The court said no, but will NJ try again in tax fight?

NJ residents working from home are taxed by their New York companies. Murphy says the state will make changing that a priority
Credit: jacobchristensen via Creative Commons CC BY-NC-SA 2.0
Working from home during pandemic

Despite a recent setback in the courts, Gov. Phil Murphy said the fight for residents whose income has been taxed by New York despite working from home in New Jersey during the coronavirus pandemic is still a priority.

But what exactly happens next — and how aggressive New Jersey ends up getting with its neighbor across the Hudson River — remains to be seen.

Last year, the Murphy administration backed New Hampshire’s bid to get the U.S. Supreme Court to block Massachusetts from taxing New Hampshire residents who were employed by companies based in Massachusetts but working from home during the coronavirus pandemic.

A similar bistate tax conflict has emerged between New Jersey and New York after New York continued to collect income taxes from thousands of New Jersey commuters during COVID-19 shutdowns, when most offices in New York were closed to prevent the spread of new infections, forcing New Jersey residents to work from home.

$1 billion in tax credits

New Jersey officials have estimated more than $1 billion in tax credits may be paid out under current tax policies to homebound commuters to offset income taxes that New York collected from New Jersey residents during the pandemic.

New Jersey’s legal brief referred to those estimates and also argued the bistate tax issues highlighted by the pandemic are “serious and of national importance.” But late last month, the high court declined to take up the case, leaving the issue largely unsettled.

When asked what options are being considered in the wake of the high court’s decision, Darryl Isherwood, a spokesman for Murphy, said the administration is “disappointed in the Supreme Court’s decision” but is also not giving up the fight.

“New Jersey is being unfairly harmed and we will continue to seek avenues to fight for the rights of our taxpayers,” Isherwood said, but without identifying any specific options.

For some lawmakers, stakes are high

However, some state lawmakers appear to be bruising for a more immediate and direct fight with New York Gov. Andrew Cuomo, a Democrat who has come under fire after a flood of sexual-harassment allegations.

The lawmakers have argued that the current shift to remote work is likely to last, at least in some form, well after the pandemic wanes, and that the stakes for New Jersey are too high to ignore.

In New Jersey, income-tax revenue is constitutionally dedicated to funding specific items in the state budget, including direct property-tax relief programs and aid payments to K-12 school districts that can help ease pressure on local property taxes.

“This situation will never be resolved to the benefit of New Jerseyans if Governor Murphy continues to roll over and play dead,” said Sen. Steve Oroho (R-Sussex).

“Until we fight back, this unfair taxation by New York will never end,” Oroho said.

Is remote work a ‘convenience?’

Officials in New York have consistently viewed the remote work performed by employees of New York-based companies — even during the recent COVID-19 lockdowns — as a “convenience,” thus permitting the workers’ income to still be subject to New York’s tax laws.

But New Jersey’s tax laws generally dictate that income is “sourced based on where the service or employment is performed.”

Still, to prevent double taxation, the New Jersey Treasury department has traditionally provided offsetting tax credits to residents for income taxes paid to New York.

That means New Jersey has paid out tax credits during the pandemic, whether workers actually earned their income in New York or not. There is no such tax conflict between New Jersey and Pennsylvania due to a longstanding reciprocal compact that allows residents to pay income taxes where they live, regardless of where they work.

Potential tax savings for NJ residents

Last year, a bipartisan bill sponsored by Oroho was drafted in response to concerns about the taxation of remote work, and passed by the Democratic-controlled Senate in a 35-0 vote.

The bill calls for, among other things, the Treasury department to conduct an in-depth review of savings that New Jersey residents could see, due to differences in the two states’ tax structures, if the income they earned while working from home in New Jersey was taxed by Trenton instead of Albany.

The measure also seeks to compel the Treasury department to provide an explanation of “efforts the State has taken to address the inequity of New York’s taxation of New Jersey residents’ income.”

Despite breezing through the Senate, the bill stalled in the Assembly, which is also controlled by Democrats. It’s unclear what may be holding things up in the lower house, and no action is expected before this November’s election, when all 120 seats in the Legislature will be up for grabs.

New Hampshire v. Massachusetts case

Cecilia Williams, a spokeswoman for Assembly Speaker Craig Coughlin (D-Middlesex), said the Assembly leader had been “closely monitoring the New Hampshire v. Massachusetts case” and was “disappointed that the Court chose not to hear this important states’ rights issue.”

“At the same time, it’s not yet clear what the future of remote work will hold exactly,” Williams said. “Through the summer and fall, the Assembly plans to engage internally in discussion on this matter.”

A court filing submitted by a key official from President Joe Biden’s administration in June suggested individual taxpayers, and not states themselves, may have better cases to make when it comes to determining which state should be able to tax income they earn while working from home.

But Oroho, the Republican senator, is among those calling on Murphy and other Democrats to show more urgency in the wake of the Supreme Court’s recent decision not to take up the remote-work tax case filed by New Hampshire.

Basing income tax on where work is performed

Oroho suggested the Murphy administration should direct employers to begin apportioning income-tax withholdings based on where work is actually performed by a New Jersey resident who has been working from home during the pandemic. Taking New York to court should also be on the table, the senator said.

“Governor Murphy should draw a line in the sand with Governor Cuomo and make clear that New Jersey is prepared to make our own case before the United States Supreme Court, if necessary,” Oroho said.

But in a response, Treasury spokeswoman Jennifer Sciortino pointed to the state’s existing statute and said, “Absent a change in statute, we must administer the law as written.”

“Employers can’t be required to withhold money from New Jersey taxpayers that results in credits for taxes paid to another jurisdiction,” she said. “Given the complexity of this legal matter, we risk doing more harm than good to our taxpayers if we rush to implement any shortsighted fixes.”

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