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Connecticut legislative fix averts double taxation

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On March 4, 2021, Connecticut Gov. Ned Lamont approved emergency legislation designed to protect residents working remotely during the COVID-19 pandemic from potentially facing double taxation.1 Effective for the 2020 tax year only, the law allows Connecticut residents to obtain a credit for income tax paid to another state that applies a “convenience of the employer” rule. Similarly, the legislation provides a credit to residents who paid income tax to another state due under a law or rule requiring them to do so if they were working in that state before March 11, 2020. Finally, the law waives state tax nexus thresholds during the 2020 tax year for employers with employees working remotely from Connecticut solely because of the pandemic.

Background Generally, Connecticut law provides a credit against resident income tax liability to taxpayers who pay income tax to another state for services performed in that state.2 In order for the credit to apply, the tax paid must be on income from sources derived within the state and subject to Connecticut income tax.3

With respect to nonresident taxpayers, Connecticut in 2018 adopted a “convenience of the employer” rule, under which a nonresident taxpayer’s wage income is sourced to the employee’s physical location if the employee is working remotely as a requirement of the employer.4 Otherwise, income is sourced to the employer’s location if the employee is working remotely at his or her convenience. First effective in 2019, Connecticut’s convenience rule applies only if the taxpayer’s resident state applies a similar rule for work performed for a Connecticut-based employer.5 Connecticut enacted this income sourcing rule in response to other states that impose convenience rules, including Arkansas, Delaware, Nebraska, New York and Pennsylvania.

As a result of the pandemic, states have issued specific guidance over the past year addressing the income tax withholding treatment of telecommuting employees working remotely from different states.6 In particular, the New York State Department of Taxation and Finance released guidance stating that for nonresidents whose primary office is located in New York, days spent teleworking during the pandemic are considered days worked in the state unless the employer has established a bona fide employer office at the nonresident’s teleworking location.7 The guidance is considered a rigid application of New York’s convenience rule. In contrast, Massachusetts, a state that did not traditionally follow a convenience rule, adopted and later finalized an emergency regulation allowing the state to source and tax the income of nonresident employees that worked in Massachusetts prior to the pandemic, but who are telecommuting during the pandemic.8 The regulation applies until 90 days after the Massachusetts governor lifts the state’s COVID-19 emergency declaration.9

Connecticut emergency legislation The emergency legislation addresses potentially adverse tax impacts on Connecticut residents by extending the state’s income tax credit to resident taxpayers working remotely in the state under two specific circumstances. First, Connecticut residents who paid income tax to any other state following the application of a convenience rule with respect to the sourcing of nonresident income are permitted a credit against their Connecticut income tax liability for tax paid to that state on income earned while working remotely from Connecticut during the 2020 tax year.10 This provision is designed to address the situation of residents paying tax to states such as New York, which had existing convenience rules in place before the pandemic.

Second, resident taxpayers are allowed a credit on income tax paid to another state under a law or rule requiring nonresident employees to pay nonresident income tax on income earned while working remotely from Connecticut due to the pandemic if they were working in that state immediately before March 11, 2020.11 In contrast to the first example, this provision addresses the instance of residents paying tax to states including Massachusetts, which adopted temporary nonresident income sourcing rules tied to remote work arrangements during the pandemic.

Additionally, the legislation provides business tax nexus relief for employers during the 2020 tax year. Specifically, the Connecticut Department of Revenue Services may not consider the activities of employees who worked remotely from Connecticut during the 2020 tax year solely due to the pandemic in determining whether an employer has nexus with Connecticut for any state tax.12 Finally, the legislation makes changes to the Connecticut Payment in Lieu of Taxes (PILOT) Program by establishing a minimum reimbursement rate for PILOT grants and a method for prorating the grants when appropriations are insufficient to fund the full grant amounts.13

In advance of the bill’s enactment, the Department issued a bulletin explaining the impact the legislation would have on individual income tax filing and payment obligations for the 2020 tax year.14 The Department also emphasized that Connecticut residents should be mindful of the continued tax implications of working remotely beyond the 2020 tax year, advising taxpayers to take the appropriate steps to ensure that Connecticut tax is properly applied to their specific facts and circumstances.

Commentary As the result of aggressive application of convenience rules in New York and pandemic-contingent income sourcing regulations in Massachusetts, Connecticut enacted legislation to address the risk of residents being subjected to double taxation on income earned while earned working remotely in the state during the pandemic. According to fiscal estimates, the state is forgoing approximately $300 million in additional personal income tax revenue that would have otherwise been due without the extension of the income tax credit.15 However, the remote work legislation was met with broad support from both the Connecticut legislature and the governor due in part to a modest budget surplus attributable to increased income and sales tax revenues.16

The timing of the bill’s enactment presents some interesting questions regarding Connecticut’s ability to receive state aid provided in the federal American Rescue Plan Act of 2021 (ARPA), which was signed into law by President Joe Biden on March 11.17 The ARPA contains a provision that appears to prohibit states from using relief funds to “directly or indirectly offset a reduction in . . . net tax revenue” resulting from changes in state law or regulations that reduce tax burdens “by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise.”18 ARPA provides that the “covered period” under which changes resulting in a reduction in net tax revenue began on March 3, 2021, the day before Connecticut adopted its remote worker legislation.19 Depending on how broadly the ARPA provision is interpreted by the U.S. Treasury Department, it is possible that the extension of Connecticut’s resident income tax credit – even for the 2020 tax year only – may be considered a tax cut that would require the state to repay the allocated federal funds equal to the amount of tax relief provided. The extent of the ARPA provision’s applicability may also impact whether similar legislation will be proposed during the next state legislative session, given that remote working arrangements in light of the pandemic are expected to continue through 2021.

More broadly, the Connecticut legislation highlights several issues regarding the ability of states to tax the income of nonresident employees working remotely beyond their borders during and after the pandemic. First, Connecticut has decided to acquiesce to the more aggressive nonresident taxation rules of neighboring states by providing a favorable income tax credit for Connecticut residents working remotely during the pandemic. Second, the legislation comes as New Hampshire has asked the U.S. Supreme Court to rule on whether Massachusetts may constitutionally tax nonresidents working in New Hampshire and lacking a connection with the state during the pandemic.20 Assuming the Massachusetts regulation and convenience rules in other states withstand legal scrutiny in the current remote work environment, it will be interesting to see how other states will react and respond to the state taxation of nonresidents working remotely across state lines during the pandemic and beyond.



1 Public Act No. 21-3 (H.B. 6516), Laws 2021.
2 CONN. GEN. STAT. § 12-704(a).
3 CONN. GEN. STAT. § 12-704(a)(1).
4 CONN. GEN. STAT. § 12-711(b)(2)(C).
5 Id.
6 For further discussion of state income tax withholding policies and guidance issued during the pandemic, see GT SALT Alert: COVID-19 impact on remote work and state tax policy.
7 Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax, N.Y. Department of Taxation & Finance, updated Oct. 19, 2020.
8 MASS. REGS. CODE tit. 830, § 62.5A.3, finalized Mar. 5, 2021.
9 MASS. REGS. CODE tit. 830, § 62.5A.3(1)(d).
10 Public Act No. 21-3, § 1(b)(1).
11 Public Act No. 21-3, § 1(b)(2).
12 Public Act No. 21-3, § 1(b)(3).
13 Public Act No. 21-3, §§ 5-8.
14 Commissioner’s Bulletin, Connecticut State Senate Passes H.B. No. 6516 and Immediately Transmits the Legislation to Governor Lamont, Connecticut Department of Revenue Services, Mar. 5, 2021.
15 H.B. 6516 Fiscal Note, Connecticut Office of Fiscal Analysis, Feb. 24, 2021.
16 Press Release, Comptroller Lembo Projects $131.4 Million Surplus, Continues Call for Federal Assistance, Connecticut Comptroller’s Office, Mar. 1, 2021.
17 P.L. 117-2 (2021).
18 P.L. 117-2, § 9901(a).
19 Id.
20 New Hampshire v. Massachusetts, No. 22O154, U.S. Supreme Court, filed Oct. 19, 2020. Connecticut joined 13 other states in filing amicus briefs urging the Court to hear the case.



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