U.S. Supreme Court Declines Nonresident Tax Case
The question of how states will deal in the long term with employees that formerly commuted to an out-of-state employer, but now telecommute, will remain unanswered as a result of U.S. Supreme Court inaction.
The nation’s highest court opted not to hear a case initiated by New Hampshire that challenged a Massachusetts measure that continues to tax nonresidents that formerly commuted to work in the Bay State, but now work from home because of the pandemic.
Connecticut filed an amicus brief in support of New Hampshire, as did Arkansas, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, and Utah.
This was just the latest setback in the case. The Biden administration had already signaled their opposition, and urged the court to reject the case.
‘Convenience of the Employer’
The controversy behind the lawsuit was the “convenience of the employer rule,” a law in place in seven states, including Connecticut, that imposes taxes on employees based on where they work rather than where they live.
In other words, Connecticut residents that work in Massachusetts would typically pay Massachusetts income taxes, and receive a corresponding credit from their home state.
However, the pandemic upended this situation, with many that formerly commuted to another state working from home.
In addition to the the potential constitutional issues, remote workers face the threat of double taxation if the question remains unanswered or states do not figure out a way to clarify their respective tax laws.
With billions of tax dollars on the line, this is likely not the end of legal action on this issue.
Connecticut enacted a temporary fix to the issue during the 2021 legislative session.
The state Senate approved HB 6516 March 1 on a bipartisan 28-7 vote after the bill earlier cleared the state House 125-24. It was quickly signed in to law by Gov. Ned Lamont.
HB 6516 allows those commuters turned telecommuters to continue to pay income tax in the state of their employer for the 2020 tax year and receive a corresponding deduction on their Connecticut tax liability.
Questions on how to treat these employees in the long term remain.
For example, If employees continue to work from home through the duration of the 2021 tax year and are no longer crossing state lines, can the neighboring state still tax them on their income?
CBIA will continue to monitor the issue.
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