While the U.S. Supreme Court did not choose to hear arguments in the case of New Hampshire v. Massachusetts, it does not mean that the disagreement between the two states will have no impact on the tax landscape. Jennifer Karpchuk, shareholder with the law firm Chamberlain Hrdlicka, joins us to discuss the background of New Hampshire v. Massachusetts, its relevance to the tax structures of Pennsylvania and Philadelphia, and the possible effects on Pennsylvania’s “convenience of the employer” interpretation.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
The U.S. Supreme Court recently declined to hear a case named New Hampshire v. Massachusetts. So that's a wrap, right? Whatever the subject matter of that case was has been deemed not worthy of the highest court in the land's attention, so we all move on to other matters. Well…not so fast. Not when that subject matter has to do with the taxation landscape in a country still dealing with the after-effects, and even continuing effects, of the coronavirus pandemic. To help us dive into that Supreme Court case and its possible impacts on taxation in Pennsylvania and beyond, we have with us Jennifer Karpchuk, shareholder for law firm Chamberlain Hrdlicka.
As was said, the U.S. Supreme Court recently declined to hear a tax base case entitled New Hampshire v. Massachusetts. Can you tell us a bit of the background on this case and why it was possibly going to be seen by the Supreme Court?
[Karpchuk] During 2020, in the middle of the pandemic, Massachusetts had implemented this policy where it essentially was adopting a status quo approach to income tax purposes. What would have happened prior to the pandemic, Massachusetts wanted to continue to happen even though there was a pandemic. The effect of that was that non-residents who would have been working in Massachusetts, but were now working remotely from home in states outside of Massachusetts…so, for instance in New Hampshire, they were still responsible for the Massachusetts income tax despite the fact that they were performing their job fully from New Hampshire or another state. New Hampshire basically sought to invoke the Supreme Court's original jurisdiction where one state sues another state that's invoking the U.S. Supreme Court's original jurisdiction. So it sued Massachusetts in an attempt to get the high court to declare Massachusetts’s policy unconstitutional.
Obviously, Pennsylvania has dealings with outside states, but if you could throw even a little more spotlight on it, can you tell us why this case may have importance, even if it wasn't heard, for Pennsylvania and Philadelphia in particular?
[Karpchuk] This case would have been, and could still be, important in terms of drawing some attention to Pennsylvania and Philadelphia's positions on the so-called “convenience of the employer” rule or tasks. There are not a lot of jurisdictions that have this type of rule – there's only a handful – but two of them are Philadelphia and Pennsylvania. So, in these convenience of the employer jurisdictions, essentially what it does is, if an employee is working in a work-from-home location outside of the taxing jurisdiction, if they're doing that for the employer's convenience – the employer wants them to work from home – then they're not subject to the jurisdiction’s income tax. But if the employee’s instead working from home for the employee's convenience, then they are subject to the income tax with that jurisdiction – so Pennsylvania or Philadelphia, despite the fact that they aren't actually working at all in that particular location.
It's essentially similar to what Massachusetts was doing in this policy. The difference being that Massachusetts is theoretically a temporary policy only for the term of the pandemic, but Pennsylvania and Philadelphia, on the other hand, this is a policy that they had on the books and they continue to have on the books.
Was there any insight put out there as to why the Supreme Court decided not to hear arguments on this case?
[Karpchuk] That's sort of the million-dollar question. Unfortunately, we don't have an answer to that. It could have declined to hear the case because it wasn't interested in the issue, that's certainly one option. They could have declined to hear the case because it thinks that the issue is something that should be addressed by Congress. Another possible line here: a lot of criticism of the New Hampshire v. Massachusetts case has to do with standing, whether New Hampshire was really the right party to be bringing this challenge in the first place. There are states that have income taxes. New Hampshire is not one of them. So, New Hampshire couldn't point to any real specific monetary harm from Massachusetts’s policy. There was a lot of criticism about whether or not they really had standing to be bringing the suit in the first place.
You had mentioned it earlier: the convenience of the employer law. What is that law? What does it stipulate? Could it potentially be challenged due to what is obviously a changing work environment?
[Karpchuk] The convenience of the employer rule is really looking at for whose convenience is the employer working remotely. If it's for the employer's convenience, then that employee is not subject to the jurisdiction in which the employer is located. It's not subject to that jurisdiction's income tax. But if that employee is instead working for his or her convenience from home – on a hybrid or a permanent basis – then they're still going to be subject to that jurisdiction's income tax, despite the fact that they are not physically working within the office of that specific employer. In terms of potentially being challenged, it certainly could be challenged.
In fact, there is already a case in New York that's been brought after the U.S. Supreme Court denied cert in New Hampshire v. Massachusetts. A professor at a university in New York who is a resident of Connecticut, and sometimes works from home in Connecticut, brought a case challenging New York's convenience of the employer rule. He has already brought this case back in 2003 and he has renewed his fight after he saw that cert was denied in New Hampshire v. Massachusetts. He's essentially arguing that the case really should be reheard and the facts and circumstances have really changed in the almost two decades since his original case was brought. Which is certainly true, people are working remotely even before the pandemic, probably people were working remotely a lot more than they were in 2003. But particularly with the pandemic and the almost-forced push to work from home and work remotely, you certainly have a lot more people that could be impacted. That's certainly a case to watch now that New Hampshire v. Massachusetts has gone. The name of that case is Zelinsky, and it's at the New York Division of Tax Appeals right now.
That case having been brought could be a little bit of a foreshadowing here, but where do you see this going? Do you think there's going to be even more cases brought on this basis? Obviously, it doesn't seem like it would be the end of the road for this, so do you see a major proliferation?
[Karpchuk] I think it's certainly possible. It's certainly likely that we'll see more of these challenges in other jurisdictions. We might see some protective refunds filed for those in New York that are following along with what happens in Zelinsky. New Hampshire v. Massachusetts, although it's gone, has brought attention to the issue and has raised these issues in the convenience of the employer states. The issues were there before, but this has really brought some renewed interest to it.
What sort of planning do you think CPAs, CPA firms, and businesses should be undergoing right now to prepare for possible changes in this area? Or is it really just a wait-and-see approach until we know exactly where it's heading?
[Karpchuk] I would say it depends a bit. So, those in New York may want to file their own protective refund appeals pending the outcome of Zelinsky's case. In other jurisdictions, CPAs and CPA firms might want to consider whether their clients have an argument that their client is entitled to a refund based on one of these convenience of the employer policies and, if so, whether a refund should be filed or there should be an attempt to challenge the law. Just keeping abreast of what is going on in this area is definitely important.