Massachusetts wants to keep taxing telecommuters from N.H., stirring up a new kind of border war

Mass. Department of Revenue faces criticism for collecting income tax on out-of-state workers stuck at home. But it's a broader issue for remote work.

Before the coronavirus kept us all housebound, thousands of New Hampshire commuters streamed south each morning to work at Massachusetts businesses — and paid the income tax to prove it.

But now a border war is brewing over that lucrative prize.

Since the COVID-19 pandemic started, Governor Charlie Baker’s administration has made it clear it will continue to tax out-of-state residents who normally go to work in Massachusetts each morning, even if they’re stuck at home.

That didn’t cause much of a stir back in the spring, when it seemed like the coronavirus would be gone by Labor Day. But it is causing a stir now.

Baker’s Department of Revenue said on July 21 that it wants to keep collecting these income taxes, probably until the end of the year. Before COVID hit, New Hampshire residents who worked for a Massachusetts employer could adjust their income tax liability downward to reflect any days they spent working from home (and perhaps avoid the state tax entirely). The Baker administration’s approach essentially treats these new at-home days as in-office days, if people are home specifically because of the pandemic.

That isn’t sitting well with politicians in New Hampshire. They argue these constituents should benefit from their state’s longstanding tradition of not imposing a broad-based income tax, now that they are not schlepping into Massachusetts every weekday.

Governor Chris Sununu this week directed the New Hampshire attorney general to review the taxation rules issued by neighboring states to ensure New Hampshire residents aren’t being improperly taxed, and to determine the legality of these border-state rules. The Republican governor’s brief statement on the matter didn’t mention Massachusetts by name. But it didn’t need to: An estimated 84,000 New Hampshire residents regularly commuted to Massachusetts in normal times, roughly four times the total of commuters to all other states.

Sununu’s action followed a story last weekend in the Union Leader, the state’s largest newspaper, about the Baker administration’s approach to collecting income taxes from New Hampshire residents.

Meanwhile, the two top Democrats on the New Hampshire Senate’s ways and means and finance committees fired off a brief letter to Geoffrey Snyder, Baker’s revenue commissioner, on Wednesday. The letter slammed the Baker administration’s plans to collect income taxes from New Hampshire residents who are working remotely because of the pandemic through the end of the year, or 90 days after Baker ends the state of emergency, whichever comes first. Snyder’s agency plans to hold a virtual public hearing to discuss the issue on Aug. 27.

In an interview, Senator Dan Feltes said he and Senator Lou D’Allesandro wrote to Snyder because of the upcoming hearing, and because the Baker administration’s approach to taxing telecommuters is getting more serious now.

“The notion that New Hampshire residents who are, in many cases, doing the safe thing [and staying home] and are getting penalized for doing that, is anti-worker and anti-public health,” said Feltes, who is hoping to challenge Sununu in the fall for the governor’s seat. “It seems like a prelude to a long-term rule that hurts New Hampshire workers.”

A spokeswoman for Baker’s Department of Revenue didn’t have much to say about the criticism, other than to note that the agency’s approach is intended to minimize disruption for employers and employees during the pandemic.

The revenue department initially indicated it would collect income taxes in this manner from out-of-state residents until Baker lifted the state of emergency, according to Eileen McAnneny, president of the business-backed Massachusetts Taxpayers Foundation. She said her group suggested to the state agency that employers would need more advance notice, and advocated for a definitive conclusion for that reason — a suggestion reflected in the updated guidance issued by the department in July.

Amy Pitter, head of the Massachusetts Society of CPAs, said Baker’s approach is a sensible response to a temporary emergency situation, rather than forcing employers to change their payroll processes. During the time period covered by the agency’s directive, she said, the workers will be treated, for tax purposes, exactly the same as before the pandemic.

And Andrew Botti, a litigation attorney with the McLane Middleton law firm, said these workers are often logging into computer servers in Massachusetts, one of several factors that give the state enough jurisdiction to impose the tax. Besides, he said, it’s not as if New Hampshire is losing income tax revenue to its neighbor.

But some tax experts say Baker’s legal ground gets shakier the longer this pandemic drags on.

“Everybody thought this would be over in eight weeks,” said Jeffrey Levine, an accountant based in Newton. “These people aren’t in Massachusetts. They shouldn’t be paying Massachusetts taxes.”

How much tax money are we talking about? The DOR declined to say.

But the border fight underscores a bigger question that state bean counters may need to confront. Once the pandemic finally ends, many employers say they’ll be more lenient about telecommuting. That trend could take a bite out of Massachusetts finances, if many New Hampshire residents never resume their daily commutes south across state lines, or drive into Massachusetts infrequently.

“I’m sure there are economists right now thinking about if telecommuting becomes the norm in the future, what does that mean for economies of high-cost states?” Pitter said.

Steve Gallant, tax partner at accounting firm LGA in Woburn, said if challenged, he expects the Mass. Department of Revenue will be willing to take this fight to court to protect this important revenue stream. Meanwhile, Gallant said, he’s not quite sure what he’ll tell his colleagues at LGA who live in New Hampshire and commuted to the Woburn office prior to the COVID-19 shutdown. Maybe, he said, it will get resolved in time for the next tax season.

“I’m sure it’s going to the courts,” Gallant said. “Hopefully by the time we have to deal with it, we’ll have a clearer understanding.”