Edward A. Zelinsky, who works from two different states, has a keen interest in a tax case coming before the U.S. Supreme Court.
That’s because the ultimate decision by the nine justices may have deep ramifications for workers in the U.S. like him as well as employers.
Zelinsky, a law professor at Yeshiva University in Manhattan, works from home in Connecticut for most of the workweek, conducting legal research on tax law. He also maintains an office on Yeshiva’s New York City campus, where he teaches.
In 1994 and 1995, Zelinsky filed his New York State nonresident income tax returns by apportioning to New York the 40 percent of his salary attributable to his time working in the state. New York’s Office of Taxation and Finance countered by taxing all of his salary, arguing that Zelinsky worked at his home out of personal convenience rather than necessity.
Now, in a related case, New Hampshire v. Massachusetts, Zelinsky hopes that the Supreme Court will agree that remote workers should not be taxed in states where they are not working. Many businesses and remote workers are awaiting its ruling with bated breath.
Until the coronavirus pandemic struck last year, the issue of how to tax remote workers in the country was mostly of interest to professional athletes, who pay taxes in the states where they play road games, as well as entertainers, like musicians, who perform before live audiences in different states.
Following the outbreak of the health crisis last year, millions of U.S. workers abandoned offices and began working from home. A year into the pandemic, the issue of taxing remote work has risen to the forefront of concerns for many employees as well as employers.
The National Taxpayers Union Foundation, a Washington, D.C.-based think tank representing major U.S. exporter and importers, estimates that at least 2.1 million Americans who previously crossed state lines for work are now working from home. As the Pew Charitable Trusts notes, most workers whose jobs could be done remotely rarely teleworked pre-Covid-19.
Currently, 71 percent of those employees work from home all or most of the time, and given a choice, more than half would like to do so permanently after the crisis ends.
States take on states
“It was wrong in 94-95, and it’s wrong today,” said Zelinsky, a tax-law expert. “And it’s unfair to people who get caught up in these rules, which tend to be middle-class, working-class folks. New York likes to pretend that it’s going after rich guys. They know the rich guys don’t have a problem with these taxes because they get their employers to gross-up [bump up their pay to cover the taxes] and make them whole.”
These days, Zelinsky and other tax experts are focused on a remote-worker tax dispute between New Hampshire and Massachusetts. In October 2020, New Hampshire filed suit in the U.S. Supreme Court against Massachusetts after the Bay State began taxing New Hampshire residents who worked remotely for Massachusetts companies.
Zelinsky has filed a friend-of-the-court brief in the New Hampshire v. Massachusetts case, urging the Supreme Court to rule in New Hampshire’s favor, noting that Delaware, Pennsylvania and Nebraska have enacted policies similar to that of Massachusetts.
“Massachusetts’ current tax overreach is part of an older and broader problem: Well before the Covid-19 crisis, other states have for decades unconstitutionally taxed the incomes nonresidents earn on the days these nonresidents work at their out-of-state homes and never set foot in the taxing state,” Zelinsky argues in his brief.
New Hampshire doesn’t have an income tax or a sales tax, a point of pride that it touts as the “New Hampshire Advantage” as it competes with neighboring states for residents and businesses. According to U.S. Census data cited by the state, as of 2017, 103,000 New Hampshire residents worked for Massachusetts-based companies, more than 15 percent of New Hampshire workers.
“In the middle of a global pandemic, Massachusetts has taken deliberate aim at the New Hampshire Advantage by purporting to impose Massachusetts income tax on New Hampshire residents for income earned while working within New Hampshire,” New Hampshire argues in its Supreme Court filing.
‘Taking a very close look’ at remote-worker issue
The impact of the case goes beyond the two states.
According to Grant Thornton, an audit, tax and advisory firm, a bill pending before the New Jersey legislature would direct the state treasurer to study the long-term fiscal impact of New York’s taxation of New Jersey residents on the Garden State. The treasurer will also consider joining the New Hampshire-Massachusetts suit on the side of New Hampshire.
Connecticut and other northeastern states, including Rhode Island and Vermont, may also join the litigation to defend their residents who worked in Massachusetts and now work remotely, Grant Thornton said in an article.
Businesses with remote workers are anxiously awaiting the court decision on New Hampshire’s tax challenge.
“Companies are taking a very close look at the remote-worker issue in a way that they didn’t before,” said Cathy Schultz, vice president for tax policy at the National Foreign Trade Council, a Washington, D.C.-based trade group that advocates on international business issues such as trade and tax policy. This will be important, she said, because “quite honestly, moving forward, there are a lot of workers that are not going back [to the office] full time.”
Widespread tax confusion
Since tax laws vary so widely, Zelinsky recommends that businesses consult with tax attorneys or other experts in the states where they have mobile employees in order to make sure they are in compliance.
In some states, merely having an employee physically located in the state could provide what is known as nexus, making the business subject to corporate income tax.
According to Eileen Sherr, director for tax policy and advocacy for the Association of International Certified Public Accountants (AICPA), when the Covid-19 crisis started, 15 states that have the nexus rule said they would temporarily suspend it because of the pandemic.
Workers appear to be in the dark as well about their potential tax obligations.
A Harris Poll in October 2020 on behalf of AICPA showed that 55 percent of those who have worked remotely during the pandemic were not aware that a failure to change their state tax withholding to reflect their remote work situation may result in tax consequences.
“Working remotely can have tax implications that vary from state to state,” Sherr said in the survey report. “The sudden and unplanned increase of many employees working remotely due to the pandemic has left many of them unaware of their current state tax liabilities and any additional steps they need to take now and at tax filing time.”