Detailed Massachusetts Development
Many people have been working remotely for over a year now—a situation that appears unlikely to change soon. Not surprisingly, certain jurisdictions have issued guidance for employers with respect to withholding for remote workers. In some states, the guidance instructs an employer to make no changes to withholding if the employee, pre-COVID, was assigned to a work location in the state. Massachusetts finalized a regulation (830 CMR 62.5A.3) on March 5, 2021 to govern the sourcing of compensation received for services performed by a nonresident during the COVID-19 state of emergency. If the nonresident was an employee engaged in performing services in Massachusetts immediately prior to the Massachusetts COVID-19 state of emergency, and the nonresident is subsequently performing those services from a location outside Massachusetts due to a Pandemic-Related Circumstance, all such compensation will continue to be treated as Massachusetts source income subject to Massachusetts personal income tax and withholding. A “Pandemic-Related Circumstance” is defined broadly to include remote work policies adopted by an employer or government orders related to the pandemic, as well as any other work arrangement in which an employee who performed services at a location in Massachusetts prior to the Massachusetts COVID-19 state of emergency performs such services for the employer from a location outside Massachusetts. The regulation also addresses Massachusetts residents. A resident employee who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing services from a location outside of Massachusetts, and who began performing such services in Massachusetts due to a Pandemic-Related Circumstance, will be eligible for a credit for income taxes paid to the state where the employee was previously providing services. In addition, the employer of such employee is not obligated to withhold Massachusetts income tax to the extent the employer remains required to withhold income tax in such other state.
This regulation has not been particularly well received by New Hampshire. The Granite State has filed a Bill of Complaint with the U.S. Supreme Court, which has original jurisdiction over disputes between states, arguing that Massachusetts’ rule impedes New Hampshire’s sovereign right to control its own tax and economic policies, including undermining the strategy New Hampshire has deliberately employed to provide current and prospective businesses and residents with the New Hampshire Advantage, which includes not having a personal income tax. The Complaint also alleges the rule violates the Commerce and Due Process Clauses of the U.S. Constitution. Numerous amicus briefs have been filed with the Court, including one authored by tax law professor Edward A. Zelinsky. In his brief, Professor Zelinksky notes that the current dispute between New Hampshire and Massachusetts reflects an “older and broader” problem, as evidenced by New York’s convenience of the employer test. Under this test, the workday of an employee assigned to a New York work location is treated as an out-of-state day for tax purposes only if the nonresident works remotely out of necessity required by the employer, as distinguished from the employee’s own convenience. The New York tax authorities have taken the position that New York nonresidents working from home during COVID-19 will continue to be subject to New York tax on their wages. In sum, should the Court decide to take the case, there may be implications beyond New Hampshire and Massachusetts. Please stay tuned to TWIST for additional updates.
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