On May 25, the acting Solicitor General of the United States filed an amicus brief in New Hampshire v. Massachusetts with the Supreme Court in response to the Court’s January 25 Call for the Views of the Solicitor General. The brief urges the Court to reject New Hampshire’s motion for leave to file a bill of complaint under the Court’s original jurisdiction. In contrast, amicus briefs filed late last year by a number of states and taxpayer groups unanimously urged the court to accept the case, generally urging the Court to find New Hampshire’s rule unconstitutional. (See earlier coverage here and here.) In a new development on May 27, the two U.S. Senators from New Hampshire, Senators Jeanne Shaheen and Maggie Hassan, expressed their disappointment in the Solicitor General’s amicus brief and announced the introduction of the Multistate Worker Tax Fairness Act that would prevent states from taxing nonresident workers who are not physically present in the taxing state.
Many practitioners viewed New Hampshire’s suit as a longshot because the Court is generally reluctant to exercise its original jurisdiction. (Justices Thomas and Alito both believe that the Court does not have discretion to decline to exercise its jurisdiction in cases between two states. Former Justice John Paul Stevens believed the same.) Of particular concern was that an aggrieved New Hampshire resident could conceivably represent his or her own interest in seeking a refund from Massachusetts or challenging the tax in court after paying the tax. However, a significant number of states urged the Court to take up the case. Although the Court is free to hear the case despite the Solicitor General’s view, the brief makes it even less likely that the Court will hear the case.
In the suit, New Hampshire challenges Massachusetts’s emergency regulations governing the taxation of income during the COVID-19 state of emergency. Massachusetts enacted a rule pursuant to which income earned by a nonresident of Massachusetts who worked in Massachusetts prior to the pandemic but who is working from home outside of the state remains Massachusetts-source income subject to Massachusetts income tax. Accordingly, employers would be required to continue to withhold Massachusetts income tax on wages paid to those individuals even though the individuals are no longer working in Massachusetts. Although the Massachusetts guidance is among the most sophisticated and detailed withholding guidance issued by the states during the pandemic, it is not alone in taking this approach. Rhode Island issued regulations substantially similar to Massachusetts, and the Pennsylvania Department of Revenue has issued similar guidance in the form of FAQs posted on its website. New York applied its preexisting convenience of the employer rule to reach the same result. New Hampshire’s position is that Massachusetts’ rule violates its state sovereignty by taxing New Hampshire residents on income earned while working in New Hampshire.
Convenience of the Employer Rule
Following the Solicitor General’s amicus brief, no state may be more relieved than New York. If New Hampshire’s suit were successful, it could have also threatened a sourcing model used by New York and a small number of other states known as the “convenience of the employer” rule. Presumably, if Massachusetts’s effort to tax wages earned by nonresidents working outside of the state is found to violate New Hampshire’s state sovereignty, the same analysis could be applied to attack the same result under the convenience of the employer rule. Under that rule, which is arguably misnamed, the income of an employee who works remotely for the employee’s convenience rather than the employer’s necessity remains sourced to the state where the employer is located.
The rule is most well-developed in New York, which has historically applied the rule to tax the income in situations where the connection to New York is fairly attenuated. Other states, including Arkansas (which recently adopted the rule in a legal opinion), Connecticut, Delaware, Nebraska, and Pennsylvania, also apply the rule, as does New Jersey with respect to its residents who work in New York. Interestingly, both Connecticut and New Jersey signed onto an amicus brief urging the Court to find the Massachusetts rule unconstitutional and directly implicating the convenience of the employer rule. Both states have bristled at New York’s approach to taxing their residents and tolerate the rule only to spare their residents the double taxation that would result.
Although the convenience of the employer rule featured prominently in amicus briefs filed by other amici, the Solicitor General’s brief suggests, without directly mentioning the rule, that the suit is a poor vehicle for addressing the concerns presented by the rule. The brief focuses on the temporary nature of the Massachusetts rule and its narrow application—to individuals who worked in Massachusetts immediately prior to the COVID-19 emergency and who are working remotely due to the pandemic—to indicate that it would shed little light on the broader issues New Hampshire and its amici identified. If the Court declines to hear the case, it is possible that another state, such as New Jersey or Connecticut, could file a bill of complaint against New York to directly challenge the convenience of the employer rule in light of the Solicitor General’s brief.