“Stay Home But Pay Up” – Taxing Telework During a Global Pandemic: New Hampshire v. Massachusetts

Graham W. Steadman
Associate, Litigation Department
Published: New Hampshire Bar News
December 16, 2020

On October 19, 2020, the New Hampshire Department of Justice filed a much-anticipated “Motion for Leave to File Bill of Complaint” with the United States Supreme Court, challenging Massachusetts’ authority to tax the personal income of tens of thousands of New Hampshire residents who ceased commuting to the Bay State due to the COVID-19 pandemic.  If decided, the case may establish constitutional parameters on a state’s authority to tax out-of-state telework—a practice that has exploded since March and will likely continue long after the pandemic subsides.

The accompanying 33-page “Bill of Complaint” accuses Massachusetts of violating both the Commerce Clause and the Due Process Clause of the United States Constitution by confiscating income not sufficiently related to Massachusetts.  The Supreme Court of the United States has original jurisdiction over suits between states, and thus the complaint was filed there.  See 28 U.S.C. § 1251(a).

The Commerce Clause forbids states from engaging in economic discrimination in interstate commerce.  The Due Process clause prevents states from seizing property when there is an insufficient nexus between the property and the taxing state.

New Hampshire’s Commerce Clause claim relies on the four-part test first established by the Supreme Court in Complete Auto. Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).  Under that test, the Court assesses whether a tax is: (1) applied to an activity with a substantial nexus with the taxing State; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and (4) is fairly related to the services provided by the State.”  See id; Comptroller of Treasury of Maryland v. Wynne, 135 S. Ct. 1787, 1793 (2015).  All prongs of this test must be satisfied for a tax to be constitutional.  New Hampshire alleges that Massachusetts has violated all four prongs.

New Hampshire’s Due Process count alleges that the pervasiveness of telework by New Hampshire residents has severed any meaningful connection between the income generating activity, i.e., the work that now occurs exclusively in New Hampshire, and the services funded by the Massachusetts income tax (e.g., the maintenance of roads, public transportation, or utilities that New Hampshire commuters regularly used pre-pandemic).  See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272–73 (1978) (stating that the Due Process Clause places two restrictions on a State’s power to tax income: (1) no tax may be imposed, unless there is some minimal connection between the activity and the taxing; and (2) “the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State.”).

Pre-pandemic, Massachusetts permitted New Hampshire residents working in Massachusetts to prorate their income tax liability based upon the number of days they worked from home in New Hampshire.  See 830 CMR 62.5A.1(5)(a) (2008).  Now, however, Massachusetts seeks to tax the income of New Hampshire residents who have been teleworking “due solely to the Massachusetts COVID-19 state of emergency” as if they were still commuting to Massachusetts each day.  Mass. Dep’t of Revenue, Technical Information Release 20-5, Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic (Apr. 21, 2020).

Clashes over the taxability of telework are not new.  To the chagrin of its neighbors, New York has enforced its so called “convenience rule” to tax out of state teleworkers for years.  Under that rule, non-residents who work for New York employers and telecommute part-time—either for their own convenience or the convenience of their employer—must pay income tax to New York on all of their wages, even if their wages may also be taxed by their home state.  See Nicole Belson Goluboff, Tolls on the Broadband Commute: State Tax Limitations on Interstate Telework, 20-SPG Media L. & Pol’y, 217 (2013).  Over the years, the United States Supreme Court has declined to hear at least two cases challenging the constitutionality of this practice.  See Zelinsky v. Tax Appeals Tribunal of State, 1 N.Y.3d 85, 88, 801 N.E.2d 840, 843 (2003), cert. denied, 541 U.S. 1009 (2004); Huckaby v. N.Y. Div. of Tax Appeals, 4 N.Y.3d 427, cert. denied, 546 U.S. 976 (2005).

The Court’s original jurisdiction is not commonly invoked, and in this case, Massachusetts will likely argue that New Hampshire residents, not the State, should bring suit in the lower courts.  This case, however, may pique the Court’s interest.  First, the facts presented create a clear-cut opportunity for the Court to set an outer limit on a state’s authority to tax telework, while still allowing the legislative branch to enact more targeted and specific reforms in this arena.  Second, Massachusetts enacted the challenged rule based upon exigencies associated with the pandemic.  At that time, it appeared that the pandemic would be short-lived.  Now, with the pandemic having extended more than seven months, with no end in sight, the basis for this “emergency rule” is strained at best.  The Supreme Court may wish to resolve the matter for that reason.  The Court will decide whether to accept this case in the coming months.