On March 5, 2021, the Massachusetts Department of Revenue promulgated a new regulation (830 CMR 62.5A.3), setting forth the sourcing rules that apply to income earned by employees who telecommute due to the COVID-19 state of emergency in Massachusetts. The new regulation relates to non-resident employees who telecommute outside of Massachusetts on behalf of Massachusetts-based employers. It also explains the parallel treatment accorded to resident employees with income tax liabilities in other states that have adopted similar sourcing rules.
For Massachusetts personal income tax purposes, Massachusetts residents are generally taxed on all of their income derived from all sources (M.G.L. c. 62, § 2). Non-residents are taxed on gross income earned from sources within the Commonwealth, including income derived from or connected with any trade or business, or any employment carried on in Massachusetts (M.G.L. c. 62, § 5A(a)).
Under the regulation, all compensation received for services performed by an out-of-state employee who, immediately prior to the Massachusetts COVID-19 state of emergency, performed such services in Massachusetts, and who is performing services from a location outside Massachusetts due to the pandemic, will continue to be treated as Massachusetts source income subject to personal income tax under M.G.L. c. 62, § 5A.
Massachusetts residents who performed services outside Massachusetts prior to the COVID-19 state of emergency and began performing such services in Massachusetts due to the pandemic will be eligible for a credit for income taxes paid to the state where the employee was previously providing services. This assumes the other state has adopted similar sourcing rules.
The regulation also contains specific apportionment rules for non-resident employees who, prior to the Massachusetts COVID-19 state of emergency, determined Massachusetts source income by apportioning based on days spent working in Massachusetts.
The regulation applies to the sourcing of wage income attributable to employee services performed commencing March 10, 2020 through 90 days after the date on which the Governor of the Commonwealth gives notice that the Massachusetts COVID-19 state of emergency is no longer in effect.
If you have any questions regarding anything contained in this alert, please contact me or a member of our Tax Law practice.