The rule clarifies when Massachusetts’ income tax applies to nonresidents telecommuting from home, while working for Massachusetts based companies, due to the COVID-19 pandemic.
In response to the COVID-19 pandemic, Massachusetts declared a state of emergency and issued temporary social-distancing measures. Businesses and employees have adopted telecommuting arrangements in response.
Under the new rule, employers must source compensation to Massachusetts, and withhold income tax, for personal services performed by a nonresident:
- who, before the Massachusetts COVID-19 emergency, was an employee engaged in performing those services in Massachusetts; and
- who is performing those services from a location outside the state due to pandemic-related circumstances.
Pandemic-related circumstances include:
- a government order issued in response to the COVID-19 pandemic;
- a remote work policy adopted by an employer to follow federal or state government guidance or public health recommendations on the COVID-19 pandemic;
- employee compliance with quarantine or isolation directives on a diagnosis or suspected diagnosis of COVID-19 or the advice of a physician on COVID-19 exposure; or
- any other remote COVID-19 work arrangement during the period that the rules are in effect.
The rule also explains apportionment based on working days in the state and allows a credit for income taxes paid to another state by affected residents.
New Hampshire’s Motion
New Hampshire argues that Massachusetts’ imposition of an income tax on its residents, who now work from home in New Hampshire, is an attack on New Hampshire’s sovereignty.
Further, Massachusetts’ imposition of tax on nonresidents is in violation of both the Commerce Clause and the Due Process Clause because it subjects New Hampshire residents to unconstitutional confiscation.
New Hampshire is the only state bordering Massachusetts without an income tax. New Hampshire argues that not having an income tax gives it a “New Hampshire Advantage” that allows it to compete in the market for peoples, businesses, and economic prosperity.
New Hampshire acknowledges that the Massachusetts rule has a set end date, the earlier of December 31, 2020 or 90 days after the end of the COVID-19 state of emergency. However, New Hampshire argues that there is reason to believe the underlying shift in policy will outlast the current pandemic.
The pandemic has altered how work is conducted and some companies have already announced that remote work will remain a permanent option following the pandemic. Thus, New Hampshire argues that the Massachusetts rule or some similar policy will continue after the pandemic.
Impact of Suit on Other States
The U.S. Supreme Court will decide whether to hear the case later this term. A decision one way or the other will have implications throughout the country.
Seventeen states have offered some guidance on how the COVID-19 pandemic has affected telecommuting. Among these states:
- 16 have said that telecommuting does not create nexus;
- 10 do not require more withholding for telecommuters; and
- 10 do not requiring a change in the apportionment formula.
As the COVID-19 pandemic continues, and telecommuting arrangements are repeatedly extended, other states are likely to reexamine how they are handling taxation of these remote workers. Those state decisions will be affected by the outcome of this case.
By Andrew Soubel, J.D.
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