By Edward Zelinsky

Law360 (November 4, 2020, 3:37 PM EST )

Edward Zelinsky

With great fanfare,[1] New Hampshire has sued Massachusetts in the U.S. Supreme Court[2] to stop the Bay State's personal income taxation of thousands of New Hampshire residents who previously commuted into Massachusetts but, as a result of the COVID-19 crisis, now work remotely from their homes in New Hampshire.

Procedurally, New Hampshire's lawsuit invokes the Supreme Court's original jurisdiction over "controversies between two or more states."[3] Substantively, New Hampshire's litigation seeks to enforce against Massachusetts the limitations imposed by the U.S. Constitution's due process clause[4] and dormant commerce clause[5] on states' authority to tax nonresidents' incomes earned beyond the taxing state's borders.

While the controversy between New Hampshire and Massachusetts was precipitated by the coronavirus pandemic, the underlying problem is older and broader. For decades, New York and states that emulate New York have leapt over their respective boundaries to tax the incomes earned by nonresidents working remotely at their out-of-state homes. Massachusetts is only the most recent state to join this parade. Unless the Supreme Court hears New Hampshire's case, Massachusetts will not be the last.

The Supreme Court's constitutional case law prohibits New York, Massachusetts and other states from taxing the income earned by remote workers at their out-of-state homes. The court should hear New Hampshire's challenge and require these overreaching states to bring their personal income taxes into compliance with constitutional norms.

These states may tax nonresidents only on the properly apportioned incomes such nonresidents earn within the taxing states' respective borders. By their unconstitutional taxation of interstate remote workers, these states typically cause double taxation or overtaxation of the income earned by remote work.

Remote work was expanding before the COVID-19 crisis. This crisis has simply accelerated the trend to work at home. Even after the pandemic ends, the trend toward remote work will grow further. This trend makes it all the more urgent that the high court hear New Hampshire's case and reaffirm the constitutional prohibition on states taxing income earned remotely outside their respective borders.

In short, New Hampshire v. Massachusetts is no mere cross-border skirmish. Rather, this lawsuit raises a fundamental principle of federalism: Massachusetts, New York and the states that emulate them can constitutionally tax nonresidents' incomes only when such incomes are earned within their respective borders.

Massachusetts is thus wrong to tax New Hampshire residents who work remotely at their homes in the Granite State without ever setting foot in Massachusetts. The high court should hear New Hampshire's case to reaffirm the fundamental premise of our federal system that states' authority to tax nonresidents' incomes stops at their borders.

The Commerce Clause, the Due Process Clause and New York's Convenience-of-the-Employer Rule

The due process clause forbids a state from leaping over its border to tax a nonresident on remote work income the nonresident earns outside that state.[6] Under the dormant commerce clause,[7] when income is earned across state borders, a state must stop at its border and only tax the part of such income properly apportioned to that state.[8]

Despite these venerable constitutional rules, New York has for decades taxed nonresidents on the incomes they earn working remotely at their out-of-state homes outside New York's borders.

Under its convenience-of-the-employer doctrine, New York reclassifies a day actually worked at home in another state as a New York day for state income tax purposes. By this regulatory sleight of hand, New York taxes income that would be properly apportioned to the home state where the nonresident taxpayer actually works for that day.[9]

Twice, the New York Court of Appeals has been confronted with the inconsistency between New York's extraterritorial taxation caused by the convenience-of-the-employer doctrine and the Supreme Court's admonition that, as a constitutional matter, a state cannot tax income earned by a nonresident outside that state's borders.

Both times, in Zelinsky v. Tax Appeals Tribunal in 2003[10] and then again in Huckaby v. NY State Division of Tax Appeals in 2005,[11] New York's highest court sustained New York's unconstitutional tax overreach.

I brought the Zelinsky litigation hoping to persuade New York of the unconstitutionality of its convenience-of-the-employer doctrine. I failed, as the Empire State's Court of Appeals sustained New York's taxation of the income I earned at my home in Connecticut, doing legal research and writing for my employer, the Benjamin N. Cardozo School of Law.[12]

One year later, in Huckaby, the court similarly upheld New York's tax imposed on income earned by a nonresident at his home in Tennessee. The second time the New York court addressed this issue in Huckaby, three of the court's seven judges held that New York's convenience-of-the-employer doctrine unconstitutionally taxes nonresidents when they work at their out-of-state homes.[13]

This dissent was particularly noteworthy because two of the three dissenters had ruled against me in Zelinsky and apparently had second thoughts when they heard Huckaby. Commentators[14] agree with these three dissenters that New York violates the U.S. Constitution's commerce and due process clauses when New York taxes nonresidents on the incomes they earn working remotely at their homes outside New York's borders.

COVID-19 and Massachusetts

Against this background Massachusetts announced[15] that, for the duration of the COVID-19 crisis, it will follow New York and other states[16] by taxing the incomes of individuals who previously commuted into the Bay State but who now work remotely at their out-of-state homes outside Massachusetts.

Remote work had been growing before the pandemic as the internet, social media and other forms of electronic communications facilitated work at home. The COVID-19 crisis has accelerated this trend toward telecommuting as employers and governors[17] have sought to curb the virus by keeping employees at their residences. Even when the COVID-19 crisis ends, remote work will continue to grow.[18]

When a state like Massachusetts or New York income taxes remote work actually conducted in another state, it creates double taxation or overtaxation of remote work income. The home state in which the remote worker earns his income has the authority to tax this income since a state may tax all income earned by the state's residents.[19]

Thus, the second state income tax imposed on nonresident, interstate remote workers by New York, Massachusetts or other states will often double tax income that the state of residence has particularly strong claims to tax: The state of residence provides all public services used by the remote worker when she lives and works at home.

Sometimes a remote worker's home state abates this double tax by a state income tax credit to the remote worker for the second tax imposed by the state where the worker's employer is located. But not always: Many states do not give a credit to their respective residents for taxes assessed by other states when the double-taxed income is actually earned in the state of residence rather than in the state causing the double taxation.[20]

Even if the remote worker's state of residence grants the remote worker a credit against his home state income tax for out-of-state taxes, the credit is usually limited to the home state's tax rate.[21] Since New York income tax rates are typically higher than other states' income tax rates, a credit granted by the remote worker's home state against its income tax will often offset only part of the higher New York tax.

Thus, the upshot of the state income tax policies on remote work pursued by New York, Massachusetts and other states following their leads is what the commerce and due process clauses forbid, namely, the taxation of income earned outside these states' borders — with the double and overtaxation such extraterritorial taxation often entails.

Conclusion

The Supreme Court should hear New Hampshire's lawsuit against Massachusetts. This lawsuit involves more than a mere cross-border skirmish: Massachusetts' unconstitutional taxation of remote work income earned outside Massachusetts' borders raises a fundamental issue of federalism. This unconstitutional state income taxation of remote work has been troubling for decades. Today, amid the COVID-19 crisis, it is even more so.

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Edward A. Zelinsky is the Morris and Annie Trachman professor of law at the Benjamin N. Cardozo School of Law.

Disclosure: Zelinsky sued the state of New York, challenging the constitutionality of its convenience-of-the-employer rule, in Zelinsky v. Tax Appeals Tribunal. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., Elaine S. Povich, New Hampshire Sues Massachusetts Over Remote Income Taxes, PEW Stateline (Oct. 19, 2020).

[2] New Hampshire, Plaintiff v. Massachusetts, Defendant, Docket No. 220154, docketed October 23, 2020.

[3] Article III, § 2 of the U.S. Constitution. See also 28 U.S.C. § 1251(a)("The Supreme Court shall have original and exclusive jurisdiction of all controversies between two or more States.").

[4] Amendment XIV, § 1 of the U.S. Constitution ("nor shall any State deprive any person of life, liberty, or property, without due process of law...").

[5] Article I, § 8 of the U.S. Constitution ("The Congress shall have Power...To regulate Commerce...among the several States."). This affirmative grant of power to Congress has been interpreted as having "dormant" (also called "negative") implications, limiting or prohibiting the authority of the states to impact interstate commerce by regulation or taxation. See Edward A. Zelinsky, Comparing Wayfair and Wynne: Lessons for the Future of the Dormant Commerce Clause, 22 Chap. L. Rev. 55 (2019).

[6] Okla. Tax Comm'n. v. Chickasaw Nation , 515 U.S. 450, 463 n. 11 (1995) (when taxing nonresidents, a state "generally may only tax income earned within the" state); Shaffer v. Carter , 252 U.S. 37, 57 (1920) ("As to nonresidents, the jurisdiction extends only to their property owned within the State and their business, trade, or profession carried on therein, and the tax is only on such income as is derived from those sources.").

[7] See Zelinsky, supra, note 5.

[8] Complete Auto Transit, Inc. v. Brady , 430 U.S. 274, 287 (1977) (state tax must be "fairly apportioned" to the taxing state); Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 663 (1948) (New York "gross receipts" tax must be "fairly apportioned" to business done in New York.).

[9] The regulatory basis for New York's convenience-of-the-employer doctrine is 22 NYCRR § 132.18(a).

[10] Zelinsky v. Tax Appeals Tribunal , 1 N.Y. 3d 85 (2003), cert. denied 541 U.S. 1009 (2004). The taxpayer, Zelinsky, was me.

[11] Huckaby v. N.Y. State Div. of Tax Appeals , 4 N.Y. 3d 427 (2005), cert. denied 546 U.S. 976 (2005).

[12] I remain unpersuaded by New York's defense of its convenience of the employer rule, both as a matter of constitutional law and as a matter of tax policy. See Edward A. Zelinsky, The Proper State Income Taxation of Remote and Mobile Workers, 12 Columbia J. of Tax Law No. 1 available at journals.library.columbia.edu/index.php/taxlaw/announcement/view/350 (Oct. 21, 2020); Edward A. Zelinsky, A Tale of Two Bills: Preventing the Double Taxation of Remote Workers, 97 Tax Notes State 1163 (2020).

[13] Huckaby, 4 N.Y. 3d at 440 (dissenting opinion of Judge Robert Smith).

[14] See, e.g., Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, state taxation, para. 20.05[4][e][i] (3d. 2015); Morgan L. Holcomb, Tax My Ride: Taxing Commuters in our National Economy, 8 fla. Tax. Rev. 885, 922 (2008); William V. Vetter, New York's Convenience of the Employer Rule Conveniently Collects Cash From Nonresidents, Part 2, 42 st. tax notes 229 (2006).

[15] 830 C.M.R. 62.5A3.

[16] See, e.g., 61 Pa. Adm. Code § 109.8; Nebr. Admin. Code Title 316, Reg. 22-003.01(C)(1).

[17] See, e.g., Governor Andrew Cuomo, Executive Order 202.6 (March 18, 2020).

[18] See e.g., Christopher Mims, Remote Work Won't Be Just for White-Collar Workers, Wall. St. J. (Oct. 23, 2020) R4.

[19] Okla. Tax Comm'n. v. Chickasaw Nation, 515 U.S. 450, 462-463 (1995) (A state "may tax all the income of its residents...") (emphasis in original).

[20] See Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, State Taxation, ¶ 20.10[2] (3d. ed. 2020 rev.) (states often "limit their credits to taxes paid to other states to taxes that are paid on income `derived from sources in other states.'").

[21] See, e.g., N.J. Stat. Ann. § 54A:4-1(b) (limiting credit based on the resident's New Jersey tax liability); Conn. Gen. Stat. Ann. § 12-704(a)(2) (limiting credit based on the resident's Connecticut tax liability). See also Edward A. Zelinsky, Apportioning State Personal Income Taxes to Eliminate the Double Taxation of Dual Residents: Thoughts Provoked by the Proposed Minnesota Snowbird Tax, 15 Florida Tax Rev. 533, 546-550 (2014) (describing state tax credits for residents' payments of out-of-state taxes).

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