COVID and Remote Working Lead to State Tax Warfare

February 8, 2021

On January 25, 2021, the United States Supreme Court asked the U.S. Solicitor General to weigh in on a tax dispute between New Hampshire and Massachusetts, the resolution of which could have significant tax implications for New York and its neighboring states. At issue is whether Massachusetts can continue to tax remote workers who live in New Hampshire but worked in Massachusetts for Massachusetts employers prior to the onset of the pandemic.


Individuals who are not tax resident in New York are nonetheless taxed in New York on their New York source income. Individual employees who are, or become tax resident outside of New York, will have New York source income if they continue to be employed by their New York employer and fail to satisfy the “Convenience of the Employer” Test (the “CET”). To satisfy the CET, a taxpayer must establish that his or her home office constitutes a “bona fide employer office.” The CET guidelines set forth a series of factors to be considered in determining whether the taxpayer’s home office meets the requirements. The factors are divided into three categories: (1) the primary factor, (2) the secondary factors, and (3) other factors. If a taxpayer’s home office does not satisfy the CET, the employer must withhold NYS income taxes from their employee’s wages, and the employee must pay NYS income tax on his or her NYS source income. The CET is a multi-factor test which is difficult to satisfy unless the employee’s duties genuinely require that he or she work outside of New York. The employee’s personal preference to work remotely at home and not return to New York is insufficient.

Failing the CET will result in the New York employer continuing to withhold NYS taxes. Only if a non-NYS tax resident employee satisfies the CET, would that employee avoid NY taxation on his or her wages. If a non-NYS tax resident employee satisfies the CET, then the NY employer would withhold taxes for the state in which the employee’s home office is located unless such state is one that has no income tax on wages. Also, the employee’s presence in another state could cause the NY employer to have its own tax nexus with that state.

Arkansas, Delaware, Nebraska and Pennsylvania also tax non-residents for work performed from an out-of-state home office for in-state employers under their own versions of the CET. Connecticut also applies its version of the CET to a tax nonresident who works from an out-of-state home office but only if the nonresidents’ domiciliary state does so as well.


Massachusetts applied a new CET-like approach in 2020. Before the pandemic, New Hampshire residents who commuted to Massachusetts paid income taxes based on the number of days they actually worked in Massachusetts. On March 10, 2020, Massachusetts issued an emergency order requiring people who normally worked in-state and who were working from an out-of-state home office for a pandemic-related reason to continue to be taxed on their income in Massachusetts rather than the new state from which they were working. Massachusetts says it adopted its new rule in April 2020 to maintain the status quo during the pandemic. The outbreak meant that people who once commuted to Massachusetts were suddenly doing the same jobs from their home in New Hampshire, Connecticut or other neighboring states. Under the Massachusetts rule, “Massachusetts businesses could simply continue withholding as before, without need for continual changes due to fluctuating remote-work circumstances over the course of the declared emergency,” Massachusetts argues.

New Hampshire argues that Massachusetts is taxing work performed entirely outside its borders, with no guarantee the practice will end when the pandemic is over. New Hampshire, which does not impose a personal income tax on wages, says its neighbor is violating the Constitution’s commerce and due process clauses. Fourteen states have filed briefs supporting New Hampshire’s case either on the merits or on whether New Hampshire has the right to bring the suit directly to the Supreme Court without first having to proceed through lower courts. New Jersey and Connecticut have filed a brief backing New Hampshire, advising the Court they are losing massive sums to New York in violation of the Constitution.


The pandemic also raises tax issues for remote workers who remain New York tax residents. If an existing New York tax resident works from an out-of-state home office, the New York employer will continue to withhold New York taxes. Eight states and Washington, DC have said that if the temporary relocation resulted from COVID-19, then the employee will not create nexus for the New York employer there and there is no requirement for the New York employer to withhold taxes for the other state. But four other states say this would create nexus and they will source the wages to the employee’s home state.

We will not know whether New York’s tax rules applicable to remote workers will be upended by the New Hampshire v. Massachusetts case before this spring’s tax filing season. If the Solicitor General follows the office’s traditional practice, the office will file a brief with the Supreme Court in time for the Court to decide by the end of its term in late June 2021 how to handle the case. Billions of state tax dollars are at stake.

We will continue to monitor this case as well as other developments relating to remote-work tax issues. If you have any question regarding this Client Alert or would like to further discuss issues addressed herein, please feel free to contact Ronald P. Cima (212-574-1471), Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Daniel C. Murphy (212-574-1210), Brett R. Cotler (212-574-1269) or Tyler Combest (212-574-1472).