We have been living with the pandemic for nearly two years. During these two years, much has changed in the workplace and how companies conduct business. Teleworking is certainly one aspect of our "new normal," however, many other disruptors to the "old way" also are changing the economic landscape. Labor market shortages, inflation, impacts to commercial real estate, higher wages, and even a basic understanding of what "work" means to many people are just a few factors that have drastically altered the picture of what the early days of 2020 looked like. The state and local tax situation also is much different than what it was before COVID-19. During the early days of the pandemic, most states took a "wait and see" approach. Now, however, states are very active in addressing issues, and it is important for taxpayers to understand the trends that are developing across the nation. This article will touch on some of the most important of those trends.
Many of you reading this article are doing so during traditional work hours, while sitting in your home office. Most forecasters agree that teleworking will remain common in large portions of the nation's workforce, even after the pandemic. This raises significant state and local tax issues. At the beginning of the pandemic, as noted above, many states let it be known that they would not seek to enforce nexus rules on those employers that had employees teleworking, essentially adopting the view that work arrangements would be viewed as they existed before the teleworking began. That relaxed view is now trending strongly the other way.
For instance, early in the pandemic, the Pennsylvania Department of Revenue issued guidance and clearly said that it would not seek to impose corporate net income or sales and use tax nexus solely on the basis of having employees temporarily working remotely in Pennsylvania due to the pandemic. This relaxed view changed on July 1, 2021, and Pennsylvania is now once again resuming its enforcement of its pre-COVID-19 telework policy. Many other states have taken similar actions. This area of the law is very fluid across the nation, and if a business has employees teleworking, it is necessary to understand what additional state and local tax exposure may occur.
The Continuing Impact of Wayfair
It has been over three years since the U.S. Supreme Court's landmark ruling in South Dakota v. Wayfair, 138 S.Ct. 2080 (2018). The Wayfair decision altered over 25 years of sales and use tax nexus analysis by doing away with the necessity of "physical presence." Wayfair ushered in the concept of "economic nexus" for sales and use taxes, and states have embraced that concept. In fact, all states now have enacted legislation which adopts an "economic nexus" standard for sales and use tax nexus.
Despite the passage of time since Wayfair, many businesses still have not conducted an analysis to determine whether they may have nexus in additional states due to the standards. Even businesses that have addressed Wayfair need to stay abreast of states constantly changing their sales and transaction thresholds. Presently, compliance is very important because states currently are viewing economic nexus as an audit target area. Businesses that have not yet addressed this important area should immediately begin to conduct an analysis and get into compliance, using tools such as voluntary disclosure agreements, if available.
Relatedly, the Multistate Tax Commission (MTC) finished a two-year project to identify internet activities not protected by P.L. 86-272. Necessitated by Wayfair, the main takeaway from the MTC's guidance is that when a business interacts with a customer through its website or app, it is engaging in business activity beyond the protections of P.L. 86-272, thereby creating possible nexus. The guidance also provides a list of protected and unprotected internet activities. While not binding law, it does provide guidance as to possible legislative and administrative action by states.
One pro-business trend is the reduction or elimination of state corporate and personal income taxes. Supported by increased tax receipts generation and the influx of federal money, many states are providing relief to taxpayers by reducing rates or outright eliminating taxes. During 2021, Arkansas, Oklahoma, Idaho, and Nebraska all reduced corporate net income tax rates, and North Carolina enacted legislation to phase out its corporate net income tax entirely. Personal income tax rates were reduced by Arizona, Oklahoma, Arkansas, and Ohio. Hopefully this trend will continue as the economy continues to wake up from its pandemic lull.
These are just some of the areas in which state and local tax issues are having an impact on businesses. As we continue to move through what are hopefully the end stages of this pandemic, it is imperative that businesses stay informed as to state and local tax issues. While the activity of state tax departments might have slowed down during the pandemic, they now are getting back up to speed, and it is very likely that 2022 will bring with it more audit and enforcement activity.