The final regulation lays out sourcing rules for income earned by nonresident employees who telecommute for in-state businesses from outside Massachusetts because of the state's COVID-19 emergency. The rule is effective until 90 days after the governor gives notice that the emergency is over and also explains parallel treatment the state will give resident employees with income tax liabilities in other states that have adopted similar sourcing rules, according to the rule.
The final rule is the same as new emergency and proposed regulations issued in December, which reversed a previous policy and extended the COVID-19 pandemic-related nexus and income-sourcing rules into 2021. The December changes represented a reversal from previous regulations that had ended the relief by Dec. 31, 2020.
The department's rules have attracted significant attention and controversy. In October, New Hampshire asked the U.S. Supreme Court to strike down the rule in an application for original jurisdiction, claiming the rule violates the U.S. Constitution's due process clause and commerce clause by imposing income tax on workers who stopped commuting to the state during the spread of COVID-19, the respiratory illness caused by the coronavirus. The suit came after threats of litigation by New Hampshire Gov. Chris Sununu, a Republican.
In January, the U.S. Supreme Court invited the solicitor general to consider whether it should hear the case as a matter of original jurisdiction. The solicitor general has not yet responded.
The justices have already heard the views of several states besides New Hampshire and Massachusetts. Two amicus briefs, signed by state attorneys general of both parties, have pleaded with the court that it must decide whether states can tax other states' residents in this manner.
If the high court takes the case and rules against Massachusetts, it could have a broader effect on states with similar income sourcing rules, especially New York.
A Massachusetts Department of Revenue spokesperson noted on Friday that the temporary income-sourcing regulations clarify that nonresidents who worked in Massachusetts but now work remotely because of government orders, medical guidance or a work policy related to COVID-19 will continue to pay Massachusetts state income taxes.
The temporary measure was created to allow for clarity when it comes to Massachusetts tax collections and other states and several other states have put similar rules in place, the department said. The department also noted that taxation is the same as it would have been pre-COVID-19.
A spokesperson for the Office of Massachusetts Attorney General Maura Healey, which represents the department of revenue in the U.S. Supreme Court challenge, declined to comment. The New Hampshire attorney general's office didn't immediately respond to requests for comment.
New Hampshire, which does not impose a state income tax on the wages and salaries of its residents, has said Massachusetts is violating the U.S. Constitution's due process clause and commerce clause by imposing income tax on workers who aren't setting foot in the state during the public health crisis.
New Hampshire has complained that Massachusetts was attacking its right not to impose income tax on its own residents and that New Hampshire residents physically in New Hampshire to perform work, even for Massachusetts employers, lack sufficient nexus with Massachusetts.
Massachusetts told the justices in a reply on Dec. 11 that New Hampshire is wrong on all counts, essentially arguing the reverse of what New Hampshire argued.
In addition to pushing back on New Hampshire's position that the case merits original jurisdiction, Massachusetts said its temporary regulation "readily passes muster" to satisfy all four prongs of 1977's Complete Auto Transit v. Brady
. It taxes an activity with substantial nexus to the taxing state, it is fairly apportioned, it does not discriminate against interstate commerce, and it is fairly related to services provided by Massachusetts, the commonwealth told the justices.--Additional reporting by Abraham Gross, Paul Williams and Maria Koklanaris. Editing by Vincent Sherry.
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