Legality of MA collecting income tax from out-of-state residents working from home?

In July Massachusetts enacted an emergency regulation to collect income tax from employees of MA companies that are currently working from home in other states. I’m not sure if CT or RI has challenged this yet, but NH certainly has.

When this is reviewed, what are the odds that it will be found legal for MA to collect the tax? Right now I know it’s being reviewed by the New Hampshire Department of Justice but even though I’m sure they’ll find that the tax is not justified, I don’t know what, if anything, this changes. Will it need to be sent to the US supreme court to really be resolved?

It’s an interesting legal question, I suppose.

If you live in NH and physically work in an office in MA, you have to pay MA income tax on that income. But MA would give a credit for days spent working out of state.

I think it’s probably a bit of an uphill battle for MA, if only because they found it necessary to issue a new regulation to cover it.

You can bet MA will go to court over it though, there’s a lot of implications with the future of telework and there’s a substantial number of commuters from NH to MA.

Wait, do I not have to pay income tax if I earn money in a state I don’t live?

I occasionally do consulting work for somebody in Georgia, and when I do I pay Georgia income tax on that money. All of the work I’ve ever done for them is remote. It’s not like I live in South Carolina and commute into Augusta every day. The only place I’ve ever been in Georgia is Hartsfield-Jackson.

Georgia’s cut works out to about 1.8% of what I made from that job (plus a $2 penalty for not paying estimated taxes throughout the year). Their tax forms have places and schedules for non-residents.

Well, I’m an Arkansas resident doing telework for company in South Carolina. I only pay AR income tax and I’m well into the 7% SC income tax bracket ($15,400).

I’m thinking MA is going to have a serious uphill battle to make this one stick.

As far as legal, it is once they passed the law. The real argument is whether is constitutional.

I once briefly lived in Santa Cruz, CA. I did a gig in Monterey for a production company based in San Jose. They had a company in San Francisco do their payroll. My check was missing almost 8% of my gross that went to a SF payroll tax.

NY is not MA of course, but it’s not clearly illegal. or unconstitutional. And I’m not at all sure NH has any standing to go to court- typically, states deal with this by providing their own tax credits, so that State A doesn’t tax the income taxed by State B, but NH can’t do that.

The US Congress presumably could, under their power to regulate interstate commerce, pass a law prohibiting this. But until and unless they do so, I don’t see any basis on which to challenge it.

That sounds wrong to me. Did you challenge the city payroll tax deduction?

I just Googled and ADP, possibly the biggest payroll services company, is based in New Jersey. Do the employees of all of its customers pay New Jersey payroll tax?

Agree that @Snowboarder_Bo’s SF city tax deduction is/was almost certainly wrong.

As to ADP, its worth understanding ADP & similar outfits have two very different services they offer.

One is traditional payroll accounting. Where the workers work for whoever (e.g. Company X) while Company X contracts with ADP to create paychecks, compute deductions, and file the employer’s part of taxes. The employees have no connection to ADP itself; only to Company X who has a contractual connection to ADP.

A different service they and many other large outfits offer is called a “Professional Employer Organization” or “PEO”. Here’s wiki’s and ADP’s take on this.

In that case the employees of Company X actually are employees of ADP. Company X outsources all of the employee stuff to ADP, not just payroll. Company X has zero employees. Even the owner(s) of Company X are ADP employees.

Company X hires, fires, and promotes who they want, but ADP is the legal employer, the source for all benefits, the publisher of the employee handbook (as customized by Company X), and is responsible for all aspects of compliance, including things like EEO.

Back when I was in IT, my 40-person company used ADP in this way. It made all the regulatory stuff much easier to comply with and enabled us to offer big-company bennies as a small company. Because most of our employees were fairly highly paid, the incremental cost of doing this was totally worth it vs handling all the hassle of benefits & compliance ourselves.

Having said all that, we were not based in NJ and no part of NJ taxes applied to us. So the location of a PEO’s headquarters is not a deciding factor in which governments get to extract which taxes.

I run an engineering consulting company. We pay all of our taxes to the state of Colorado even if some of the work is being done in another state. From what my accountant has told me generally there is an exception for short periods of employment in other states like when I send my employees to a conference to learn/run a booth they are working in that state but its for less than one week per year. I don’t remember what the limit is (I’d guess it varies by state) but at a certain point you have to pay income tax in that state. I also am an employee of a company in Wisconsin. I don’t go to Wisconsin though I may head there for one week the rest of the year. I’m currently only having my pay withheld for Colorado. That decision was made by intuit.

My intuition is that Mass is reaching and these people will end up suing the state and the state will lose.

echoreply I’m a Wisconsin resident, for example. Any income I receive of a type that is taxable is taxable to Wisconsin.

Just another data point - I am a traveling consultant employed by a consulting company. We often work at the client site, and we often work from home for a remote client. We are always taxed in the state where we are physically working. If I am at the client site I am taxed in that state. When I am working from home, I am taxed in my home state.

I agree that MA is pushing on this and am very interested in any court outcomes.

There’s another implication if MA were to lose in court and that would be that NH employees would instantly be pocketing 5% more than a MA employee with the same salary. Something would have to give there.

For those saying that MA would lose in court: On what grounds? You can say that it’s an unconvential tax policy, and you can say that it’s unreasonable, or cruel, or unwise. But none of those is grounds for a court overturning a law. If it’s overturned, it’ll be because it violates either the MA constitution, or the US constitution. Which one, what part, and how?

I believe it would be lack of jurisdiction. There is no difference between what they are trying and taxing some resident of Wyoming who works in Wyoming. A better example might be all of the companies registered in Delaware and Delaware deciding they could tax all of their employees nation wide.

Generally, states only have the power to tax commerce that occurs in their state or involves their residents. This is a reach to tax those who have nothing to do with them.

I haven’t really dug to see if there was some legal justification Massachusetts conjured up when they imposed the policy.

But in looking just at the Mass Dept of Revenue site with regards to non-resident taxation and employment and services, generally, the term “in Massachusetts” is used, in a way that implies physically by the employee.

So the DOR promulgated a regulation.

Since they make exceptions for activities by employees on behalf of MA companies that take place outside of MA (I didn’t look up examples), they are now seemingly attempting to redefine what “in” means.

Zelinsky ( who is a law professor) from the case I linked earlier and another person tried to bring cases regarding NY taxing out-of-state telecommuters to the Supreme Court, but SCOTUS denied certiorari , so I doubt a case claiming it violates the US constitution would be successful. ( presumably if 4 justices thought it might, they would have accepted the case). As far as the MA constitution, I’d be really surprised if people who are not in MA have any rights under it.

It appears the Dodds-Shay bill never went anywhere, but that is probably what it would take- a new federal law.

Actually, there is a bit of a difference - it apparently only ( at least for now) applies to people who were physically working in MA and were presumably paying taxes to MA prior to the pandemic.

And yet even a tax heavy state recognizes the ability of people to leave the state and no longer be subject to their jurisdiction.

Several silicon valley companies have gone to permanent telecommuting. Some of those employees have discussed leaving the high cost area and companies have proposed lowering salaries in response. Could California continue taxing those people? What if the company transfered them to Cleveland? Can you get away only if you change companies? Just because you once did business in a state doesn’t obligate you to pay them taxes forever.

The big question here is whether the change to teleworking is temporary or permanent.

For comparison, consider this: If you move to a different state you’re expected to get a driver’s license in the new state and surrender your old one. Usually within a few months. But if you’re just visiting a different state, even for a few months, you’re expected to keep your license in your home state. Which license you need depends on where you are permanently residing.

Switching back to teleworking:

Folks who live near MA and have been driving-commuting to a facility in MA to labor have been paying MA tax on those earnings all along. If in 2019 they occasionally remoted in from home in e.g. CT, or took a business phone call on the weekend they’d still be paying MA tax on the earnings from that work done in CT. So far so normal; no extraterritoriality issues here.

If due to COVID that same person is now WFH in CT the COVID-driven WFH is (presumably) temporary. So this is simply a larger example of that weekend remote-in or weekend phone call. And should continue to be taxed as MA work.

OTOH, as you suggest, someone who permanently moves to a different state too far to drive-commute (e.g. VA) or who changes permanently to a WFH-only job while still living in nearby CT would logically not be taxed as an in-MA worker.

The devil is entirely in what constitutes “temporary”, when nobody can predict the future of COVID and of WFH as a business technique.