Taxing Remote Workers

Many of us have been working remotely since the coronavirus pandemic hit in earnest last March. If your place of work and place of residence are in the same state, there’s no problem. But what if you live in one state and would work in another state — that is, if you were still going into the office? Which state gets to share in the tax revenue on your income?

New Hampshire is asking the U.S. Supreme Court to directly answer that very question, in a challenge to a Massachusetts law that says Massachusetts may tax nonresidents who used to work in the state but now work from home instead. Other states are interested, too — some because they have tax laws similar to Massachusetts (like New York and five other states) and some because they are losing tax revenues as a result of such laws (like New Jersey and Connecticut).

The stakes are high, because the treatment of remote worker taxes can mean big bucks for state budgets. New Jersey, for example, estimates it will credit thousands of New Jersey residents who used to work in New York City, but now work remotely, for about $1.2 billion in income taxes paid to New York starting in March 2020. In an era where COVID shutdowns have cost countless jobs, and many state budgets are dealing with the lower tax revenues generated by the decreased economic activity, the treatment of taxes to remote workers could tip the balance between a balanced state budget and a budget that is in the red.

The Massachusetts law being challenged in the Supreme Court was adopted in April 2020; Massachusetts said the law just maintains the status quo income tax treatment of remote workers so Massachusetts won’t have to determine precisely where they are working during the pandemic. New Hampshire, which doesn’t have an income tax, says that by taxing New Hampshire residents who formerly commuted but now are actually working from home, Massachusetts is invading New Hampshire’s sovereignty and violating the due process and commerce clauses of the Constitution. New Hampshire has invoked the Supreme Court’s original jurisdiction, which allows one state to sue another state directly in the high court, without going through lower courts, if the Court gives them permission to do so. The Supreme Court has asked the Biden Administration to weigh in on whether it should take the case. There’s some urgency to this issue, both because of the budget crisis in many states and because tax season is just around the corner.

Taxation of remote workers is just one of the many interesting legal issues that are going to be addressed as a result of the pandemic, the governmental shutdown orders, and the resulting disruption of what used to be normal practices — practices that now may be morphing into a “new normal” where remote work is much more commonplace. And you can be sure of one thing: when a legal issue raises the prospect of shifting billions of dollars of tax revenue, you can expect cash-hungry states with their eyes on their budgets to fight like cats and dogs for every cent.