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Massachusetts DOR Issues Telecommuting Guidance

In an attempt to minimize the disruptions experienced by businesses whose workforce is mandated to function remotely due to COVID-19, the DOR has issued a TIR and emergency regulations covering a broad base of telecommuting-related topics.

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Insights  <  Massachusetts DOR Issues Telecommuting Guidance during COVID-19

In an attempt to minimize the disruptions experienced by businesses whose workforce is mandated to function remotely due to COVID-19, the DOR has issued a TIR and emergency regulations covering a broad base of telecommuting-related topics.

A long-standing principle of state income tax is that having an employee working in a state creates in-state income for the employee and gives the state the right to subject the employer to sales tax and corporate income tax.

If an employee lives in Massachusetts but works in a neighboring state, this alone does not give Massachusetts the right to tax the employer’s income.

In an attempt to minimize the disruptions experienced by businesses whose workforce is mandated to function remotely due to COVID-19, the Massachusetts Department of Revenue (DOR) has issued a Technical Information Release (TIR) and emergency regulations covering a broad base of telecommuting-related topics.

The TIR is broken into four main subsections:

  1. Personal income and withholding tax
  2. Sales and use tax nexus
  3. Corporate income tax
  4. Paid family and medical leave

All subsections present two scenarios; for the purposes of this article a non-resident individual of Massachusetts, who prior to COVID-19 was an employee of a Massachusetts business, but is now working remotely in another state, will be referred to as Individual 1. A resident individual of Massachusetts, who prior to COVID-19 was an employee of a non-Massachusetts business, but presently works remotely in Massachusetts, will be denoted as Individual 2.

The following changes are considered in effect from March 10, 2020, until Governor Charlie Baker gives notice that the present declared state of emergency is no longer in effect.

Personal Income Tax & Withholding

Under the TIR, those in the Individual 1 category will continue to be looked upon as generating Massachusetts-source income that is subject to personal income and withholding tax. Following is an illustration of this rule.

Assume a Connecticut resident individual who typically works in Massachusetts is required to work from his Connecticut home due to COVID-19. He earns $10,000 in wages during the COVID-19 period. Massachusetts will continue to tax him on the $10,000, even though he did not physically work in Massachusetts. The Massachusetts employer must continue to withhold Massachusetts income tax. As a resident of Connecticut, Connecticut will likewise tax him on these wages. At this time, Connecticut has not issued any guidance about whether he can reduce his Connecticut tax liability by the taxes he paid to Massachusetts.

If those in the Individual 2 classification continue to incur an income tax liability in the state of their employer as a result of that state’s sourcing rule, they will be eligible for a credit for taxes paid to the other state. Moreover, the employer of Individual 2 is not obligated to withhold Massachusetts income tax for the employee to the extent that the employer is required to withhold income tax with respect to the employee in their employer state of origin. Following is an illustration of this rule.

Assume a Massachusetts resident individual who typically works in Rhode Island is required to work from her Massachusetts home due to COVID-19. She earns $25,000 in wages during the COVID-19 period. Massachusetts will tax her on this income, as a Massachusetts resident. If Rhode Island likewise taxes her on these wages, she can reduce her Massachusetts tax liability by the amount of Rhode Island taxes. If her employer is obligated to withhold Rhode Island income tax on this wage income, Massachusetts income tax does not likewise have to be withheld.

Sales Tax and Corporate Income Tax Nexus

According to the TIR, those in the Individual 2 category will not trigger Massachusetts nexus for either sales and use tax collection or corporate income tax purposes. Furthermore, Individual 2 will not impact the numerator of a business’s corporate income tax apportionment payroll factor for the duration of the Massachusetts COVID-19 state of emergency.

Paid Family and Medical Leave (PFML)

As clarified in the TIR, those in the Individual 2 classification, who were not subject to PMFL, will remain not subject to it since their current remote work status is considered temporary. Conversely, those in the Individual 1 category will continue to be subject to PFML regulations, as they have been in the past. 

Massachusetts businesses continue to be responsible for withholding taxes for employees working remotely, even if said employees are living in and telecommuting from another state.

The Commonwealth’s TIR and emergency regulations are similar to other states, including Maryland, New Jersey and Pennsylvania, that have recently provided guidance for employees working remotely.

Maryland’s commentary is limited in scope. Their Comptroller stated that it does not intend to alter the nexus or income sourcing rules. However, there is a caveat in MD Tax Alert 04-14-20B that allows residents of certain states (Virginia, Washington D.C., West Virginia, and Pennsylvania), who earn income in Maryland, to be exempt from Maryland state income tax and withholding. Conversely, if a Maryland resident earns income in these states, they will not be subject to income tax or withholding in that state. This is due to the fact that Maryland has entered into reciprocal agreement with the aforementioned states for the duration of the COVID-19 heath emergency. This list is subject to change at any time. (https://www.marylandtaxes.gov/covid/documents/TaxAlert04-14- 20BEmployerWithholdingonTelewo rkers.pdf)

New Jersey follows the same approach as Massachusetts when it comes to Personal Income Tax/Withholding, Corporate Income Tax nexus and Sales & Use Tax nexus. (https://www.state.nj.us/treasury/taxation/covid19-payroll.shtml)

Pennsylvania is also almost identical to Massachusetts in the sense that they will not seek to impose Corporate Income Tax nexus or Sales & Use Tax nexus solely on the basis of temporary activity occurring during the COVID-19 emergency; as addressed in PA Proclamation of Disaster Emergency 3/6/20 and the PA Dept. of Rev. customer help forum. However, a PA employee that works from home in another state (aside from the reciprocal states) temporarily due to the COVID-19 pandemic, the department would not consider that as a change to the sourcing of the employee’s compensation and it would be subject to PA withholding. (https://revenue-pa.custhelp.com/app/answers/list/c/251,255)

For more information and full content of the Massachusetts DOR TIR, please visit:

https://www.mass.gov/technical-information-release/tir-20-5-massachusetts-tax-implications-of-an-employee-working

and

https://www.mass.gov/regulations/830-CMR-625a3-massachusetts-source-income-of-non-residents-telecommuting-due-to-covid.

Joseph Feehan, LL.M., J.D., is a partner with blumshapiro (www.blumshapiro.com), the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts (including Newton, Quincy, Boston, Worcester, and North Andover), Rhode Island, and Virginia. The firm, with a team of over 500, offers a diversity of services, which include auditing, accounting, tax and business advisory services. blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies. To learn more visit us at blumshapiro.com.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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