States squarely about taxing the income of outside workers

The case has not yet been scheduled for a closed conference between Supreme Court justices, who will decide whether to hear the case. A ruling would have significant budgetary implications for states that lost billions of dollars in tax revenue during the pandemic and could set a precedent for taxing outside workers who weathered the coronavirus crisis.

The United States Congress has spent years talking about establishing clearer rules for interstate tax disputes, but has not yet passed legislation. New Hampshire submitted its complaint directly to the US Supreme Court, which originally had jurisdiction over disputes between two or more states.

New Jersey, Connecticut, Iowa and Hawaii filed a brief Tuesday urging the court to consider the New Hampshire petition. On Monday, Ohio, Texas and eight other states with Republican attorneys general also weighed on behalf of New Hampshire.

The Massachusetts v. New Hampshire issue is not an isolated frontier battle between those states. It raises a fundamental national issue that has been going on for decades, ”said Edward Zelinsky, who teaches tax law at Yeshiva University’s Cardozo Law School in New York City.

Mr. Zelinsky has filed a friend-of-the-court letter in support of New Hampshire.

Federal courts have ruled that states may tax the income of non-residents, as long as employees have a substantial link with the tax state, the taxes are reasonably related to the services provided by that state, and a tax is distributed fairly and does not discriminate against interstate trade.

Massachusetts normally divides the amount of income it taxes based on the number of days commuters work in the state, primarily at businesses in and around Boston, a lawsuit said. But the Commonwealth issued a rule earlier this year that would treat income paid to nonresidents who stopped traveling to the state because of the pandemic as if they were still commuting.

New Hampshire, which has no income tax, said in its petition that Massachusetts rule violated its sovereignty, and also undermined “ an incentive for businesses to find capital and jobs in New Hampshire, a motivation for families to move to the United States. communities of New Hampshire. , and the state’s ability to pay for public services by reducing economic growth. “

In its own admission, Massachusetts stated that its rules maintained the status quo to avoid disruption to taxpayers. The Commonwealth also said the Supreme Court had no jurisdiction to hear the New Hampshire indictment, because taxpayers who feel they are being charged unfairly can file their cases in Massachusetts courts.

Before the pandemic, six states followed what is known as the “convenience rule” for taxing income paid to residents of other states. This is especially important in large cities that regularly commute across state lines, such as Omaha, Neb. And New York City.

As a rule, work for a New York-based company that is performed remotely is still taxable in New York if the telecommuting was for the convenience of the employee, tax attorneys said. That means that someone like Mr. Zelinsky, who researches and writes from his home in Connecticut one or two days a week during the academic year, will be taxed by the state of New York on his entire salary because Yeshiva University is located in Manhattan.

Mr. Zelinsky has unsuccessfully challenged this practice in New York courts, saying in an interview that he does not believe the convenience rule is supported by the US Constitution.

New Jersey officials agree. In their letter, they argued that New York was taking more than its fair share by taxing non-residents who generate income outside their borders because they work from home.

“They don’t rely on New York’s public services, they don’t rely on a transit system,” Parimal Garg, chief adviser to New Jersey Governor Phil Murphy, a Democrat, said of the residents of the state who are no longer commuting to their jobs. in New York City. “A ruling here could help mitigate the tax impact of the pandemic on New Jersey.”

Officials in New York did not respond to requests for comment.

According to state budget officials, the tax consequences of changing tax rules run into the billions of dollars. In 2018, approximately 434,000 New Jersey residents paid $ 3.7 billion in New York income tax, according to the New York State Department of Taxation and Finance. Nearly 87,000 Connecticut residents paid New York an additional $ 1.3 billion in 2018; The residents of those two states account for about 10% of all income tax New York collected that year.

Both New Jersey and Connecticut offer their residents a credit on their home state’s returns for income taxes paid to other states. The New Jersey Office of Revenue and Economic Analysis this month estimated that about $ 100 million to $ 400 million of its annual credits were for working from home for New York businesses before the start of the pandemic.

That figure has risen to between $ 929 million and $ 1.2 billion as a result of the public health crisis, the office said. It is estimated that between 44% and 58% of people now work from home.

Connecticut officials, who work with the same telecommuting rates, are forecast to send between $ 339 million and $ 444.5 million less in New York income tax and between $ 48.2 million and $ 63.2 million less in income taxes paid to Massachusetts. .

—Jess Bravin, Richard Rubin and Laura Saunders contributed to this article.

Write to Jimmy Vielkind at [email protected]