Live Tax Free or Die: The Increase in Telecommuting and Need for a Federal Uniform State Tax Regulation After New Hampshire v. Massachusetts.

• Author: Reardon, Victoria R.

"[T]he pandemic has drastically altered how work is conducted, with countless Americans now performing job functions at home that they had previously performed only at their places of employment. This Court's ongoing decision to conduct oral arguments by telephone illustrates this point. And some companies are already announcing that remote work will remain a permanent option following the pandemic." (1)

1. Introduction

   In 2019, roughly 6% of employed Americans worked from home on a full-time basis. (2) By May of 2020, the percentage of employed Americans working remotely--also known as telecommuting--increased to 48%. (3) This sudden spike in telecommuting stemmed largely from the temporary pandemic restrictions set in place by local, state, and federal government entities. (4) Such restrictions forced American employers to change the way they conduct business. (5) Since the start of the pandemic, several notable companies, including Microsoft and Facebook, elected to keep certain employees fully remote, while other companies have implemented policies that permit employees to telecommute in a hybrid format. (6)

   The increase in telecommuting led the Commonwealth of Massachusetts to implement a temporary regulation--Massachusetts Source Income of Non-Residents Telecommuting Due To the COVID-19 Pandemic (Telecommuter Regulation). (7) Although Massachusetts did not direct its Telecommuter Regulation toward any state in particular, the guidelines disproportionately impacted the State of New Hampshire's residents. (8) New Hampshire officials became concerned with the Telecommuter Regulation because New Hampshire does not have traditional personal income tax, while Massachusetts imposes income tax on all qualifying personal income. (9) Income-sourcing rules, the subject of the Telecommuter Regulation, often vary greatly among states, which sometimes leads to controversies between state governments. (10) Due to its distaste for the Telecommuter Regulation and its polarizing tax rules, New Hampshire filed suit against Massachusetts in the Supreme Court of the United States. (11) The Court rejected New Hampshire's attempt to obtain economic relief for its residents without further explanation. (12)

   As of 2022, there is no federal uniform tax standard for imposing personal income tax on telecommuting nonresidents. (13) Previous attempts at achieving uniformity have failed, but there are currently two bills in Congress that, if passed, would force all states to adopt the physical presence test as their income-sourcing rule. (14) The physical presence test and the convenience-of-the-employer test (COTE) are two commonly used state income-sourcing policies. (15) The physical presence test requires that a resident be physically present in the state of employment for that state to impose income tax on them. (16) By contrast, COTE imposes a tax on nonresident telecommuters depending on whether the reason for remote working is employer necessity or employee convenience. (17) In a COTE state, if an employee is working remotely for their own convenience, that state will impose income tax on the employee if the employer is located within that COTE state. (18)

   This Note explores the impact of increased telecommuting and lack of federal guidance regarding states' taxation of nonresident telecommuters. (19) Given the wide discrepancy between New Hampshire and Massachusetts tax law and the recent conflict regarding the Telecommuter Regulation, Sections II and III focus on the respective states and certain issues that will likely result from a lack of federal regulation. (20) Next, this Note discusses pending legislation, assess the constitutionality of states imposing taxes on nonresidents, and analyze COTE and other telecommuter state tax policies. (21) This Note concludes by urging the federal legislature to enact a uniform standard for interstate taxing of telecommuters working out-of-state and calling for Massachusetts to permanently incorporate COTE as its tax income-sourcing rule. (22)

2. History

   1. New Hampshire

      New Hampshire is home to approximately 1.3 million residents and has a median household income of $76,768. (23) Nearly one-fifth of New Hampshire residents commute to work in a different state; a majority of those out-of-state commuters work in Massachusetts. (24) New Hampshire's increase in migration has contributed to its population spike--the largest population percentage increase in New England. (25) According to a survey conducted by the Carsey School of Public Policy at the University of New Hampshire, the top reasons for moving to New Hampshire are family, natural environment, quality of life, employment, and taxes. (26) Statistics further indicate that the majority of recent and established migrants who listed "taxes" as a top reason for moving into the state earned at least $100,000 annually. (27)

      New Hampshire, unlike forty-one other states, does not impose ordinary income tax on its residents. (28) The New Hampshire Department of Revenue Administration currently imposes a 5% tax rate on residents or inhabitants who receive interest-and-dividends income from all sources in excess of $2,400. (29) Nevertheless, in 2021, New Hampshire Governor Chris Sununu signed a bill that will phase out the individual interest-and-dividends tax by 2027. (30) As a result, there will be an incremental decrease in the interest-and-dividends tax rate by 1% each taxable year ending after December 31, 2023. (31)

   2. Massachusetts

      New Hampshire's neighbor, Massachusetts, has a population of over 6.8 million people. (32) The median income Massachusetts households earn is $81,215, but the cost of living varies depending on one's location within the Commonwealth. (33) Massachusetts ranked sixteenth in a list of the most populous states, while New Hampshire ranked forty-first. (34) In 2020, a higher percentage of Massachusetts residents migrated out of the Commonwealth than migrated in. (35) Approximately 35% of Massachusetts residents listed "employment" as a driving factor for their decision to move out of the Commonwealth. (36) Based on U.S. Census data, New Hampshire was the top migration destination for Massachusetts residents in 2019. (37)

      Massachusetts acquired the nickname "Taxachusetts" because of its historically high income tax it imposed on its residents. (38) The Commonwealth has, however, significantly reduced its income tax rates over the past thirty years, and Massachusetts currently ranks twenty-fifth in highest income tax rates among U.S. states. (39) As of 2022, the Commonwealth imposes a 5% income tax on its residents. (40) Massachusetts's tax statute includes a provision taxing nonresidents who work within its borders. (41) This provision proved to be an effective system for Massachusetts until 2020, when the rate of nonresidents telecommuting from out-of-state skyrocketed, and the Commonwealth implemented an alternative method for taxing nonresidents. (42)

   3. COVID-19: Worldwide Pandemic Changes the American Workforce

      The COVID-19 outbreak abruptly disrupted the promise of 2020, which ultimately became one of the deadliest years in U.S. history. (43) The COVID-19 pandemic forced local, state, and federal government officials to effectuate strict restrictions of nearly all social, religious, and business gatherings. (44) To comply with these restrictions and prevent further spread of COVID-19, people expeditiously adapted to the "new normal," which involved implementing remote-friendly technology in all aspects of life. (45)

      While pandemic restrictions forced nonessential businesses to close physical offices, a multitude of companies moved work to virtual platforms. (46) According to a recent study, 22% of all American employees can be equally productive working remotely as they would be in the office. (47) The ability to work remotely and maintain a sufficient level of productivity varies among several areas of employment. (48) For many employers and employees, the efficiency of telecommuting became very appealing, and several large companies offered their employees the option to continue telecommuting either full-time or part-time after the height of the pandemic. (49)

   4. New Hampshire v. Massachusetts

      1. Massachusetts's Regulation

         The sudden change of the American workplace forced the Massachusetts Department of Revenue (MDOR) to implement the Telecommuter Regulation in light of the Commonwealth's various COVID-19 restrictions. (50) Massachusetts enacted the Telecommuter Regulation to adhere to the pandemic-related safety protocols, while upholding the status quo of Massachusetts income-sourcing taxes. (51) Under the Telecommuter Regulation, the Commonwealth would treat all nonresident employees who worked in Massachusetts immediately prior to the COVID-19 pandemic yet worked out-of-state due to a "pandemic-related circumstance" as subject to Massachusetts source income subject to tax. (52) The Telecommuter Regulation was in effect for approximately eighteen months from March 10, 2020 to September 13, 2021. (53)

      2. New Hampshire Files Suit in the Supreme Court

         After the MDOR implemented the Telecommuter Regulation, Governor Chris Sununu stated that he viewed the Commonwealth's Telecommuter Regulation as a "direct attack" on the "New Hampshire [a]dvantage," given that 15% of New Hampshire residents were employed by Massachusetts employers. (54) Governor Sununu spoke about his unease with the Telecommuter Regulation and his intent to take action against Massachusetts. (55) Governor Sununu's plan came to fruition on October 19, 2020, when New Hampshire officially filed suit against Massachusetts in the Supreme Court. (56)

         New Hampshire relied on both the Dormant Commerce Clause and the Due Process Clause in support of its suit. (57) In its Dormant Commerce Clause argument, New Hampshire cited to the test articulated in Complete Auto Transit, Inc. v. Brady (58) and asserted that Massachusetts's Telecommuter...