Can the state collect income tax from non-residents working abroad for a state-based company? Massachusetts, New York and several other states say they can, and now New Hampshire is asking the Supreme Court to protect its citizens from this tax evasion.
Tens of millions of Americans worked from home during the pandemic, including about 2.1 million people who crossed state lines on their way to work. In Massachusetts, a state of emergency was declared in April, meaning that non-residents who worked in the state before the pandemic must continue to pay a 5 percent income tax, even if they work remotely.
Most states only tax income earned in connection with employment within their borders. For example, a hedge fund manager who divides his time equally between his offices in Fairfield, Connecticut and Miami only has to pay Connecticut income tax on half of his salary. The same rule applies to athletes, consultants and other professionals.
However, in five states other than Massachusetts (New York, Pennsylvania, Delaware, Arkansas, Nebraska), nonresident taxpayers work from home. New York State requires nonresidents who work remotely for a government employer to pay income tax unless necessity, as opposed to convenience, requires the employee to perform work outside the state.
If an employee of a New York company chooses to work most of his days from his home in another state, he is still taxed in New York as if he had worked all day in Manhattan. In October, the IRS stated that there would be no pandemic exemption for non-residents who telecommute unless their employer establishes a bona fide employer agency at the telecommuting location.
installs a satellite office in the second homes of its bankers, they still have to pay taxes in New York as long as they work remotely. Welcome to Hotel New York. You can leave, but you can never leave.
Last fall, New Hampshire, which does not levy a payroll tax, took Massachusetts to court and asked the Supreme Court to hear its case (N.H. v. Massachusetts). Massachusetts unilaterally imposed on New Hampshire an income tax that New Hampshire, in its sole discretion, deliberately intended not to impose, according to the Granite State.
According to established case law of the Supreme Court, states may only impose taxes within their borders that are equitably apportioned and proportionate to the services provided by the state. The Wayfair Court (2018) authorized states to collect sales tax from out-of-state retailers. But the actual sales tax must be paid by the resident, not the out-of-state business.
Massachusetts and other states impose income taxes on non-residents, even if they do not use government services. Since New Hampshire is not subject to income tax, its residents are not taxed twice. But long-distance workers in other states that have income taxes, such as Vermont, may be.
New Jersey and Connecticut give their residents tax credits for the income taxes they pay in New York. But the New York tax credits will cost them about $1.5 billion combined this year, they briefly note, to support New Hampshire. New York’s long-distance tax exemption also reduces the incentive for these states to compete on tax rates.
Under the United States Constitution, the Supreme Court has exclusive jurisdiction over disputes between two or more states, although it usually only handles the most serious cases that cannot be decided by other bodies. This is consistent with this case. The New Hampshire lawsuit raises important economic issues that affect millions of Americans across the country.
Until the Court intervenes, workers who are wrongly taxed by other states have no option but to turn to the tax courts of the states, which are biased. States like California can follow the example of Massachusetts and New York. Last week, the justices asked the acting attorney general for an opinion on the interstate tax dispute, but it appears to be a good case for the Supreme Court.
Newspaper article: Paul Gigot speaks with Tom Carroll, director of Catholic schools in Boston. Photo: David L. Ryan/Boston Globe via Getty Images
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Appears on one. February 2021 in the print edition.
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