TAXING INTERSTATE REMOTE WORKERS AFTER NEW HAMPSHIRE V. MASSACHUSETTS: THE CURRENT STATUS OF THE DEBATE.

• Author: Zelinsky, Edward

INTRODUCTION 768 I. THE CONSTITUTIONAL BACKGROUND: THE DUE PROCESS AND DORMANT COMMERCE CLAUSES 774 II. THE HISTORY OF THE STATE INCOME TAXATION OF REMOTE WORK: "CONVENIENCE OF THE EMPLOYER" TO COVID-19 775 III. PROFESSOR SHANSKE'S ANALYSIS 778 IV. PROFESSOR KIM'S ANALYSIS 780 V. PROFESSOR POMP'S ANALYSIS 782 VI. WHAT IS REMOTE WORK? 783 VII. THE IMPLICATIONS OF WAYFAIR 784 VIII. NEW YORK AND MASSACHUSETTS FAIL TO APPORTION 786 IX. PHYSICAL PRESENCE (OR ABSENCE) STILL MATTERS 789 X. FEDERAL LEGISLATION 792 XI. MASSACHUSETTS'S PANDEMIC ONLY RULE 795 CONCLUSION 796 INTRODUCTION

In New Hampshire v. Massachusetts, (1) the Granite State challenged Massachusetts's income taxation of New Hampshire residents who had commuted to the Bay State for Massachusetts employers, but who subsequently worked remotely at their New Hampshire homes because of the coronavirus. New Hampshire's lawsuit stimulated both academic (2) and popular (3) debate about the state income taxation of nonresident telecommuters who live and work at home in a different state than the state in which their respective employers are located.

New Hampshire v. Massachusetts was no mere cross-border skirmish. New Hampshire raised fundamental constitutional concerns which apply to all states (including New York) which project their taxing authority beyond their borders to tax incomes earned remotely by nonresident telecommuters.

The Supreme Court declined to hear New Hampshire's case (4) and Massachusetts has announced that it has ceased its extraterritorial income taxation of nonresident telecommuters as of September 13, 2021. (5) As a result of the High Court's refusal to hear New Hampshire's case, discussion of states' constitutional ability to tax nonresident remote workers' incomes will now proceed in the state courts. (6)

In this essay, I assess the current status of the ongoing debate about the proper state income taxation of nonresident telecommuters in a post-pandemic world. In particular, I address three academic articles which came to different conclusions about New Hampshire v. Massachusetts. My review of these articles confirms the position I took in the amicus brief I filed supporting New Hampshire in the U.S. Supreme Court: (7) Under the dormant Commerce Clause, Massachusetts. New York and other states emulating them violate their constitutional duty to apportion when they tax the income nonresident telecommuters earn remotely working at their out-of-state homes. Also for Commerce Clause purposes, nonresident telecommuters lack substantial presence in their employer's state when such nonresidents work at their out-of-state homes. New Hampshire argued correctly that, for Due Process purposes, Massachusetts taxed extraterritorially and unconstitutionally when Massachusetts taxed income earned by nonresident telecommuters from their homes outside Massachusetts's borders.

In contrast, Professor Darien Shanske contends that Massachusetts can constitutionally tax the income New Hampshire residents earn at their homes in the Granite State without setting foot in Massachusetts. Professor Shanske similarly defends as constitutional New York's "convenience of the employer" doctrine which taxes the incomes of nonresident telecommuters who work remotely at their out-of-state homes for New York-based employers. Professors Richard D. Pomp and Christine Kim come to the contrary (and, I think, correct) conclusion that the Constitution forbids the kind of unapportioned, extraterritorial income taxation of nonresidents in which Massachusetts engaged during the pandemic and which New York and other states continue to pursue today.

These three articles focus attention on five important issues in the current debate. First, who are the state taxpayers about whom we should be concerned in a post-pandemic world? As the term "convenience of the employer" (8) indicates, the individuals upon whom we should currently focus attention are nonresident employees working remotely at home for employers located in another state. The taxation of interstate independent contractors, sole proprietors and other kinds of businesses raise important and often overlapping issues. But, in the wake of the pandemic and the consequent expansion of interstate telecommuting, the pressing constitutional and tax policy issue today is the proper state income taxation of nonresident employees working remotely at home for an employer located in another state. While Massachusetts has announced that it will return to constitutionally appropriate practices, (9) New York and other states emulating New York continue to exceed their constitutional authority when they tax non-residents on income such nonresidents earn remotely at their out-of-state homes.

A second important issue in this ongoing debate is the implication of South Dakota v. Wayfair} (0) Wayfair holds that an out-of-state business with substantial economic presence but no physical presence in a taxing state has sufficient nexus to that taxing state to be required to collect that state's sales tax. Professor Shanske invokes Wayfair for his support of Massachusetts's and New York's extraterritorial taxation of out-of-state telecommuters. This pushes Wayfair farther than it should go.

Wayfair does not hold that physical presence (or its absence) is never relevant under the Due Process and Commerce Clauses. In the context of nonresident telecommuting employees, it is.

On the days when out-of-state remote workers live, work and receive their primary public services from their home states, such workers have minimal ties to the states in which their employers are located. In light of those insubstantial ties, the nonresident who works at home should not be income-taxed by her employer's state on the income she earns remotely at her out-of-state home. Wayfair does not compel a contrary conclusion.

Professor Pomp correctly observes that Wayfair is relevant to this debate but in a different way. He cites Wayfair as a model of productive constitutional decisionmaking which the Supreme Court should replicate by buttressing the constitutional norms which protect nonresident telecommuters from extraterritorial income taxation on the days they work at their out-of-state homes. By rejecting New Hampshire's lawsuit against Massachusetts, the Court declined to decide in this fashion now. But the hope remains that, as state court litigation ultimately reaches the U.S. Supreme Court, the Court will rule broadly to protect nonresident telecommuters, as Professor Pomp suggests the Court should.

Third, for a straightforward reason, the way in which Massachusetts income taxed interstate remote work during the pandemic and in which New York continues to tax such work today fails the constitutional test of apportionment: these states did not and do not apportion. Rather than identifying and taxing part of the income earned by nonresident remote workers at their respective out-of-state homes, Massachusetts taxed (and New York continues to tax) all of a remote worker's income including 100% of the income remote workers earn telecommuting from their homes outside New York's and Massachusetts's borders. Taxing all income is not the apportionment of interstate income required by the dormant Commerce Clause as construed by Complete Auto Transit, Inc. v. Brady. (11)

Fourth, in the context of taxing remote work, the metaphor of "virtual presence" invoked by Professor Shanske hinders more than it assists. Professor Shanske argues that, on a day a New Hampshire resident working at home logs onto his employer's server in Boston, that New Hampshire resident benefits from the agglomeration economies of the Greater Boston area. This agglomeration-utilizing New Hampshirite, he reasons, has significant virtual presence in Massachusetts. This agglomeration-based virtual presence, he concludes, gives Massachusetts constitutional authority to tax this New Hampshirite's income earned at her home in New Hampshire.

Professor Shanske's theory of virtual presence based on agglomerations has no persuasive limiting principle. This same New Hampshire resident may also use zoom or other similar technology to communicate from her home with customers in San Francisco, Chicago and Philadelphia. If the agglomeration economies of Greater Boston justify Massachusetts taxing the income earned by the New Hampshire resident working at her home in the Granite State, the agglomeration economies of San Francisco, Chicago and Philadelphia justify California's, Illinois's and Pennsylvania's simultaneous taxation of that income as well. The New Hampshire resident has an agglomeration-utilizing virtual presence in those three states when he communicates electronically with persons in those states. Applied consistently, Professor Shanske's agglomeration-virtual presence theory nullifies the properly-apportioned state income taxation required by Complete Auto and the dormant Commerce Clause. That theory of agglomeration-virtual presence invites--indeed, compels--multiple states to tax the income earned by a New Hampshire resident who doesn't leave her home, but who has virtual presence in many agglomeration-generating states on the same day working from her New Hampshire home.

Finally, Professors Shanske, Kim and I agree that Congress should adopt legislation in this area. However, such legislation is unlikely for the same reason Congress did not address the issue of state sales taxation before Wayfair: the legislative process has many bottlenecks enabling organized interests to protect the status quo by blocking legislation. New York and other states emulating New York through the employer convenience rule constitute such a status quo interest. As Professor Pomp observes, these states will not voluntarily surrender the revenues they derive by taxing nonvoting nonresidents who telecom-mute from their out-of-state homes. Congress is unlikely to overcome the effective veto in the legislative...