Out-of-State Remote Workers may Create Substantial Nexus as COVID-19 Protections Expire

Buckingham, Doolittle & Burroughs, LLC

In response to the COVID-19 pandemic, as work-from-home became the norm, many states provided safe harbors such that remote workers teleworking in the state would not create nexus for corporate income tax and sales / use tax purposes. Thus, businesses with teleworking employees were not burdened with additional state tax obligations during the pandemic. Now that COVID-19 restrictions are being lifted and people are returning to work, these nexus safe harbors are also expiring. However, working remotely, even if only partially, is certainly here to stay for many employees. Businesses must be aware of their state tax obligations that may be imposed as a result of allowing employees to work from home.

For instance, Pennsylvania had a nexus safe harbor in place during the pandemic, but has stated that beginning July 1, 2021, out-of-state businesses employing Pennsylvania residents working from home will have corporate income tax and sales tax collection obligations based on the employees’ activities in Pennsylvania. According to a Bloomberg survey, 37 states responded that teleworking employees in the state could create nexus for corporate income taxes (which would most likely require sales tax collection as well).

In addition to business-activity and sales / use taxes, businesses are likely required to withhold income taxes from its employees’ wages based upon where the employee is performing services. This creates compliance burdens when employees live in a different state from the business’ office or splits time between the office and home. The U.S. Supreme Court recently declined to hear a case that challenged Massachusetts’ ability to impose income tax on New Hampshire residents teleworking for Massachusetts employers, which could embolden states to use teleworking employees to increase tax revenue.

The rules concerning whether remote workers creates multistate tax obligations for businesses are changing as the United States pulls out of the pandemic and more offices open. Those businesses with employees working from their home out-of-state have particular compliance burdens.  These businesses must be cognizant of expiring nexus safe harbors to ensure they are not hit with surprise tax bills as a result of their employees’ presence in other states. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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