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Justice Department Sides with Massachusetts in Cross-Border Tax Fight With N.H.

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Jimmy Emerson, DMV/Flick Creative Commons
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The U.S. Justice Department says a lawsuit brought by the State of New Hampshire against Massachusetts over its cross border income tax collection practices during the pandemic does not warrant the involvement of the nation’s highest court.

In January, the U.S. Supreme Court requested the Solicitor General give an opinion on the suit, which New Hampshire filed last October. The lawsuit centers on a Massachusetts emergency provision that caps how much income out-of-state residents who work for Massachusetts-based companies can deduct on their income taxes while working remotely. The measure, which will expire later this year, negatively impacts up to 100,000 Granite State residents, New Hampshire contends.

In a 28-page brief filed Wednesday, Acting U.S. Solicitor General Elizabeth Prelogar told the court the suit is not of enough significance to trigger a legal remedy known as original jurisdiction, which gives the Supreme Court the ability to settle inter-state feuds.

“This is not one of the rare cases that warrants the exercise of this Court’s original jurisdiction,” Prelogar wrote, noting that such authority has only been used “sparingly” through the court’s history.

Before the pandemic, Massachusetts allowed out-of-state residents who worked for Massachusetts-based entities to deduct whatever portion of their income was derived while working outside the state. Last spring, the state passed an emergency provision that capped those deductions at the proportion of time spent working remotely before the pandemic.

New Hampshire’s attorney general at the time, Gordon MacDonald, argued this was a violation of the state’s sovereignty, and would potentially harm the tens of thousands of workers now performing their jobs from home. 

The Justice Department’s brief rejected the argument that New Hampshire, as a whole, was injured by its neighbor’s actions.

“Although New Hampshire might prefer that its residents not pay personal income taxes to any government, an independent tax obligation falling on a State’s residents generally is not an injury to that State’s own sovereign prerogatives,” Prelogar wrote. 

Massachusetts is asking the court to also reject the suit, arguing that its remote worker provision is only temporary, and that it will expire when the state of emergency is rescinded, which is set for June 15. Massachusetts also contends any out-of-state taxpayers who want to challenge the policy could appeal directly to its tax collection authority. 

The Justice Department agreed that individual taxpayers had a remedy, and that the U.S. Supreme Court does not need to get involved. It also pointed to a lack of precedence on this issue.

“New Hampshire has not identified any case suggesting that one State’s taxation of employees who reside in another State violates the sovereign interests of the other State, much less that it amounts to the type of serious violation of sovereignty,” the department wrote.

The U.S. Supreme Court could still take up the dispute, though there is no clear timeline on when the court may decide.

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