In October of 2020, New Hampshire filed a Bill of Complaint with the U.S. Supreme Court challenging a Massachusetts regulation that reached across the New Hampshire border and imposed an income tax on New Hampshire residents working remotely from New Hampshire locations during the pandemic. Eight months after New Hampshire’s filing, the Supreme Court denied New Hampshire’s request to hear its complaint. The substance of the dispute and the potential implications of the court’s decision follow.

Taxation of Remote Workers in Massachusetts

Generally, states may impose tax on income earned by nonresidents while working within the state. On April 21, 2020, the Massachusetts Department of Revenue (“DOR”) adopted a regulation declaring (for the first time) that nonresident income received for services performed outside Massachusetts would be subject to income tax. The DOR limited the application of this regulation to those individuals working outside the state due to the pandemic and set an expiration date for this provision of 90 days after Massachusetts’ state of emergency ends. Other states, most notably New York, have a similar rule known as the convenience of the employer rule that has survived state challenges. These convenience of the employer rules draw back into the state income earned outside the state when employees work remotely for their own convenience and not at the request of the employer.

New Hampshire Takes Exception to the New Regulation

In its request to the U.S. Supreme Court, New Hampshire argued imposing tax on work done outside the state constituted an unconstitutional extraterritorial assertion of tax. In other words, the regulation imposed tax on New Hampshire residents who earn their incomes from activities they undertake solely within New Hampshire. For example, the entire salary of a New Hampshire resident who commuted to work full-time in Boston prior to the regulation, but has not set foot in Massachusetts for more than eight months, continues to be subject to the Massachusetts state income tax as if that employee were still working every day in Boston.

Court Refuses to Hear the Case

Before considering this matter, the U.S. Supreme Court requested the input of the U.S. Solicitor General. The Solicitor General, referencing previous restraint shown by the court in similar matters and a lack of specific factual development, asked the court not to hear the matter. On June 28, 2021, the U.S. Supreme Court denied New Hampshire’s motion for leave to file a complaint in New Hampshire v. Massachusetts. This decision effectively ends any hopes of New Hampshire residents and other taxpayers confronting either the Massachusetts regulation or the convenience of the employer rule of other states.

DGC will watch for reactions to this decision (new law or requests for federal legislation) by other states.​ If you have questions about this topic, please reach out to a member of your DGC client service team or Scott Thomas, JD, LLM at 781-937-5172 / sthomas@dgccpa.com.

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