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The COVID-19 pandemic has had a profound impact on businesses, individuals, and tax practitioners. Under state stay-at-home executive orders, social distancing has become our new “normal.” And with it, non-essential businesses have been shuttered across the country, travel has been discouraged, and large segments of the economy have transitioned to teleworking.
Consequently, taxpayers and their advisors should consider the potential state tax implications of an entire workforce shifting, suddenly, to a telework model. Significant complexities affecting multiple layers of state taxation could arise absent state intervention. Below, we highlight several considerations for those grappling with the coronavirus pandemic’s effects upon state and local taxation.
Nexus considerations
It is generally accepted that telecommuting employees can create nexus on behalf of a foreign corporation for income tax purposes. [See, e.g., Telebright Corp. v. Director, 38 A.3d 604 (N.J. Super. Ct., App. Div.) (2012).] With employees no longer working at their assigned office locations, businesses should evaluate their new footprint. Are employees working across state lines beyond the company’s pre-pandemic boundaries? If so, businesses should consider whether the presence of those employees could trigger physical presence nexus in new jurisdictions, potentially creating a host of costly new tax compliance obligations and inequities.
Several state and local tax authorities have begun to consider these issues and have issued guidance granting various degrees of relief. Understanding whether guidance exists, the scope of the protections offered, and the timeline for when that relief may end have become critical aspects of state and local tax compliance.
Apportionment considerations
If pandemic-related workforce changes create nexus in new jurisdictions, then a business needs to consider the impact upon its multistate apportionment of business income. Absent special relief, for states that utilize payroll and property factors, the presence of employees or company property in a new jurisdiction may impact the apportionment formula. Further, advisors should consider whether a company’s sourcing of receipts may be impacted. In states that utilize cost of performance sourcing for sales revenue, a shift in workforce location could potentially affect the location where services are performed.Payroll withholding and income sourcing considerations
Generally, employers are charged with withholding income taxes based upon the location where an employee works, which may be different from the location where the employee resides. For example, a New York employer would typically withhold New York taxes for employees working from its New York office. This is true whether the employee resides in New York, New Jersey, Connecticut, or Pennsylvania. Under pandemic-related disruptions, many employees may now be working from their home state or perhaps from an altogether new state, if they chose, for example, to shelter in place with family or at a vacation property.
Absent special relief, this reassignment of work locations due to COVID-19 precautions raises employer and employee payroll compliance concerns. In addition, whether states such as New York would be successful in asserting “convenience of the employer” rules for sourcing purposes remains an open question.
Sales tax considerations
Under the Wayfair decision, in 2018 the U.S. Supreme Court abrogated the physical presence requirement and ushered in economic nexus for sales tax purposes. Consequently, many remote sellers of taxable goods and services are now subject to each state’s recently enacted Wayfair provisions, which include small seller threshold exceptions. In most states, a remote seller does not have economic nexus with a market state unless it exceeds $100,000 in sales or 200 transactions in that state.
As a consequence of COVID-19, if a remote seller could be treated as having nexus in a new state due to the presence of a telecommuting employee, then it might meet the physical presence standard and may no longer qualify as a remote seller. Consequently, absent special relief, the seller might find itself subject to sales tax collection obligations in the new state without the protections of the Wayfair small seller thresholds.
Personal income tax residency considerations
Individuals should also consider the potential impact of residency rules. In brief summary, in many states that impose a personal income tax there are two ways to qualify as a resident. The first is domicile, which reflects an individual’s true home. The second is statutory residency, which requires an individual to maintain an abode and spend more than 183 days in the jurisdiction.
If an individual shelters in place in a new state or is unable to return home and consequently takes up temporary residence in a new location, that individual may need to consider any applicable statutory residency rules.
State guidance and other considerations
As of the drafting of this alert, several states (and some cities) have issued guidance considering some of these issues and granting varying degrees of relief. Taxpayers evaluating these issues should first ascertain whether the states where their workforce is now situated have issued guidance. Taxpayers should then consider the scope of relief granted and the time frame for when the relief expires. With budgetary considerations in mind, minor foot faults exceeding the scope of relief granted may be viewed negatively by a state tax auditor.
In addition, as the economy begins to reopen, many businesses will nevertheless continue with telework arrangements. Employees may remain concerned about mass transit. Child care may require employees to telecommute even after official states of emergency expire. There will be many employers and employees that have become accustomed to, and in some cases prefer, telework arrangements. Accordingly, altering a company’s multistate footprint may trigger nexus and state tax compliance obligations requiring registrations, filings, and tax payments that were not considered before March 2020.
The following is a non-exhaustive list of jurisdictions that have issued guidance addressing COVID-19 telework nexus issues:
1. Alabama
2. Georgia
3. Illinois
4. Indiana
5. Iowa
6. Maryland
7. Massachusetts
8. Minnesota
9. Mississippi
10. Nebraska
11. New Jersey
12. North Dakota
13. Pennsylvania
14. City of Philadelphia
15. Rhode Island
16. South Carolina
17. Washington, D.C.
What does CohnReznick think?
Taxpayers, advisors, and state policymakers should examine these issues. Businesses must evaluate their new pandemic telework footprint and assess their risks and exposures. Are employees conducting activities in new states and localities? If so, they will need to be vigilant and frequently monitor the states for guidance. In the absence of guidance, taxpayers should consider whether to affirmatively approach taxing authorities in order to seek guidance to achieve a degree of certainty. The pandemic landscape is fast-moving and subject to change. We expect that more states and localities will continue to address these issues as the weeks unfold. Questions and challenges will undoubtedly remain.
Corey Rosenthal
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.