Protecting Their Own: Limiting Out-Of-State Taxation
In June, New Hampshire enacted legislation in an attempt to limit other states from taxing its residents’ income. Specifically, H.B. 1097 provides that “compensation earned or received by residents of the state of New Hampshire for services entirely performed within the state of New Hampshire shall not be subject to personal income taxation in any other state.” H.B. 1097, Ch. 185, 2022 Sess., Reg.Sess. (N.H. June 17, 2022) (emphasis added).
This legislation is a not-so-subtle attack on Massachusetts’ attempts, by regulation, to tax income earned by non-Massachusetts residents during the pandemic. Previously, New Hampshire sought to challenge the offending Massachusetts regulation at the U.S. Supreme Court but was unsuccessful. Motion for leave to file a bill of complaint DENIED, New Hampshire v. Massachusetts, No. 22O154 (U.S. June 2021). Many hoped the Court would allow the case to proceed to deal with the constitutionality of the dreaded convenience of the employer rules adopted by some states. States with such “convenience” rules in place have been using those rules to tax the income of nonresidents that was earned outside of the taxing state for years—in fact, New York is one of the biggest offenders. Unfortunately, the challenge to the “convenience” rules will have to wait for another day.
Not to be discouraged, just over a year after its failed attempt to challenge the Massachusetts regulations, New Hampshire launched its second assault on other states taxing its residents’ income. And there is an innate sense of fairness underlying the recent legislation. Why should another state be allowed to tax income for services that were performed wholly within New Hampshire? Nevertheless, the legislation raises a number of issues.
First, does one state have the ability to limit the taxing jurisdiction of another state? It is easy to understand why a state would seek to protect its citizens, but there are limits to how far that protection can extend. The New Hampshire law is telling other states what they cannot do to New Hampshirites—or at least what they cannot do to their income. While such laws are certainly appealing, especially in the area of taxation, should one state have that power over others?
Second, if a state can dictate whether another state can tax its residents’ income, should that power also extend to corporations? For example, should a state be able to prevent other states from taxing a domiciliary corporation?
Although New Hampshire’s legislation is laudable in many respects, it will be telling to see the challenges against it.
This article is one in a series of articles written for the August 2022 edition of The BR State + Local Tax Spotlight.