Due to the COVID-19 pandemic, many Connecticut individual taxpayers who normally commute to work in New York or Massachusetts have been instructed to work remotely from their home. As a result, this has created substantial Connecticut income tax uncertainty for these individual taxpayers and their employers.
While income is generally subject to state income tax based on where the individual taxpayer physically performs the work, several states, such as New York, have an exception called the "convenience of the employer rule." Under the convenience of the employer rule, if the individual taxpayer is based with an employer in one state but instead works outside of that normal state for any reason other than for the convenience of the employer, then income earned while working outside of the normal state is still taxable in the normal state. In 2019, Connecticut adopted legislation that provided that for determining the Connecticut source income of a nonresident, the nonresident must include income from days worked outside Connecticut for that taxpayer's convenience, if that nonresident's state of domicile also employees the convenience of the employer test (such as New York). Massachusetts has adopted a pandemic-like convenience rule: if an individual taxpayer was based with a Massachusetts employer prior to the COVID-19 pandemic but now works outside of Massachusetts, then income earned during the pandemic period while working outside of Massachusetts is still taxable in Massachusetts.
These convenience rules may lead to double taxation. For example, assume that a Connecticut resident worked for ABC Inc. in Massachusetts before the COVID-19 pandemic. Due to the COVID-19 pandemic, the Connecticut resident was instructed to work remotely from her home in Connecticut for ABC Inc. As a Connecticut resident, the individual would be subject to Connecticut income tax on all income wherever earned, and assuming that Massachusetts' COVID-19 pandemic-like convenience rule applies, the individual would also be subject to Massachusetts income tax even though she was working remotely from her home in Connecticut.
Generally, Connecticut offers its resident individual taxpayers a credit for income tax paid to another state on income earned for services performed in that other state. The issue that is raised by the example, is whether Connecticut will allow the individual a credit for the Massachusetts taxes paid, because the individual was required by the pandemic to work from her home in Connecticut. If Connecticut does not provide a credit for the Massachusetts taxes paid, then the Connecticut resident will be subject to double taxation: both Massachusetts and Connecticut would be taxing the same wages without any offsetting credit.
The Governor and the Legislature are aware of this issue and it seems reasonably likely that legislation will be forthcoming shortly, at least with respect to taxes due for the 2020 calendar year, that will address this concern. On February 11, 2021, the joint Finance, Revenue, and Bonding Committee introduced raised bill S.B. 873, which would allow Connecticut residents and part-year residents to take credits for income taxes paid to another state that has either a convenience of the employer rule (like New York) or a COVID-19 pandemic-like convenience rule (like Massachusetts). With respect to the convenience of the employer rule, the legislation makes clear that the credit would apply even if the employee was obligated by necessity to work remotely from Connecticut. With respect to the pandemic-like convenience rule, the legislation would require that in order to get the benefit of the credit, the employee will need to show that he or she performed work in the normal state immediately prior to March 11, 2020.
However, there is one catch. The proposed legislation would only be effective for the 2020 calendar year. As currently drafted, the proposed bill does not address what happens in year 2021 or thereafter. It is our understanding that the final version of S.B. 873 may include provisions dealing with post-2020 years, but at this point in time, it is unknown what those provisions may look like.
In addition to the income tax issue, teleworking has also raised the issue as to whether an out-of-state employer will be considered to have nexus within Connecticut for purposes of the imposition of Connecticut taxes solely by reason of the remote worker in Connecticut. The proposed bill would also deal with this issue on a temporary basis by providing that the activities of an employee who worked remotely from Connecticut during 2020 shall not be considered by the Department of Revenue Services when determining whether such employer has nexus with Connecticut for 2020. Left unanswered by the proposal is the extent to which such activities may be sufficient to create nexus with Connecticut in the years following 2020.
We will follow S.B. 873 and related bills as they make their way through the legislative process and will update when more information is available.
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