Analysis: U.S. Supreme Court case could result in ‘significant’ income tax loss in New York

(The Center Square) – A pending U.S. Supreme Court case between the states of New Hampshire and Massachusetts could have an inevitable – and deep – impact on New York if it is heard.

In October, New Hampshire officials filed suit against their counterparts in Massachusetts in a complex case involving remote working – a professional practice that has increased since the COVID-19 lockdowns last March – and the physical location of employers.

Massachusetts officials have argued an income tax can be imposed on out-of-state workers benefiting from employment at a firm within its confines. But in the case of New Hampshire, officials have challenged the premise from their New England neighbor.

If federal judiciaries hear the case and rule in New Hampshire’s favor, a number of states across the country could face losses, according to a recent research article from S&P Global Ratings. On the flip side, others could stand to gain.

“(The case) could result in the reallocation of billions of income tax dollars between certain states,” S&P researchers wrote in the article. “New York and Massachusetts, in particular, could potentially lose significant amounts of income tax, while New Jersey and Connecticut could gain revenue.”

While New Hampshire’s lawsuit against Massachusetts has, more recently, shined a spotlight on imposing income taxes on out-of-state residents, it is not unprecedented.

For years, New York state has adopted a similar strategy, primarily for nearby New Jersey and Connecticut residents who are employed by a New York City-based company.

“New Jersey and Connecticut have had to enact income tax credits to residents for income taxes paid to New York to avoid double-taxing their residents,” the S&P researchers wrote. “New York state has defended its tax on the theory that as long as a company does not require workers to telecommute from a specific out-of-state location, telecommuting out of state was at the convenience of the employee.”

If the New Hampshire v. Massachusetts case has a nationwide implication, S&P researchers estimate New York could lose between $1.27 billion and $1.64 billion in tax revenue.

Amid the uncertainty, New York, which has been among the hardest hit states throughout the pandemic, has doubled down on its long-standing practice even amid the stay-at-home orders and other measures aimed at spreading COVID-19.

An updated bulletin in late October from the New York Department of Taxation and Finance lays out the agency’s stance on remote working in the era of the coronavirus.

“If you are a nonresident whose primary office is in New York state, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location,” the bulletin states.

Danielle Bereznay, an employment attorney with Mintz Insights, weighed in on the definition of “bona fide employer office” in a research brief after the updated bulletin.

“Although an employee’s home office could meet the eligibility factors laid out in the bulletin, generally it would not qualify as a bona fide employer office outside of New York,” Bereznay said. “Thus, for tax purposes, an employee working from his or her home office would be considered to be working in New York.”

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