Massachusetts Denies Nonresident’s Refund Claim for COVID-19 Telecommuting

By: Michael Colavito, SALT Director

At a glance 

• The main takeaway: A nonresident was subject to income tax on wages after the Massachusetts Tax Board upheld the validity of the state’s emergency tax regulation that required nonresident employees who worked in the state before COVID-19 to pay income tax on wages earned on services performed outside the state during COVID-19. 
• Assess the impact: Many states issued guidance on individual income tax and employer withholding tax during COVID-19 that differed from their typical rules, and taxpayers should make sure that they complied properly.  
• Take the next step: Aprio’s State and Local Tax (SALT) team can help individuals determine their income tax obligations as well as employers with their withholding tax obligations. 

Schedule a free consultation today to learn more!

The full story

The Massachusetts Appellate Tax Board (ATB) issued its decision in Sakowski v. Commissioner of Revenue where it upheld the Department of Revenue’s (DOR) COVID-19 income tax withholding regulation as applied to a New Hampshire resident that worked from home during the COVID-19 pandemic. In doing so, the nonresident’s refund claim was denied by the ATB. The ATB’s decision partly relied on the U.S. Supreme Court’s decision in South Dakota v. Wayfair, 585 U.S. 162 (2018) as support for its reasoning that the sourcing of an employee’s wage income did not need to be based on the employee’s physical presence within the Commonwealth at the time the services were performed.

Massachusetts’ emergency COVID-19 income tax regulation 

Shortly after the COVID-19 pandemic enveloped the U.S. in 2020, the Massachusetts DOR promulgated an emergency regulation intended to “minimize sudden disruption for employers and employees during the COVID-19 state of emergency.” The regulation provided that nonresidents working remotely from outside the Commonwealth during the pandemic were required to determine the portion of their wages subject to Massachusetts income based on: 

1. The taxpayer’s percentage of work performed in Massachusetts during January and February of 2020, or 
2. If the taxpayer worked for the same employer in 2019, the same apportionment percentage used to determine Massachusetts-source wages for 2019, whichever method resulted in the lower tax liability.  

Thus, the practical impact of the regulation was that the portion of a nonresident’s wages that was subject to Massachusetts income did not change during the pandemic despite the nonresident potentially performing no services within the Commonwealth during that period. This was particularly relevant for residents of New Hampshire, which does not impose an income tax on an individual’s wage income.  

A closer look at the case

The are two interesting aspects of the ATB’s decision that are worth noting. First, the ATB relied on the U.S. Supreme Court’s decision in South Dakota v. Wayfair as support for its conclusion that the DOR’s emergency regulation did not run afoul of the Commerce Clause of the U.S. Constitution.  The ATB opinion referred to the Wayfair decision when it stated that “physical presence is not the touchstone for constitutionality” and “what is outside a state’s borders has become a concept that cannot be measured by physical presence alone.” The ATB then reasoned that the taxpayer’s job duties did not change during the time when he telecommuted for pandemic-related reasons except for not physically appearing in his employer’s Massachusetts office.  

Interestingly, there were other facts pertaining to the individual’s job duties that tied his work to locations outside of Massachusetts, namely that his reporting supervisor was located in Maryland and that the matters he worked on regularly related to geographic locations not within Massachusetts. Thus, the ATB’s reliance on Wayfair’s “economic nexus” approach seems somewhat inconsistent with the actual application of the regulation, which is largely based on a nonresident’s physical presence in Massachusetts in the period prior to the actual tax period at issue.  

Second, the ATB repeatedly noted that the nonresident, even though working from New Hampshire, was still benefiting from services provided by Massachusetts, such as fire and police protection and road maintenance. Here, the ATB reasoned that such services protected Massachusetts workplaces during the pandemic, thus “enhancing employees’ work security regardless of their states of residency.” 

The bottom line

What makes the Sakowski decision somewhat different than a similar ruling recently issues in New York, is that the Massachusetts emergency regulation changed the sourcing rule for the wages of nonresident individuals. The ATB’s opinion even acknowledged that the DOR’s regular regulation provides that “the portion of a non-resident’s income that is earned while telecommuting for a Massachusetts employer while outside the state is excluded from Massachusetts income.” 

It’s also noteworthy that the ATB concluded that the applicable income tax law in Massachusetts does not require physical presence of nonresidents in Massachusetts for their wages to be taxable despite the provision describing in-state sourcing of income as including “employment carried on by the taxpayer in the commonwealth.”  

Still, despite the ATB concluding that the emergency regulation was not inconsistent with Massachusetts income tax law, it was certainly a distinct shift from the DOR’s regular income sourcing regulation. This is in contrast to New York’s application of its “convenience of the employer” rule that has routinely resulted in a nonresident’s wages earned from services performed outside the state being subject to New York personal income tax.

Aprio’s SALT team has experience advising individuals of their nonresident income tax obligations as well as assisting employers with their withholding tax obligations. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter. 

1. Sakowski v. Commissioner of Revenue, Docket No. C347594 (Mass. App Tax Bd. July 8, 2024).
2.  Mass. Technical Information Release (TIR) 20-10 (July 21, 2020), superseding TIR 20-5.
3.  The ATB’s reliance on Wayfair as providing Constitutional support for this principle is troubling to the extent it suggests that a nonresident need not be physically present in a state to be subject to income tax in that state if the employee’s work is economically connected to that state.