf (accessed June 21, 2021).
[4] Colleary v. Tully, 69 AD2d 922 (App. Div., 3rd Dep’t, 1979).
[5] See e.g., Matter of Zelinsky v Tax Appeals Trib., 1 NY3d 85 (2003), cert. denied 541 US 1009 (2004); Huckaby v. N.Y. State Div. of Tax Appeals, 829 N.E.2d 276, 280 (N.Y. 2005).
[6] N.Y. Dep’t of Tax. & Fin., Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax, (Oct. 19, 2020), available at https://www.tax.ny.gov/pit/file/nonresident-faqs.htm (last accessed June 22, 2021); see also Charlie Kearns, Chelsea Marmor, Long-Awaited Guidance from New York State Concludes Wages from Telecommuting Due to Covid-19 are New York-Sourced, Eversheds Sutherland SALT Shaker Blog, (Oct. 22, 2020), available at https://www.stateandlocaltax.com/new-york/long-awaited-guidance-from-new-york-state-concludes-wages-from-telecommuting-due-to-covid-19-are-new-york-sourced/ (last accessed June 22, 2021).
[7] 2021 Arkansas Laws Act 1019 (S.B. 484).
[9] Mass. Opp. p.1, citing Pennsylvania v. New Jersey, 426 U.S. 660, 666 (1979).
[10] Massachusetts also argued that the emergency regulation does not invade New Hampshire’s sovereign interests because it maintains the status quo during a temporary period. In addition, New Hampshire seeks to circumvent the administrative procedures made available to the affected taxpayers – the nonresidents subject to Massachusetts tax. Finally, Massachusetts argues that New Hampshire does not have standing because it is not injured.
[11] Massachusetts argues that under Complete Auto Transit, the Constitution does not prohibit Massachusetts from creating an emergency wage sourcing rule to respond to nonresidents telecommuting to Massachusetts because of the pandemic. Specifically, the wages have substantial nexus with Massachusetts because the work was performed in Massachusetts until the pandemic. The wages are also fairly apportioned to Massachusetts and the tax does not discriminate against interstate commerce nor does it result in double taxation. Massachusetts also alleges that the wages are fairly related to the services provided by the state because telecommuting employees still enjoy benefits from Massachusetts while telecommuting including high minimum wages, earned sick time, paid family and medical leave laws, and “the most generous unemployment benefits in the Nation.” Mass. Opp., 9. 31, citing U.S. Dep’t of Labor, Comparison of State Unemployment Laws 2019, at 3-11 (2019), available at https://us.eversheds-sutherland.com/portalresource/complete.pdf (accessed June 21, 2021).
[12] Massachusetts argues that there is a definite link because only the proportion of days the employees physically worked in Massachusetts prior to the state of emergency continue to be subject to Massachusetts tax. Likewise, the income is rationally related to the values connected with Massachusetts because there are substantial benefits afforded to these employees, as outlined in the commerce clause arguments summarized above.
[14] New Hampshire argues that the emergency regulation violates the dormant Commerce Clause. In New Hampshire’s view, the emergency regulation is unconstitutional because it: (1) taxes New Hampshire residents on income that is not connected with Massachusetts, (2) creates a possibility of double taxation, and (3) taxes New Hampshire residents as if they are physically performing work in Massachusetts even though they are not. New Hampshire also argues that the temporary regulation violates the Due Process Clause of the Fourteenth Amendment because it lacks a “definite link” or “minimum connection” between the wages Massachusetts seeks to tax.
[15] New Hampshire v. Massachusetts, Brief for the United States as Amicus Curiae, Original No. 154, No. 22O154 (U.S. docketed May 25, 2021) (petition pending review), available at https://us.eversheds-sutherland.com/portalresource/20210525184546051_154orig.pdf (accessed June 21, 2021); see also Jeffrey Friedman, Charlie Kearns, U.S. Solicitor General Opposes SCOTUS Review in New Hampshire v. Massachusetts, Eversheds Sutherland SALT Shaker Blog (May 26, 2021), available at https://www.stateandlocaltax.com/teleworking-businesstravel/u-s-solicitor-general-opposes-scotus-review-in-new-hampshire-v-massachusetts/ (accessed June 21, 2021).
[19] 830 Code Mass. Regs. 62.5A.3(1)(d).
[20] 141 S. Ct. 1230, 208 L. Ed. 2d 487 (2020).
[21] Id. citing, Arizona v. California, 589 U.S. ––––, 140 S.Ct. 684, 206 L.Ed.2d 175 (2020) (Thomas, J., dissenting).
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