The Attorney General of Massachusetts is asking the U.S. Supreme Court to decline a petition filed by the State of New Hampshire over cross-border income tax collections during the pandemic.
In October, New Hampshire filed a lawsuit alleging a temporary tax regulation enacted by its neighboring state during the pandemic violated New Hampshire’s sovereignty.
The tax provision, which was enacted in April during the first weeks of the pandemic, essentially froze how much income out-of-state residents who work for Massachusetts-based entities can deduct on their income taxes while working remotely.
The temporary provision created bipartisan uproar in New Hampshire, where tens of thousands of workers who previously commuted across the border are working remotely due to COVID-19, resulting in many residents paying income taxes to a state they now don’t set foot in.
In a 48-page brief, Maura Healy, the Massachusetts Attorney General, contends the case doesn’t warrant Supreme Court involvement for several reasons. While the court has what’s known as “original jurisdiction” when states sue each other, the Commonwealth alleges the suit isn’t inappropriate because New Hampshire “presented no evidence the state itself has been injured.”
Massachusetts also contends that any tax payers who feel their assessments are improper can file an appeal through the state’s taxing agency, and that because the rule will expire after the pandemic, the matter doesn’t rise to the level of “grave public concern,” which Massachusetts contends is a threshold for cases that involve two states.
The Commonwealth previously allowed out-of-state residents who worked for Massachusetts-based entities to deduct whatever portion of their income was derived while working from home. That meant an out-of-state worker who commuted, say, four days a week but worked from home one day a week could reduce their taxable income by 20-percent.
This spring, the state revised the policy to cap deductions at the proportion of time spent working remotely before the pandemic, meaning if an employee is now working from home five days a week instead of just a single day per week, they can still only deduct 20-percent of their income.
Healy contends that Massachusetts is in effect simply keeping its taxing policies status quo during the pandemic, and that that move was intended to streamline record keeping for businesses who may withhold a portion of its employees’ salary.
“While New Hampshire complains that Massachusetts is ‘reaching across its borders’ to tax New Hampshire residents newly telecommuting to their jobs in Massachusetts, Massachusetts has always taxed the Massachusetts-source income of nonresidents who work at Massachusetts businesses, just as other states in turn tax Massachusetts residents’ income from those states,” writes Healy in the legal filing.
New Hampshire’s petition claims Massachusetts is violating the Commerce and Due Process clauses of the constitution by “picking the pockets” of New Hampshire residents, according to Gov. Chris Sununu. The state claims the policy hurts New Hampshire’s ability to attract residents and its recruitment efforts for state employees.
Other states including New York, New Jersey and Pennsylvania enacted similar measures this spring.
It isn’t clear when the Supreme Court justices may issue a decision on whether to accept the case.