A Major Development in Corporate Income Tax
What’s New Hampshire v. Massachusetts got to do with it?

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The pandemic has caused drastic shifts in employment and business arrangements. Major tax implications have surfaced, and taxpayers have been eager for state guidance or federal legislation to address pandemic-related issues. But with limited state guidance, and with federal legislation completely stalled, one development has become the focus of our attention: New Hampshire’s recent suit filed in the US Supreme Court against Massachusetts.1 New Hampshire alleges that a recent Massachusetts regulation improperly attempts to tax income not earned within the borders of Massachusetts. The strongest basis for New Hampshire’s suit is the US constitutional requirement that state taxes be “fairly apportioned.” Furthermore, although the regulation relates to Massachusetts’ personal income tax and payroll withholding rules, the case may affect critical corporate income tax issues such as proper apportionment and market sourcing. Consequently, it is essential for taxpayers of all stripes, from individual employees to large multinational corporations, to pay attention to the impact of the pandemic on the state tax landscape.

New Hampshire v. Massachusetts, in a Nutshell

As the pandemic lasted far longer than many anticipated, Massachusetts set up an ostensibly temporary regulation that it has since extended twice. The regulation was promulgated to address nonresident employees who were suddenly working from their homes outside Massachusetts rather than from their employers’ Massachusetts offices. The regulation sources to Massachusetts, and therefore requires employers to withhold Massachusetts personal income tax from the income of any employee that 1) worked at her employer’s Massachusetts office immediately before Charlie Baker, Massachusetts’ governor, shuttered in-person business operations on March 10, 2020, and 2) worked outside Massachusetts for “pandemic-related” reasons following the governor’s order.2

The dispute centers on the dormant Commerce Clause Complete Auto four-prong test, with New Hampshire arguing that Massachusetts’ regulation fails all four prongs of the test. Complete Auto requires that state taxes 1) apply to an activity with a substantial nexus with the taxing state; 2) are fairly apportioned; 3) do not discriminate against interstate commerce; and 4) are fairly related to services provided by the taxing state.3 The same four-prong test applies to corporate and personal income tax, with the fair apportionment prong providing the strongest grounds for corporate and individual taxpayers to challenge state overreach. New Hampshire residents working for Massachusetts employers provide services to these employers, and we see no reason for the US Constitution’s requirements to apply differently to employment services than to independent contractors, sole proprietorships, and corporate services.

New Hampshire’s nexus arguments face significant obstacles, because residents may have entered Massachusetts during the pre-pandemic period, and the Court’s recent nexus case law suggests that the receipt of payments from within a taxing state may justify nexus with that state.4 In addition, the Court has rejected discrimination prong challenges to sourcing regimes that apply to out-of-state taxpayers based on connections to in-state payers, and the Court would need to sidestep or overrule this precedent to rely on the discrimination prong. Finally, the Court has weakened the fourth prong requiring a fair relationship to services provided by the state as an independent ground to challenge a state tax.5 However, the Complete Auto fair apportionment prong provides a strong basis for the relief New Hampshire seeks.

Fair Apportionment: Implications for Market Sourcing

The Complete Auto fair apportionment analysis encompasses two separate requirements: internal consistency and external consistency. “Internal consistency,” which prohibits tax rules that hypothetically produce double taxation if applied universally by all jurisdictions, is not at issue, because the personal income tax residency-source system provides a credit for source taxes paid so as to theoretically avoid double taxation.6 “External consistency” is the less objective standard, requiring state apportionment to “[reflect] a reasonable sense of how income is generated.”7 The Court should take New Hampshire v. Massachusetts as an opportunity to clarify the practical effect of the external consistency requirement. By its own admission, the Court has permitted states “wide latitude” to adopt conflicting apportionment rules, but this latitude has produced state overreach. For example, even through multiple jurisdictions have nexus with the relevant activity, states routinely tax 100 percent of nonresidents’ income. Some states’ personal income tax rules go a step further under the aggressive convenience-of-the-employer doctrine, which taxes even income earned while working outside the state unless done for the employer’s “convenience.” New Hampshire’s suit could curb intentional state overreach through unfair apportionment rules.

Preference for Physical Location Sourcing

The thrust of New Hampshire’s case is that apportionment based on the taxpayer’s physical location takes priority over other apportionment methods. Although state tax authorities are limited to taxing nonresidents only on their income sourced into the state, it is not uncommon for states to source 100 percent of nonresidents’ income to themselves based on the nonresidents’ employment within the state (that is, following the convenience-of-the-employer rule). New Hampshire generally does not take issue with this outcome but instead seeks to block Massachusetts’ attempt to tax all or most such income when a taxpayer is physically absent from Massachusetts.

New Hampshire is not the first state to differentiate between physical location sourcing and other sourcing methods. The Court has upheld states’ use of apportionment rules that source income into the state based on factors other than a taxpayer’s physical presence. For example, the US Supreme Court has upheld single-sales-factor market sourcing apportionment in the context of corporate income tax.8 Nonetheless, the Court has not sanctioned apportionment rules that would tax 100 percent of a taxpayer’s income when the taxpayer has little or no physical presence in the state. The question New Hampshire raises is whether apportionment rules based on factors other than physical presence present a unique risk of state overreach.

Insight Into Proving External Inconsistency

The primary mechanism to limit state overreach into sister-state territories is the external consistency test. External consistency encompasses two related but distinct concerns: 1) the risk of multiple taxation and 2) the proper relationship between taxpayer activities and state-provided services. Perhaps due to difficulties in quantifying these abstract concerns, the Court’s precedents have permitted broad state taxing power by requiring taxpayers to prove that a tax is “grossly disproportionate” to the state’s interests in taxation. As a result, the Court has permitted some double taxation of taxpayer income to persist despite the external consistency requirement. Furthermore, the Court has not provided a proper measure for quantifying how much state-provided benefit a taxpayer receives. The Court’s recent nexus case law has added to the confusion by permitting state tax rules to apply to out-of-state taxpayers based only on such taxpayers’ receipt of payments from in-state customers. The Court should use New Hampshire v. Massachusetts to clarify meaningful limits to prevent multiple taxation and ensure a proper relationship between taxpayer activities and state-provided services.

To do so, the Court must grapple with at least two difficult issues related to the external consistency analysis: 1) quantifying abstract concepts such as the “risk of multiple taxation” and the “benefits of government services” and 2) determining the threshold a state apportionment factor must exceed to justify striking down the apportionment result as unconstitutional. If the Court agrees with New Hampshire—that physical location sourcing is constitutionally preferable to other sourcing methods—we submit that physical location sourcing may provide a benchmark for external consistency. Specifically, physical location sourcing may stand in as a proxy that quantifies the risk of multiple taxation and the receipt of government services, which would provide helpful insight into how taxpayers may prove that a tax is grossly disproportionate.

Conclusion—What to Watch For

The preliminary question the Court must address is whether it will accept jurisdiction of the case at all. The Court may refuse jurisdiction out of skepticism of New Hampshire’s nexus arguments and deference to administrative tax protests to resolve fact-specific questions regarding fair apportionment. If the Court takes jurisdiction, the Court’s remedy will be an important focus point. If the Court completely invalidates Massachusetts’ regulation, it likely means the Court takes issue with Massachusetts’ nonphysical location sourcing method. However, the Court may uphold the regulation but impose tailored limits for its application, in which case the Court may address with more certitude how to prove external inconsistency. Finally, taxpayers should be mindful that the Court may narrow its holding (for example, to personal income tax only or under the unique circumstances of the pandemic). In any case, we will watch New Hampshire v. Massachusetts closely to gain insight into pandemic-related issues, even those affecting corporate taxpayers.

Evan Hamme is counsel and Marc Simonetti is a partner, both at Pillsbury Winthrop Shaw Pittman LLP.



  1. New Hampshire v. Massachusetts, Docket No. 220154 (2020).
  2. The regulation would source to Massachusetts a portion of income earned after March 10, 2020, based on the ratio between working days spent in Massachusetts and all working days from January 1, 2020, to March 10, 2020.
  3. Complete Auto Transit, Inc. v. Brady, 430 US 274, 279 (1977).
  4. Wayfair v. South Dakota, 138 S. Ct. 2080 (2018).
  5. Commonwealth Edison Co. v. Montana, 453 US 609 (1981).
  6. Container Corp. of America v. Franchise Tax Board, 463 US 159, 169 (1983).
  7. Id.
  8. Moorman Manufacturing Co. v. Bair, 437 US 26 (1978).

Two Hypothetical Examples Revealed by New Hampshire v. Massachusetts

These examples illustrate how physical location sourcing may serve as a proxy for quantifying the risk of multiple taxation and benefits received by the state. Example 1 illustrates this principle for hypothetical circumstances akin to those currently faced by New Hampshire residents employed by Massachusetts businesses. Example 2 illustrates the principle for a corporate taxpayer with arguments parallel to those faced by such New Hampshire residents.

Example 1: New Hampshire v. Massachusetts (Hypothetical)

Facts—Employee A was physically located in MA all working days pre-pandemic (2.5 months in 2020) and at her home in NH for the entire pandemic (9.5 months in 2020).

Risk of Multiple Taxation

  • Physical location sourcing – MA 20% (2.5 months/12 months); NH 80% (9.5 months/12 months);
  • MA’s employer location sourcing – MA taxes 100%; and
  • MA’s sourcing risks taxing 180% (MA’s actual 100% tax + NH 80% physical location authority).

Disproportionate to State Services

  • MA provided services while Employee A was physically present for 20% of 2020; and
  • MA taxes at 100% or 5 times the portion of Employee A activity protected by MA services.

Example 2: Implications for Corporate Income Tax Market Sourcing

Facts—20% of Corporation A’s property or payroll in State X and remaining 80% in other states; State X’s single-sales-factor market sourcing rule sources 100% of A’s receipts into State X. Corporation A could argue the market sourcing rule is externally inconsistent because:

  1. State X’s market sourcing produces a risk of taxing 180% of such income; and
  2. Market sourcing apportions 500% of the percentage of State X services to A.

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