States Sq. Off on taxing the income of distant employees

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States Square Off on taxing the income of remote workers

More than a dozen states filed legal information this week to weigh up a petition New Hampshire filed in court in October to prevent Massachusetts from taxing residents who work remotely. The petition states that Massachusetts does not have the right to tax the income of New Hampshire residents who previously commuted to their Massachusetts jobs but now work from home.

The case is not yet scheduled for a private conference among Supreme Court judges to decide whether to grant it a hearing. A decision would have a significant budget impact for states that lost billions of dollars in tax revenue during the pandemic and could set a precedent for taxing remote workers that persists after the coronavirus crisis.

For years, the US Congress has debated setting clearer rules for interstate tax disputes, but has not passed any laws. New Hampshire filed its complaint directly with the US Supreme Court, which originally has jurisdiction over disputes between two or more states.

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

“The Massachusetts versus New Hampshire issue is not an isolated border skirmish between these states. It raises a fundamental national problem that has been around for decades, ”said Edward Zelinsky, who teaches tax law at Yeshiva University’s Cardozo Law School in New York City.

Mr. Zelinsky submitted a letter from a court friend who supports New Hampshire.

Federal courts have ruled that states may tax non-residents’ income as long as workers have a material connection with the tax state, the taxes are proportionate to the services provided by that state, and a tax is fairly shared and the interstate states do not discriminate against trade .

Massachusetts usually divides the amount of income it taxes based on the number of days commuters work in the state, mostly at companies in and around Boston, a court case said. But the Commonwealth put a rule in place earlier this year saying that incomes paid to non-residents who no longer travel to the state because of the pandemic will be treated as if they were still commuting.

New Hampshire, which has no income tax, said in its petition that Massachusetts rule violates its sovereignty and “undermines an incentive for businesses to find capital and jobs in New Hampshire, a motivation for families in the New Hampshire communities to draw and the ability of the state to pay for public services by slowing economic growth. “

In its own lawsuit, Massachusetts argued that its rules maintained the status quo to prevent disruption for taxpayers. The Commonwealth also said the Supreme Court did not have jurisdiction to hear the New Hampshire challenge, as taxpayers who feel wrongly charged could go to Massachusetts courts.

Before the pandemic, six countries followed the so-called “convenience rule” for taxing income paid to residents of other countries. This is especially important in major cities like Omaha, Neb. And New York City, which regularly attract commuters across state lines.

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Under the rule, work for a New York-based company that operates remotely is still New York taxable if the telework was for the benefit of the employee, according to tax attorneys. That means that someone like Mr. Zelinsky, who researches and writes from his Connecticut home a day or two a week during the academic year, is taxed by New York State on his entire salary because Yeshiva University is in Manhattan .

Mr. Zelinsky has unsuccessfully challenged this practice in New York courts, saying in an interview that he doesn’t believe the U.S. Constitution supports the convenience rule.

New Jersey officials agree. In their letter, they argued that New York is getting more than its fair share by taxing non-residents who earn income outside of their borders by working from home.

“They don’t rely on New York public services, they don’t rely on a transit system,” Parimal Garg, New Jersey governor’s chief attorney Phil Murphy, a Democrat, said of the state’s residents no longer commuting Jobs in New York. “A decision here could help mitigate the tax impact of the pandemic on New Jersey.”

Officials in New York did not respond to requests for comment.

The tax impact of a change in tax rules runs into billions of dollars, according to budget officials in several states. In 2018, around 434,000 New Jersey residents paid $ 3.7 billion in income taxes, according to the New York State Department of Taxation and Finance. Nearly 87,000 Connecticut residents paid New York an additional $ 1.3 billion in 2018. Residents of these two states account for about 10% of New York’s income tax this year.

Both New Jersey and Connecticut offer their residents a credit on their home state returns for income taxes paid to other states. The New Jersey Office of Revenue and Economic Analysis this month estimated that approximately $ 100 to $ 400 million of its annual loans were earmarked for work done at home for New York businesses before the pandemic began.

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

Connecticut officials working on the same teleworking fees predicted residents would pay $ 339 to $ 444.5 million less income tax in New York and $ 48.2 to $ 63.2 million less Massachusetts income tax.

Write to Jimmy Vielkind at Jimmy.Vielkind@wsj.com

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