New Jersey Led Amicus Brief Centers on Risk of “Double Taxation”; Has Major Implications for Taxes New Jersey Residents Pay to Other States in 2020
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Steve Barnes or Lee Moore
TRENTON – Acting to protect its residents from unfair and costly “double taxation,” New Jersey today filed a U.S. Supreme Court amicus brief in a case challenging the right of states to levy an income tax directly on non-residents for income they earned while working from home in their states of residence.
Altogether, seven U.S. states currently levy taxes on non-residents directly for income they earn working from home for employers in the taxing state. In October 2020, New Hampshire filed a lawsuit in the Supreme Court against Massachusetts, challenging the latter’s decision to adopt such a rule this year. New Jersey’s amicus brief highlights that these rules, which tax income of nonresidents even when they do not step foot in the taxing state, have only grown in importance during the pandemic. Given the available data demonstrating the rise in the number of nonresidents working from home, such rules have a “staggering” impact on the fiscal well-being of other states like New Jersey. This is especially consequential for New Jersey, the brief explains, because New York taxes nonresidents who work from home for New York-based companies.
“In the course of this once-in-a-century pandemic, hundreds of thousands of New Jersey residents who typically commute to New York and pay New York taxes have been working from home for the last nine months,” said Governor Phil Murphy. “We are hopeful that the Supreme Court will hold that states do not have the constitutional authority to tax individuals who neither live nor work there. Such a ruling could mean as much as $1.2 billion will go into New Jersey’s treasury to benefit our taxpayers and help our state address the massive fiscal shortfall caused by COVID-19.”
“I’m proud to lead the fight for New Jersey taxpayers in the U.S. Supreme Court, and to highlight for the Court that taxing our residents when they work from home in our state is unfair and unconstitutional,” said New Jersey Attorney General Gurbir S. Grewal. “This case has a major impact for our state’s bottom line, especially during a pandemic, when unprecedented numbers of employees have been working from home. We hope that the Supreme Court will agree to resolve this issue of nationwide importance.”
“Treasury is proud to have worked with the Governor and the Attorney General’s office in taking action to seek justice for New Jersey taxpayers. We began working on this issue upon coming into office in 2018. While this situation has existed for many years, the COVID-19 pandemic has further exacerbated it. Treasury’s challenge and priority has been finding a fair and equitable solution that does not overburden our residents,” said New Jersey State Treasurer Elizabeth Maher Muoio. “What we determined is that, absent federal legislation providing uniform guidance, we are essentially dependent upon the Court to restrain those states seeking to tax billions of dollars in income that is more fairly attributed to New Jersey. We are hopeful that the Supreme Court will once and for all provide the necessary guidance to protect New Jersey and its taxpayers from overreaching and inequitable tax treatment by other states.”
Today’s brief, which is a product of collaboration between the Attorney General’s Office and the Treasury Department, urges the U.S. Supreme Court to exercise its “original jurisdiction,” which typically refers to lawsuits by one state against another state filed directly in the highest court. The brief argues that the justices should hear the New Hampshire case because the tax issue is of “nationwide and pressing importance” given the number of states that tax the income of nonresidents working from home. The brief highlights that New Jersey has a direct stake in the case, as its neighbor New York has for decades collected income taxes from New Jersey residents who work remotely from their homes in New Jersey for employers located in New York.
The brief notes that New York has made clear, through pandemic-related guidance, that except in cases where an employer creates a “bona fide employer office” at a worker’s out-of-state telecommuting location, a worker should consider days worked from home as “days worked in New York” even during the pandemic. Like other states in similar circumstances, New Jersey provides a credit to New Jersey residents for income taxes paid to other states. That means that New York’s tax rules have a direct impact on New Jersey’s own revenues, and thus on the services and property tax relief it can provide.
Based on work-from-home estimates and data provided by the Treasury Department’s Office of Revenue and Economic Analysis, the brief contends, New Jersey may this year end up crediting anywhere between $928.7 million and $1.2 billion to its residents for income taxes imposed on them by New York “based entirely on income they earned while working at home in New Jersey.” Likewise, the brief notes, New Jersey may end up crediting between $3.1 million and $4.1 million to its residents for taxes they are paying to Massachusetts based on income earned while working in New Jersey.
The New Hampshire lawsuit centers on an emergency rule adopted by Massachusetts that any out-of-state residents who work for Massachusetts companies must pay Massachusetts income taxes, even for the periods in which they are working entirely from home due to the COVID-19 pandemic.
New Hampshire, which does not impose its own income tax on residents, argues that the Massachusetts rule violates the Dormant Commerce and Due Process Clauses of the U.S. Constitution, and also argues that the Supreme Court is required under both the U.S. Constitution and certain federal statutes to exercise original jurisdiction and hear its complaint.
States joining New Jersey in asking the Supreme Court to hear the New Hampshire challenge to the Massachusetts rule include Connecticut, Hawaii and Iowa.