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NH Pols Call Mass. Income-Sourcing Tax Rule Unconstitutional

By James Nani · August 21, 2020, 8:06 PM EDT

New Hampshire's top officials urged Massachusetts on Friday to withdraw a proposed rule that would end its COVID-19 pandemic-related nexus and income-sourcing relief, calling it unconstitutional, with the Granite State's governor saying he hoped to avoid legal action.

Republican New Hampshire Gov. Chris Sununu and the state's attorney general and economic commissioner all published letters asking Massachusetts officials and its Department of Revenue to reconsider a July 21 proposed rule. The rule would resume sourcing income to Massachusetts based on an employee's presence, even if the employee relocated because of the pandemic.

Sununu, in a letter to Republican Massachusetts Gov. Charlie Baker, said the letters show serious policy and legal concerns with New Hampshire residents having Massachusetts taxes imposed on them despite not entering into Massachusetts in months because of the pandemic. The push comes after Sununu earlier this month said the attorney general would review the actions of states trying to improperly tax New Hampshire citizens.

"It is my hope that this matter can be resolved promptly and in a manner that removes any necessity for New Hampshire to consider legal remedies," Sununu said.

The letters come as the Massachusetts Department of Revenue plans to hold a public hearing on the proposed rule changes Aug. 27. New Hampshire Attorney General Gordon MacDonald, in a letter to the revenue department, argues that the proposal would retroactively change how Massachusetts taxes the income of nonresidents for work performed outside of Massachusetts. New Hampshire is reviewing the rule, and similar rules by other states, to see if they're improper, he said.

"When compared to the current rules, the Emergency Income Tax Rule would result in an immediate income tax increase for New Hampshire residents required to work from a location within New Hampshire due to the COVID-19 pandemic," MacDonald said.

Under the proposal, a New Hampshire resident who worked for a Massachusetts employer and is required to work from home from March 2020 to Dec. 31, 2020, because of the pandemic would have their income for that period treated as from a Massachusetts source and subject to Massachusetts tax, MacDonald said.

That would replace Massachusetts's so-called daily allocation rule, in which nonresidents were only taxed on their income based on the number of days spent working in Massachusetts, the letter said.

"I respectfully request that the Massachusetts Department of Revenue rescind or modify the Emergency Income Tax Rule to eliminate the unfair, unexpected, retrospective and extraterritorial income tax increase on New Hampshire's residents as well as the infringement on the sovereign jurisdiction of the state of New Hampshire," MacDonald said.

MacDonald added that the rule doesn't just infringe on private interests but on New Hampshire's "fundamental interests as a sovereign," noting the state doesn't have a personal income tax. The rule is inconsistent with Massachusetts statute that limits taxation of nonresidents to gross income from sources within the commonwealth, according to the letter.

In addition, the proposal raises due process and commerce clause concerns under the U.S. Constitution, the letter said, and raises double taxation concerns as it "inherently discriminates against interstate commerce without regard to the tax policies of other states," citing 2015's Comptroller of Treasury of Md. v. Wynne . In that case, the Wynnes won after the justices held that Maryland had violated the dormant commerce clause when it provided them only a partial credit for income taxes paid to other states on income earned in those states.

New Hampshire Democrats have lined up behind Sununu's administration. State Senate Majority Leader and Ways and Means Committee Chairman Dan Feltes, D-Concord, said in a statement that he and Sen. Lou D'Allesandro, D-Manchester, chairman of the Senate Finance Committee, sent a letter to the Massachusetts Department of Revenue on Aug. 5 condemning the rule change and followed up with a letter citing similar concerns Friday.

"This change in tax law is anti-worker, anti-public health, and needs to be rescinded," Feltes said. "If Massachusetts doesn't withdraw this tax rule change, Gov. Sununu should file a lawsuit in federal court to protect Granite staters and the New Hampshire advantage."

A Baker administration spokesperson told Law360 that the Massachusetts Department of Revenue put in place regulations and the July technical information release to ensure clarity with tax collection for Massachusetts and other states while minimizing sudden disruption for employers and employees during the pandemic.

The administration spokesperson noted that the rules are similar to those adopted in Vermont and Rhode Island, are temporary and, as proposed, wouldn't extend beyond 2020. The spokesperson added that taxation is the same as it would have been before COVID-19, using as an example an out-of-state employee who typically works two days in Massachusetts and three days remotely. Due to COVID-19, if that nonresident is now working five days remotely, Massachusetts is still taxing two-fifths of the employee's wages, the spokesperson said.

Timothy Noonan, a tax practitioner with Hodgson Russ LLP, told Law360 that New Hampshire officials should probably consider sending similar letters to other states such as New York, Georgia and Nebraska, all of which he said appear to be following a policy similar to that of Massachusetts.

"There is an overall lack of consistency in the way states are handling these telecommuting issues," Noonan said. "The scope of the problem is much broader than a simple dispute between these two states."

--Additional reporting by Paul Williams, Maria Koklanaris and Daniel Tay. Editing by Neil Cohen.

Correction: A previous version of this story incorrectly attributed a state as having a policy similar to that of Massachusetts. The error has been corrected. 

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