The Supreme Court’s unwillingness to intervene in a fight among states over taxing income from remote work may spark a jurisdictional revenue war. In August, the Court refused to take up a lawsuit by New Hampshire against Massachusetts’ practice of levying income taxes on Granite State residents employed by Bay State companies but working from home during the Covid lockdowns. Now New Jersey officials, who filed an amicus brief in the case because the state’s telecommuting residents are similarly taxed by New York, have proposed a law that would let the state tax telecommuters, including possibly tens of thousands of Empire State residents now working from home but employed by Garden State companies. The in-your-face legislation also provides incentives for Jersey residents to challenge New York’s law in tax court—one of the only venues left to residents after the Supreme Court decision. Given that several hundred thousand New Yorkers once commuted to other states to work and may now be staying home to telecommute, Albany risks losing revenues.
Beginning in March 2020, Covid restrictions brought a sharp rise in telecommuting, or working remotely from home. Studies have suggested that, during the pandemic’s initial phases, up to 36 percent of all private-sector employees, or about 43 million people, worked at home at least one day a week, and 15 percent, or about 18 million, telecommuted full-time. Census data before the pandemic found that as many as 6 million workers regularly cross state lines to go to their jobs. So it’s likely that several million current telecommuters have jobs with firms in another state. In New Hampshire, about 15 percent of residents with jobs—some 84,000 workers—commuted to Massachusetts pre-pandemic.
Fearing the loss of taxes on many of these incomes after the lockdowns began, Massachusetts adopted in late April 2020 a special regulation declaring that even income that nonresidents derived by working for Massachusetts companies “outside Massachusetts would be subject to the state’s income tax.” New Hampshire sued, arguing that the move represented an infringement on its sovereignty under the Constitution, and calling the special Massachusetts rule an example of a state taking “direct aim” at residents of another state to solve its revenue problems. In its filing, New Hampshire reminded the Supreme Court that “it has long recognized that states have limited power to tax nonresidents,” and that in a previous ruling, the Court had said that taking revenues from nonresidents “when there is no jurisdiction or power to tax is simple confiscation.”
Ohio and nine other states filed an amicus brief in support of New Hampshire, arguing that the Constitution gave the Court sole jurisdiction over disputes between states. They urged the Court to intervene because the Framers of the Constitution viewed the creation of a legal venue for resolving interstate disputes as “essential to the peace of the union.” New Jersey and three other states (Connecticut, Iowa, and Hawaii) submitted their own brief in support of New Hampshire, contending that they were losing billions of dollars in tax revenues because five states besides Massachusetts (New York, Arkansas, Pennsylvania, Delaware, and Nebraska) also levy taxes on nonresidents for income they earn while working at home. Such taxes, the aggrieved states claimed, violate previous court rulings holding that taxes on interstate commerce must be “fairly apportioned”—meaning, in part, that they should apply only to an out-of-state taxpayer’s activities within a state. Like the other state briefs, Jersey’s also urged the Court to take the case because no other appropriate venue existed for hearing such disputes.
The Court, instead, turned to the Biden administration for guidance. It asked the solicitor general to weigh in. The administration’s legal office argued that the case did not merit the Court’s attention because it did not substantially affect New Hampshire’s sovereignty, and that individual New Hampshire taxpayers could litigate the issues in Massachusetts tax court. Though some legal experts derided the solicitor general’s filing as “absurd” and “grasping at straws,” the Court, apparently persuaded, denied New Hampshire’s request to take on the case.
New Jersey has now responded with legislation that enjoys the backing of lawmakers of both parties and the state’s governor, Phil Murphy, who was initially somewhat hesitant to retaliate. Under the proposed law, New Jersey would adopt the same controversial standard that New York uses to tax out-of-state residents—the “convenience of employer” rule, which says that a worker employed by a New York firm but working from home for his own convenience is judged to be present in the Empire State for tax purposes. Only a worker whose job requires him to be out-of-state (attending a meeting in another state, say) is exempt from New York taxation. By turning the tables, New Jersey’s legislation would mean that potentially thousands of New York residents employed by Jersey companies would now be subject to taxation, even if they don’t enter the state.
The bill seeks to recoup some of the money lost to New York. Before the pandemic, more than 400,000 New Jersey residents commuted into New York and paid the state about $3 billion a year in taxes. Many were traveling to Manhattan for high-paying office jobs. But workers have been slow to return to the office for those jobs in lucrative areas like finance, business services, and technology. Office occupancy in Manhattan remains at only around 45 percent of its pre-Covid figure, and Jersey officials estimate that at least $1 billion in taxes that New York is collecting from Jersey residents comes from telecommuters. Since Jersey offers those workers a credit on their resident state taxes for money paid to New York, Garden State officials argue their treasury is losing hundreds of millions of dollars or more in revenue.
While New Yorkers don’t commute to Jersey in quite the same numbers, tens of thousands could become subject to that state’s income taxes under the new law. Pre-Covid, Census surveys estimated that roughly 128,000 New Yorkers worked in New Jersey. Manhattan was the biggest supplier of cross-state workers; more than 23,000 made the trip. Brooklyn was second, with nearly 20,000 residents commuting to the Garden State; and Rockland County, bordering the northern part of Jersey, was third, with more than 17,500 commuters.
The proposed bill wages tax war on several other fronts. It offers Jersey residents tax credits if they challenge New York’s tax law in court and succeed. And the bill offers tax incentives for out-of-state firms employing New Jersey residents to open an office in-state, which could then become the home for telecommuting employees, exempting them from New York taxes.
New York is vulnerable to this turnabout because, though it’s one of the leading states that welcomes out-of-state commuters, it also ranks fourth nationally in residents working in other states: about 235,000 New Yorkers did so before the pandemic, according to a Census study. And Jersey now has become the second state to turn the tables on New York. In 2019, Connecticut began employing the convenience-of-employer rule to the taxes of telecommuters from states like New York that employ the same rule against Connecticut residents.
While more than 80,000 Connecticut workers commuted into New York before the pandemic, paying Albany $450 million in taxes, 45,000 New York residents also commuted into Connecticut before the pandemic to work for local firms. Connecticut can now demand taxes from any of those telecommuters. Jersey’s move, added to Connecticut’s, would chip away at the windfall that the convenience-of-employer rule provides to New York.
The increasingly acerbic face-off over telecommuters is just one front in a broader battle among the states over tax nexus—that is, the standard a state uses to determine whether a worker or company has enough “presence” locally to warrant being taxed. The digital age has brought new types of work and services—and numerous controversies over nexus. Tax authorities argue, for instance, that out-of-state firms selling software or cloud services to local firms have enough presence to be subject to state corporate taxes, even if they have no employees or offices in the state. As with telecommuting, the Supreme Court has refused to step into such cases, preferring to leave it to Congress to update legislation on interstate taxation. But Congress has been either uninterested in the subject or unable to reach a consensus.
The result is likely to be states passing increasingly bitter legislation against one another. Inevitably, taxpayers will lose in these battles.
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