The U.S. Supreme decided not to hear the challenge by the state of New Hampshire to Massachusetts’ taxation of workers who worked remotely in other states.[1]

The state of Massachusetts issued emergency regulations on nonresident income sourcing due to the closing of offices in the state during the COVID-19 epidemic.[2] The key provision the state of New Hampshire objected to reads as follows:

Under M.G.L. c. 62, § 5A(a), income of a nonresident derived from a trade or business, including any employment, carried on in the Commonwealth is sourced to Massachusetts. Pursuant to this rule, all compensation received for services performed by a nonresident who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing such services in Massachusetts, and who is performing services from a location outside Massachusetts due to a Pandemic-related Circumstance will continue to be treated as Massachusetts source income subject to personal income tax under M.G.L. c. 62, § 5A and personal income tax withholding pursuant to M.G.L. c. 62B, § 2.[3]

In this case, this rule applied during the following time period:

830 CMR 62.5A.3 applies to the sourcing of wage income attributable to employee services performed commencing March 10, 2020 through 90 days after the date on which the Governor of the Commonwealth gives notice that the Massachusetts COVID-19 state of emergency is no longer in effect.[4]

By the time the Supreme Court issued its ruling passing on hearing the case, the regulation was already on the path to expiring. As the State of Massachusetts noted in a supplemental brief filed on June 15:

This supplemental brief, filed pursuant to Rule 15.8, brings to the Court’s attention that on June 15, 2021, the Commonwealth of Massachusetts’s COVID-19 state of emergency ended. See Governor Charles D. Baker, COVID-19 Order No. 69 (May 28, 2021), https://tinyurl.com/5ddx42bn (ending emergency effective June 15, 2021); see also Office of Governor Charlie Baker & Lt. Governor Karyn Polito, COVID-19 State of Emergency, https://tinyurl.com/fwwsbvkt (acknowledging emergency’s end on June 15, 2021). The Governor’s declaration of an end to the emergency triggers the sunset of the pandemic-related tax regulation New Hampshire seeks to challenge in this Court in the first instance. See 830 Code Mass. Regs. 62.5A.3(1)(d) (governing “the sourcing of wage income attributable to employee services performed commencing March 10, 2020 through 90 days after the date on which the Governor of the Commonwealth gives notice that the Massachusetts COVID-19 state of emergency is no longer in effect”); see also id. at 62.5A.1(5), 62.5A.2 (setting forth Massachusetts’s pre-existing wage-income sourcing rules — not challenged by New Hampshire here — that will apply following the pandemic-related regulation’s sunset).

The regulation’s sunset, while not unexpected in that it is contemplated by the regulation’s very terms, underscores the arguments why this dispute fails to rise to the level of grave importance warranting exercise of the Court’s original jurisdiction, see Br. in Opp. 11-21; U.S. Br. 4-11, and why any disputes over application of the temporary regulation to taxpayers should be addressed through the ordinary course of state proceedings in the first instance, see Br. in Opp. 22-25; U.S. Br. 11-16. Above all, the development belies New Hampshire’s contention that this expressly time-limited measure will endure “indefinitely,” N.H. Reply Br. 2.[5]

Although the order did not contain any explanation of why the court decided 7-2 not to hear this case, a number of factors may have influenced the court’s decision to pass on this case.

First, the Supreme Court rarely hears these cases between the states where it has original jurisdiction, even though two Justices (Justices Thomas and Alito) have argued the court is required to take up these cases. While those two Justices again wanted the Court to hear this case, the other Justices do not appear to share this view.

Second, as Massachusetts noted, the regulation in question would not be in force by the time that any decision would be rendered. Of course, that overlooks the fact that those who were working outside the state and were covered by this rule would have had a claim for refund on amounts the Commonwealth taxed during the time this regulations was in place. As well, the lifting of the state of emergency occurred just days before this order was issued, so it doesn’t appear likely that this was the key reason the Court passed on this case.

To this author, a reason suggested by Don Williamson, professor at the Kogod School of Business at American University and executive director of the Kogod Tax Policy Center in an article on the denial published in Tax Notes Today Federal[6] on June 29 that the court saw this as a case that individuals (not the state) should first litigate before SCOTUS would consider looking at the issue seems a more likely reason for the Court to pass on taking on the case:

Williamson said requiring the affected taxpayers to sue in the Massachusetts courts would provide a record, and the Court could more easily make a decision instead of exercising original jurisdiction and having to start from scratch.

…

“As the Supreme Court does, and probably should, they’ll only take up an issue when they have to, and they didn’t have to take this issue up today,” Williamson said, suggesting that there may eventually be a better case for the Court to take up and address those issues.[7]

Certainly, the failure of the Court to take up this case doesn’t mean they necessarily agree with Massachusetts on the merits of their position.

However, some advisors had hoped the Court might take up this case and deal with the broader concept of states that have “convenience of the employer” sourcing rules, such as the state of New York. Such rules generally source income to the state if the employee is providing services to an employer’s location in the state and there is no reason an employer would require the employee to be in that other state had the employee not already been there.

Example – Located Out of State for the Convenience of the Employer

Mary has taken a job with Employer Co, located in State B to sell product for the company in State C, a state located on the opposite coast of the country from State B. State B sources wage income based on a convenience of the employer rule. Mary’s job includes meeting with customers at their location, providing in-person training and being available to provide in-person assistance should the customers run into problems with Employer Co.’s products.

The nature of the position Employer Co. has hired Mary to fill requires Mary to be located in State C. Thus, she is located in State C for the convenience of Employer Co. and her wages are not considered by State B to be sourced to State B, therefore she owes no tax to State B.

Example – Not Located Out of State for the Convenience of the Employer

Let us assume Employer Co. is in the business of preparing tax returns in State B and Mary, again located in State C, is hired to perform tax preparation services. Employer Co.’s clients are primarily located in State B. Mary’s job is solely to initially prepare returns based on information provided to her electronically by Employer Co. and Employer Co.’s clients. While Mary does phone these clients to ask questions, she does not meet with the clients in person, nor do others performing a similar job for Employer Co. who work out of the company’s offices in State B.

In this case, Employer Co. has no requirement that Mary be located in State C, and her job could just as easily be done in State B where Employer Co. is located. In this case, Mary performing services in State C is not for the convenience of the employer, but rather for her own convenience.

While only a minority of states have a variant of the convenience of the employer rule (with most located in the Northeast), the COVID-19 pandemic and the rethinking of tax nexus brought about by the Wayfair decision may see more states looking at using this option, especially if remote work continues to grow and employees locate in lower-tax jurisdictions.

[1] Supreme Court Order List: 594 US, Monday, June 28, 2021, New Hampshire v. Massachusetts, p. 2, https://www.supremecourt.gov/orders/courtorders/062821zor_6j37.pdf (retrieved June 29, 2021)

[2] Massachusetts 830 CMR 62.5A.3, December 8, 2020, https://www.taxnotes.com/research/state/massachusetts/regulation/ma-admin-department0830%20cmr/massachusetts-830-cmr-830-cmr-62.00-v-1-62.5a.3-v-1 (retrieved June 29, 2021)

[3] Massachusetts 830 CMR 62.5A.3(3)(a)

[4] Massachusetts 830 CMR 62.5A.3(1)(d)

[5] Supplemental Brief in Opposition, Commonwealth of Massachusetts, June 15, 2021

[6] Andrea Muse, “SCOTUS Won’t Hear New Hampshire Remote Worker Tax Fight,” Tax Notes Today Federal, June 29, 2021, https://www.taxnotes.com/tax-notes-today-federal/nonresident-taxation/scotus-wont-hear-new-hampshire-remote-worker-tax-fight/2021/06/29/76pwf (subscription required, retrieved June 29, 2021)

[7] Andrea Muse, “SCOTUS Won’t Hear New Hampshire Remote Worker Tax Fight,” Tax Notes Today Federal, June 29, 2021