Remote work and income taxes
Assessing the battle between New Hampshire and Massachusetts over the Bay State’s tax
More Americans than ever are working remotely due in large part to the Covid-19 pandemic, a trend which may continue indefinitely. This shift in the status quo has created an unprecedented tax dilemma for employers with multi-state workers as well as those employees who may now be considered multi-state workers.
New Hampshire and Massachusetts are currently engaged in a debate about imposing Massachusetts income tax on New Hampshire residents who are working remotely from their homes for Massachusetts-based companies.
Massachusetts’ position is that during the Covid-19 state of emergency, workers who performed services in Massachusetts but are now working from another state – but for the same company – should still be obligated to pay income taxes to Massachusetts.
To put it mildly, New Hampshire, which has no income tax, does not agree.
In a letter sent to Massachusetts Gov. Charlie Baker, Gov. Chris Sununu expressed “serious policy and legal concerns with Granite Staters being taxed in Massachusetts when they have not crossed the state line in months due to the Covid-19 pandemic.”
Six other states (Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania) have what are known as “convenience” rules that subject non-resident employees to income tax in their state and may result in double taxation without any offsets.
For example, a resident of New Hampshire who works remotely for a Connecticut-based employer would be subject to Connecticut income tax on those wages, unless an exception to the convenience rule was met. These states have yet to provide clarity on how they will treat unscheduled remote work due to the Covid-19 pandemic.
In August, Congress introduced a bill called the Multi-State Worker Tax Fairness Act of 2020 (H.R. 7968), which would limit a state’s ability to tax the wages of nonresident telecommuters.
The bill outlines a bright-line rule by which an employee pays income taxes to the state where the wages are earned, which can be different than the state where the employee lives. This bill is said to have bipartisan interest.
Rules like the one temporarily adopted in Massachusetts have significant implications for telecommuters going forward. We anticipate significant tax controversies and federal interventions in the near future.
Some key takeaways for employees:
- Share your facts and circumstances with your tax preparer to ensure you understand the tax implications of teleworking from a new state
- Prepare as appropriate for the hassle of complying with two states’ tax codes
Some key takeaways for employers:
- Income tax nexus: Absent specific guidance, having employees in other states may subject your business to their tax laws and filing requirements. The following states have said remote workers will not create nexus for income tax: Alabama, Georgia, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont and the District of Columbia.
- Sales tax nexus: Having an employee in another state would create a physical presence. Therefore, even if the threshold is not met for economic nexus (as defined in the 2018 case of South Dakota v. Wayfair), the physical presence determination would create a collection and filing requirement.
- Apportionment: Both the payroll and sales apportionment factors could be impacted by these changes. The additional wages would obviously increase the payroll percentage. In addition, if the employees in question are performing services in a state that uses the cost of performance method to source sales, the sales factor would also increase.
- There are over 80,000 state and local tax jurisdictions nationwide, each with its own set of evolving rules and regulations. Businesses are advised to consult with advisors with state and local tax expertise to manage and plan for the continuously evolving complexities of multi-state taxation, including mitigating risks for non-compliance.
State and local needs for new revenue sources have grown nationwide, and the need will only grow more significant as the pandemic continues to suppress the economy and drive state and city budgets into the red. In addition, we anticipate greater trends toward remote/telework. State departments of revenue may be tempted to impose, or continue to embrace, convenience rules to stave off revenue declines as workers relocate elsewhere. They will have to weigh the pros and cons of revenue collection with their desire to remain attractive as a business location for employers who wish to embrace a remote work culture.
Kelly Zack is a director, state and local tax, in the Commercial Tax practice of Boston-based AAFCPAs (formerly Alexander Aronson Finning CPAs).