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If you've seen The Sopranos, you know it's not feasible to "tax" someone outside of your jurisdiction.

With work-from-home becoming a reality in 2020 (and states desperate for tax revenue) a fight is brewing in the Supreme Court over which state has the right to tax remote workers' pay.

Tax Tussle
Heading into the pandemic, six states followed what's known as the “convenience rule.” Under the rule, a New Jersey-based remote employee of a New York company (for example) would still be taxed in New York if the telecommuting took place for the "convenience" of the employee.

While it's clear that coronavirus is more than a little inconvenient, states are trading blows on the tax interpretation.

Newcomer: Massachusetts temporarily adopted the convenience rule during the pandemic and has continued to tax nonresident remote workers as if they were still commuting.  

That move got the attention of Massachusetts’ northern neighbor, New Hampshire, which charges no income tax and is home to many-a-Boston commuter. In October New Hampshire filed a petition to the Supreme Court.

  • The Granite State claims the taxation undermines its public services, its appeal as a place to live, and even its sovereignty.
  • Governor Chris Sununu said Wednesday, “Massachusetts’ current position is a far cry from our country’s rallying call of ‘no taxation without representation,’ which they seem to have forgotten originated in their state.” 

The News: This week over a dozen states including Texas, Ohio, Connecticut, Iowa and New Jersey chimed-in, asking the Supreme Court to hear the case.

Getting Fiscal
Governors’ offices nationwide will be feverishly following any Supreme Court ruling, which would have major implications for state budgets.

  • In 2018, New Jersey and Connecticut residents paid New York a combined $5 billion in income taxes, according to the NY State Department of Taxation and Finance. That’s about 10% of all income tax New York collected in 2018.

The Takeaway: Massachusetts has argued its new tax rule is maintaining the status quo to prevent "disruption" to taxpayers. But it's not clear if workers would view a smaller tax bill as disruptive.

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