With many employees forced to work from home due to business and office closures, among myriad other concerns, employers may be forced to confront state tax issues, particularly when employees work in states or local jurisdictions other than where the employer has a presence.
Ordinarily, when an employer who is based in State A allows (or requires) an employee to work remotely from State B, whether regularly or sporadically, the employer must evaluate how the arrangement affects its tax responsibilities, including (i) whether the employer is required to withhold State B employment taxes from the employee’s wages, (ii) whether the presence of the employee in State B creates sales tax collection requirements with respect to sales to customers in State B, (iii) whether the presence of the employee in State B creates income tax filing and payment requirements in State B, and (iv) if the answer to (iii) is yes, how the presence of the employee in State B (and potentially property used by the employee in State B) affects the employer’s income tax apportionment factors.
The presence of even a single employee in State B almost certainly allows State B to impose income tax on the employer and to require the employer to collect State B sales tax and withhold employment taxes. However, some states have de minimis rules and, in ordinary circumstances, businesses have the opportunity to evaluate these rules before allowing or requiring such an employee to work remotely.
In the world of stay-at-home orders and forced business closures, many businesses have been put in this situation without any opportunity to preplan or evaluate various state laws. In the absence of guidance from states, tax departments will need to evaluate whether and how they are required to file returns in several state and local jurisdictions in which they have not previously filed.
Exacerbating this already complex situation is the fact that states and localities already are starved for cash and will undoubtedly be looking for new sources of revenue. Moreover, while constitutional issues could be implicated, there is the potential for “whipsaws.” For example, if —in the above example—State A takes the position that remote working due to COVID-19 should be ignored but State B takes the position that the presence of the employee in State B creates nexus, the employer could face two states trying to tax the same income.
A few states and localities have issued guidance indicating that, in the context of the current crisis, ordinary nexus rules will not be strictly enforced. Specifically, as of April 15, 2020, Pennsylvania, New Jersey, the District of Columbia, Indiana, and Mississippi all announced that employees working remotely in those jurisdictions due to COVID-19 will not create nexus for their employers. Mississippi’s announcement specifically stated that employees working remotely would not affect income tax apportionment for the employers. Other taxing authorities likely will announce nexus-related policies in the upcoming days and weeks.
While states thus far seem to have taken a sympathetic approach in light of COVID-19, the crisis called attention to an issue that existed before the crisis and that will continue to exist. In ordinary times, businesses should be careful when allowing employees to work remotely in other taxing jurisdictions and should pay attention, not just to employment-related concerns, but also to potentially unexpected tax consequences.
We will continue to monitor developments in this area. Additionally, we will cover this, along with several other topics, in our April 22, 2020 webinar: “Tax Issues in the Age of COVID-19” (details and registration are available here).