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Supreme Court lets Massachusetts remote work income tax rule stand for now

| Jun 18, 2021 | Internal Revenue Service

The United States Supreme Court has rejected a tax-collection lawsuit by the State of New Hampshire against the Commonwealth of Massachusetts impacting employment tax withholding for remote workers. Here’s an overview of the case and the effect of the Court’s decision.

The pandemic upends the status quo for Massachusetts employment tax withholding

In non-pandemic times, Massachusetts employers must withhold Massachusetts state income tax from non-resident employees’ paychecks in proportion to the amount of work those employees perform in Massachusetts. For example, a New Hampshire resident who commutes to Massachusetts four days per week, and works from home one day per week, has Massachusetts state income tax withheld from the 80% of her income, which is the proportion of her income earned in Massachusetts.

The COVID-19 pandemic through those rules into disarray. An estimated 100,000 New Hampshire residents who normally commuted to the Bay State started working remotely. Massachusetts employers soon wanted to know if that meant they should stop withholding Massachusetts income tax from those employees’ paychecks.

On April 21, 2020, the Massachusetts Department of Revenue issued guidance instructing Massachusetts employers to continue withholding from non-resident employee paychecks in the same proportions as they had before the pandemic triggered a state of emergency. In other words, even though New Hampshire residents were working from home full-time, the employers should keep withholding as if their employees still commuted to and worked in Massachusetts as usual.

New Hampshire seeks to sue Massachusetts over the rule

In October 2019, New Hampshire filed a request in the Supreme Court for permission to commence a lawsuit against Massachusetts.  New Hampshire claimed Massachusetts had violated the U.S. Constitution and infringed on New Hampshire’s sovereignty by issuing the rule maintaining the pre-pandemic status quo for withholding Massachusetts employment taxes from New Hampshire residents.

Massachusetts and, eventually, the United States government, opposed New Hampshire’s request. In essence, both argued that New Hampshire had no business challenging the Massachusetts revenue rule, and that the rightful party to challenge the rule, if anyone, would be an affected New Hampshire resident who had taxes withheld.

The Supreme Court decides not to take up the case

In a one-sentence ruling issued on June 28, 2021, the Supreme Court sided with Massachusetts and the federal government, refusing to give New Hampshire permission to pursue its lawsuit. The court did not explain its decision, but indicated that Justices Thomas and Alito would have allowed the case to proceed.

Where the decision leaves Massachusetts and New Hampshire taxpayers

By refusing to hear New Hampshire’s complaint, the Supreme Court effectively left the Massachusetts income tax withholding rule in place. That rule is set to expire on August 26, 2021.

However, it’s not likely to end the controversy. Individual New Hampshire taxpayers will likely file lawsuits seeking reimbursement of taxes withheld and paid to Massachusetts during the pandemic.  Additionally, if remote work is here to stay, it could mean a potentially drastic reduction in employment tax revenues for the Commonwealth, unless it finds a new way to collect employment taxes from out-of-state residents who work for Massachusetts employers.

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