As a basic rule, every state requires residents who live within its borders to pay taxes irrespective of whether they work locally, telecommute or work completely remotely. However, a few states have what they call the ‘convenience of the employer’ rule, which requires telecommuters and remote workers to pay taxes in their employer’s state. Though the convenience of the employer rule leads to double taxation for workers who live and work in separate states, telecommuters can claim a tax credit in their domicile state.
Tax sourcing rule
Following the COVID-19 pandemic outbreak that forced many employees to work from home, Massachusetts moved to impose a tax sourcing rule. The rule requires employees who were previously commuting to work to continue paying taxes to the state despite having not worked out of their employer’s office.
Effectively, some remote workers will end up paying taxes in two states with the risk of not receiving any tax credits. Domicile states have a ground to deny a tax credit claim as said employees worked and lived within the state. However, Massachusetts workers who live in states where the convenience of the employer rule is in effect may benefit from a tax credit as the states share a similar taxation modality.
Dormant Commerce Clause
Taxpayers who live in a state where the convenience of the employer rule is not applicable and who were commuting to Massachusetts before the pandemic will have to incur double taxation as both states can rightfully claim the tax based on their state taxation rules. However, these workers can challenge the move under the Dormant Commerce Clause, which covers the taxation of remote workers. The clause prohibits imposing an excessive tax burden on interstate commerce. Therefore they can expect a favorable ruling, as double taxation violates the clause.
New Hampshire stalemate
In the state of New Hampshire, things are a little different. Employees who were commuting to Massachusetts before the pandemic confined them to working from home may not have an issue with double taxation. This is because New Hampshire does not collect income tax from its residents. Hence, the workers will only pay taxes in their employer’s state — in this case, Massachusetts.
However, the state of New Hampshire doesn’t take this lightly as it does conflict with their law. The state maintains that since Massachusetts employees were working in New Hampshire, they should enjoy the benefit of income tax exemption that the state offers. The state has sought litigation, which is now pending determination.