Because she was working in Massachusetts, she had to pay that state’s income tax for every day she worked there. She loves her job, but commuting out of state was a financial hit, since New Hampshire doesn’t have an income tax.
Then the pandemic hit, forcing Sullivan and millions of other Americans to work from home five days a week. To avoid losing revenue, Massachusetts set a regulation that allows it to continue to levy its income tax on employees of Massachusetts-based companies who live out of state, even though they are no longer coming into the office to work.
Sullivan objects, noting, “I’m not using the roads, I’m not taking up space” in Massachusetts, and “I have no representation there.”
The Massachusetts tax regulation is temporary — it will last until the end of 2020 or 90 days after the state of emergency expires. Only six other states — Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania — have permanent rules that predate the pandemic.
But now millions of additional people are working remotely, and business experts predict that many of them will continue to do so after the pandemic ebbs. That prospect could lead tax departments in more states to examine the feasibility of taxing remote workers.
With an influx of workers fleeing to summer homes or otherwise working remotely from Maine, the state’s tax department is considering how to deal with the resulting income tax confusion, the Portland Press-Herald reported.
Meanwhile, many people who are working at home full-time instead of crossing states lines may owe income taxes to their home state for the first time.
A few areas — the District of Columbia, Maryland and Virginia, notably — have reciprocity agreements that simplify things for taxpayers. Those deals mean taxpayers owe only the income tax of the state in which they live, not the state where they work.
“The nature of work is changing,” said Jared Walczak, vice president of state projects at the Tax Foundation, a think tank that touts lower, more broadly based taxes. “Certainly, we won’t be as remote as we are in the pandemic, but this has been a fairly successful trial run for remote work.”
Prior to the pandemic-induced stampede to work from home, Walczak said, people living in one state and working in another would pay taxes on the income earned in the state where they worked, and then get a credit on their home-state tax form. Now, the home states of people who used to commute out of state but now work at home may claim that tax revenue for themselves.
These situations complicate tax filings, and depending on whether a credit is offered by the home state, raise the specter of workers being taxed twice.
Patrick Marvin, spokesman for the Massachusetts Executive Office of Administration and Finance, said that state’s regulation was imposed to “ensure clarity with tax collections in Massachusetts” and argued that not much had changed for residents of other states working for Massachusetts businesses.
Marvin said in an email that the regulations clarify that people working remotely for a Massachusetts company due to a pandemic-related emergency order “will continue to pay Massachusetts state income taxes.”
Massachusetts doesn’t seem likely to change its new policy despite pressure from New Hampshire Gov. Chris Sununu and some members of the New Hampshire legislature. The Republican governor accused his neighboring state, where more than 19% of his residents commute for work, of trying to “pick the pockets of the people of New Hampshire,” in an interview on CNBC in August.
New Hampshire state Sen. Dan Feltes, a Democrat who chairs the Ways and Means Committee and who is running for governor against Sununu, said Massachusetts’ move is “anti-worker, anti-public health.”
“This is penalizing New Hampshire workers for doing the right thing and teleworking, in many cases instructed by their companies,” he said in a telephone interview, “and in many ways helping the public health in Massachusetts by not transmitting it [the disease].”
He suggested that New Hampshire could take the case to court, particularly if Massachusetts continues the tax past December.
New Hampshire state Sen. Lou D’Allesandro, a Democrat who chairs the Finance Committee, called the Massachusetts action a “money grab. They see that their revenues are down and they are looking for a way to make up the slack. It’s bad policy and it’s going to create a situation where others are going to try to do things like this.”
And he’s not convinced that the Massachusetts tax move is temporary. “Have you ever tried to repeal a tax?” he said, sarcastically.
New York, which has had its regulation as part of income tax law from the early part of the 20th century, has a reputation of strict enforcement on out-of-staters working for a New York-based company. It’s called the “convenience tax” because, before the pandemic, it was believed that some people worked remotely out of convenience, not necessity. The pandemic scrambled those semantics, but the tax remains.
The New York application of the tax was tested in a 2003 case by Edward Zelinsky, who lives in Connecticut but works as a law professor at Yeshiva University’s Cardozo School of Law in New York. Zelinsky argued he should pay New York income tax on only half of his earnings, because he spends half his teaching and research time in New York and half at home in Connecticut.
But the New York Court of Appeals, the state’s highest court, ruled Zelinsky owed New York income tax on his entire salary. The U.S. Supreme Court declined to hear the case. Connecticut eased things a bit by enacting a reciprocity law in 2019, meaning it doesn’t impose Connecticut income taxes on top of the New York taxes. But New York income taxes can be as high as 8.8% while the top rate in Connecticut is 7%.
Zelinsky expects that his situation will become more common post-pandemic. “Even if you believe that the more extreme [work-at-home] predictions are not true,” he said in a phone interview, “we all agree that there is likely to be more work at home and that this is going to be a serious problem. My litigation in 2003 looks kind of quaint when you see what’s going on today. I think it’s very possible that an awful lot of people are going to get caught in a very messy situation.”
New York state aggressively keeps track of and collects from high-earning employees who are working remotely, said Attorney Liz Pascal, a partner in the New York law firm of Hodgson Russ LLC, and a specialist in state and local tax who has handled remote taxation clients.
The only loopholes, she said, are if workers never set foot in New York for an entire calendar year or if they have a home office that is a “bona fide office of the employer or it’s near some very specialized facilities necessary for your job.” Most remote workers, she said, can’t take advantage of either.
She also expects more remote work in the future. “This is probably going to be particularly an issue for states that have big urban or commercial centers that have a fair number of individuals that live across the border out of state.”
James Gazzale, spokesperson for the New York State Department of Taxation and Finance, noted that Gov. Andrew Cuomo, a Democrat, has repeatedly said this is going to be a “challenging” year fiscally, but that won’t change New York’s tax policy. And Freeman Klopott, a press officer in the New York State Division of the Budget, said in an email that his office does not expect a change in revenue.
A federal law could solve the problem. A bill from South Dakota Sen. John Thune, a Republican, called the “Mobile Workforce State Income Tax Simplification Act of 2019,” aims to apply income tax to workers in the state where they reside, no matter where their workplace is located. But the bill has gone nowhere. A version passed the House in 2017, but also stalled.
In February, the Arkansas revenue department roiled the legal tax world by issuing an opinion stating that if a person who had been working in Arkansas, but then moved to another state but continued to do the same work — say, a computer programmer — that worker would still be subject to Arkansas income tax.
“We determined that in this case, even though he was doing it from another state, he was still programming computers in Arkansas,” said John Theis, legal counsel for the revenue department who wrote the opinion. He said the opinion was written for one circumstance but might apply to others, depending on the particulars.
Theis said the constitutional question is whether the taxpayer is getting anything from the state in which his employer is located. He said while certain benefits, like 911 call response, would not apply to someone working remotely, others, such as worker’s compensation, would be provided by Arkansas.
