A Major Development in Corporate Income Tax: What's New Hampshire v. Massachusetts got to do with it?

• Date: 01 March 2021
• Author: Hamme, Evan

The pandemic has caused drastic shifts in employment and business arrangements. Major tax implications have surfaced, and taxpayers have been eager for state guidance or federal legislation to address pandemic-related issues. But with limited state guidance, and with federal legislation completely stalled, one development has become the focus of our attention: New Hampshire's recent suit filed in the US Supreme Court against Massachusetts. (1) New Hampshire alleges that a recent Massachusetts regulation improperly attempts to tax income not earned within the borders of Massachusetts. The strongest basis for New Hampshire's suit is the US constitutional requirement that state taxes be "fairly apportioned." Furthermore, although the regulation relates to Massachusetts' personal income tax and payroll withholding rules, the case may affect critical corporate income tax issues such as proper apportionment and market sourcing. Consequently, it is essential for taxpayers of all stripes, from individual employees to large multinational corporations, to pay attention to the impact of the pandemic on the state tax landscape.

New Hampshire v. Massachusetts, in a Nutshell

As the pandemic lasted far longer than many anticipated, Massachusetts set up an ostensibly temporary regulation that it has since extended twice. The regulation was promulgated to address nonresident employees who were suddenly working from their homes outside Massachusetts rather than from their employers' Massachusetts offices. The regulation sources to Massachusetts, and therefore requires employers to withhold Massachusetts personal income tax from the income of any employee that 1) worked at her employer's Massachusetts office immediately before Charlie Baker, Massachusetts' governor, shuttered in-person business operations on March 10, 2020, and 2) worked outside Massachusetts for "pandemic-related" reasons following the governor's order. (2)

The dispute centers on the dormant Commerce Clause Complete Auto four-prong test, with New Hampshire arguing that Massachusetts' regulation fails all four prongs of the test. Complete Auto requires that state taxes 1) apply to an activity with a substantial nexus with the taxing state; 2) are fairly apportioned; 3) do not discriminate against interstate commerce; and 4) are fairly related to services provided by the taxing state. (3) The same four-prong test applies to corporate and personal income tax, with the fair apportionment prong providing the strongest grounds for corporate and individual taxpayers to challenge state overreach. New Hampshire residents working for Massachusetts employers provide services to these...