(Bloomberg) -- The U.S. Supreme Court sought the Biden administration’s views on a state-against-state clash over billions of dollars in income taxes paid by people who work from home during the Covid-19 pandemic.
New Hampshire is seeking to sue directly at the high court to challenge the Massachusetts practice of taxing nonresidents who used to work in the state but now do their jobs from home.
The case could determine the fate of similar, permanent tax laws in New York and five other states. New Jersey and Connecticut filed a brief backing New Hampshire, telling the court they are losing massive sums to New York in violation of the Constitution.
The stakes are especially high for New Jersey, which estimates it will credit as much as $1.2 billion to its residents for income taxes paid to New York in the 12 months starting in March 2020. Before the pandemic, more than 400,000 residents of New Jersey commuted to jobs in New York City.
“Not only does the issue directly impact so many states, but it is of staggering consequence to their fiscal well-being,” New Jersey, Connecticut, Hawaii and Iowa argued in court papers.
Arkansas, Delaware, Nebraska and Pennsylvania also tax non-residents for work they do from home for in-state employers. Connecticut also taxes nonresidents who work from home but only if their states do so as well.
The justices directed their request for advice Monday to the new acting solicitor general, Elizabeth Prelogar. If she follows the office’s traditional practice, she will file a brief in time for the court to decide by the end of its term in late June how to handle the case.
The case is hitting the Supreme Court amid the worst fiscal crisis in decades, with states facing deep deficits and the federal government offering little help.
Massachusetts says it adopted its rule in April to maintain the status quo during the pandemic. The outbreak meant that people who once commuted into Boston were suddenly doing the same jobs from their homes in New Hampshire, Connecticut or other neighboring states.
Under the rule, “Massachusetts businesses could simply continue withholding as before, without need for continual changes due to fluctuating remote-work circumstances over the course of the declared emergency,” the state argued.
Massachusetts says it has no problem with other states taking the same steps, and it offers a tax credit for state residents who pay income taxes elsewhere.
New Hampshire says Massachusetts is taxing work that happens entirely outside its borders, with no guarantee the practice will end when the pandemic is over. New Hampshire, which doesn’t impose an income tax, says its neighbor is violating the Constitution’s commerce and due process clauses.
“The Commonwealth of Massachusetts has launched a direct attack on a defining feature of the State of New Hampshire’s sovereignty,” New Hampshire argued.
New Hampshire is invoking the Supreme Court’s original jurisdiction, which lets states sue one another directly at the high court when their sovereign interests are at stake. Under the court’s longstanding practice, states seeking to sue are required to ask permission, and to show they lack an alternative forum to press their case.
For now, tax advisers aren’t sure what to tell clients to do this filing season, which is scheduled to start on Feb. 12.
“We’re still working through our positions and trying to guide our teams on how to address this,” said Brigitte Chip, operations leader for Ernst & Young’s TaxChat product in the Americas. “It’s very complex and fluid.”
Texas unsuccessfully tried to invoke the court’s original jurisdiction after the 2020 presidential election to overturn Joe Biden’s win in four other states.
The case is New Hampshire v. Massachusetts, Orig. No. 154.
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