In principle, you pay your income taxes in the state where you earned the income. When people work in one state but live in another, that could result in two tax returns being filed — one for your state of residence and one where you earn your money. A network of interstate agreements has generally limited the need for multiple returns.
That network of agreements has been uprooted by the pandemic. Now, people who once commuted across state lines have started working from home. This changes the state in which they earn their income, even though nothing else has changed about their jobs.
In New York City, we usually see commuters from multiple states — 400,000 from New Jersey alone. How many of those commuters are now working from home? Tens of thousands, at the least.
The problem is especially acute for New Hampshire, which has many residents who commute into Massachusetts. This is because the state of Massachusetts has proposed taxing non-residents who used to work in the state but are now working from home due to the pandemic. New York has a similar rule.
Massachusetts adopted this rule in April, ostensibly to maintain the status quo. Having the rule allows Massachusetts businesses to continue withholding as they had been doing, without having to try to figure out the exact living circumstances of each worker during an emergency.
But New Hampshire collects no income tax. And now workers are being taxed by Massachusetts for working in New Hampshire. This was seen as an attack on New Hampshire’s sovereignty.
US Supreme Court to decide, eventually
Now, New Hampshire has sued Massachusetts for unlawfully taxing its citizens. The outcome of the case could determine the fate of New York’s law and laws in five other states. Connecticut and New Jersey have filed a friend of the court brief on New Hampshire’s behalf, complaining that they are losing huge sums to New York in taxation for jobs that are being performed in their states.
The Supreme Court has asked the federal government to weigh in. According to Accounting Today, the solicitor general’s office will probably file its brief in time for the court to hear the case in June.
That’s not soon enough for tax season. Guidance is limited on how to file. The case could develop, resulting in an update or even an injunction against the law. Stay tuned.