The state of New Hampshire announced Friday it will file a federal lawsuit against Massachusetts over its cross-border income tax collection policies during the pandemic.
The lawsuit centers on a Massachusetts emergency provision that caps how much income out-of-state residents who work for Massachusetts-based companies can deduct on their income taxes while working remotely.
Despite receiving complaints from New Hampshire elected officials, Massachusetts issued a public notification earlier Friday that it would extend the controversial policy through at least the end of the calendar year.
The policy negatively affects tens of thousands of New Hampshire residents who previously commuted across the state’s southern border for work, but are now working from home due to the coronavirus pandemic.
“The Commonwealth has launched a direct attack on the New Hampshire Advantage, attempting to pick the pockets of our citizens,” said Gov. Chris Sununu in a statement. “We are going to fight this unconstitutional attempt to tax our citizens every step of the way, and we are going to win."
New Hampshire’s Attorney General is scheduled to file the lawsuit next week, with the expectation the case will ultimately be settled by the U.S. Supreme Court.
Earlier this year, Congressman Chris Pappas filed federal legislation seeking to ban cross-border income tax collections.
“At a time when many New Hampshire residents are teleworking from home in order to keep their families and their communities safe, it is completely unfair for Massachusetts to levy an income tax on these workers,” said Pappas. “As I’ve said before, we aren’t going down without a fight on this. The long arm of the Massachusetts tax collector should not be reaching into New Hampshire residents’ wallets.”
Massachusetts previously allowed out-of-state residents who worked for Massachusetts-based entities to deduct whatever portion of their income was derived while working from home. In practice, this meant a worker who commuted four days a week but worked from home one day a week could reduce their taxable income by 20 percent.
This spring, the state revised the policy to cap deductions at the proportion of time spent working remotely before the pandemic, meaning if an employee is now working from home five days a week instead of just a single day per week, they can still only deduct 20 percent of their income.
Other states including New York, New Jersey and Pennsylvania have enacted similar cross-border income tax rules.
Massachusetts has declined to release information about how much tax revenue the rule change is likely to generate. The Department of Revenue’s extension of the policy runs through Dec. 31, 2020, but could be extended.