A question on the mind of every accountant and tax attorney since the coronavirus pandemic started is the subject of a lawsuit now before the U.S. Supreme Court.

New Hampshire is challenging 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 has filed an amicus brief in support of New Hampshire, as has Arkansas, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, and Utah.

New York has not yet joined the suit, but would likely join in support of Massachusetts.  

The controversy behind the lawsuit is 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.

'Upended'

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, causing many that formerly commuted to another state to work to instead work from home.

In addition to the constitutional issues, remote workers face the threat of double taxation. 

States like Massachusetts and New York responded by indicating they will continue taxing to non-residents as if they still commuted across state lines.

In addition to the the potential constitutional issues, remote workers face the threat of double taxation. 

High Stakes

There are huge stakes for the states on the prevailing side of the lawsuit.

For example, it is estimated that nearly 78,000 Connecticut residents formerly commuted to New York each workday.

Based on 2020 data, Connecticut credited those workers between $339 million to $444.5 million in income taxes paid to New York.

An estimated 78,000 Connecticut residents formerly commuted to New York each workday.

Likewise, Connecticut is likely to have credited residents working in Massachusetts up to $63 million for taxes paid to the Bay State. 

While the reverse is also true, that Massachusetts could tax its own residents that commute to Connecticut for work, for example, the position each state takes is determined by whether they have more incoming or outgoing commuters. 

Budget Deficits

Also fueling the controversy are the significant deficits faced by most states, many of which, like Connecticut, were only exacerbated by the pandemic.

Connecticut has a projected $4.3 billion deficit over the next two years.

In the next year alone, New York is looking at an $8 billion deficit, Massachusetts a $5.3 billion gap, and New Jersey a $6 billion shortfall.   

The U.S. Supreme Court has not yet indicated whether it will take up the case.