According to a new 2020 tax survey, most states consider a company to have tax nexus even when only one employee is telecommuting from their state. Given the sharp increase of the remote workforce during the COVID-19 pandemic, this could have broad tax implications for businesses.
For the past 20 years, the Bloomberg Tax Survey of State Tax Departments has examined each state’s position on some of the less-defined matters when it comes to the income taxation of corporations and pass-through entities. The study also looks at sales and use taxation, especially as it relates to nexus policies. Nexus, which refers to the relationship between a taxing authority and a business for sales tax and income tax filings, has attracted increased scrutiny ever since the South Dakota v. Wayfair Supreme Court decision. That court decision allows for the taxation of sales tax on retailers without a physical presence under a wide variety of economic presence thresholds.
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Business Tax Nexus
Employers are considered to have nexus in a state for the purposes of all taxes imposed by that state – including income, franchise, gross receipts, and sales/use – if they have employees working in the state. Individuals are typically taxed based on where they work. According to the Bloomberg study, 36 states – including Texas – report that nexus is created with just one employee telecommuting from their state. That is more than double the number of responses from a 2018 study, which was conducted before the Wayfair decision.
For employees who typically commute to their place of employment outside of their state, “stay at home” orders changed that. Instead, they are working from home (telecommuting), and they may continue to do so for the foreseeable future. Since individuals are taxed based on where they work, this may trigger nexus in states where the employer did not previously have tax liabilities. Once nexus is triggered, the employer may have new filing requirements for state and local taxes, such as sales and use tax, income tax, payroll tax, and personal income tax withholding. In other words, these telecommuting arrangements, even when temporary, can increase the employer’s tax burden during the public emergency.
Alleviating the Tax Burden
During the COVID-19 pandemic, many states have suspended their nexus rules pertaining to telecommuting. As a result, several states, including Georgia, Maryland, Massachusetts, Minnesota, New Jersey, and Pennsylvania, have issued guidance to alleviate the tax burden. Others are expected to follow suit. For example, the mayor of the District of Columbia issued a notice that its Department of Tax and Revenue will not impose corporation franchise tax or unincorporated business franchise tax solely based on employees or property that is needed to allow employees to work from home during the public health emergency. Some states, including Texas, have not yet issued guidance.
Convenience of the Employer Rule
Some states adhere to a rule commonly known as “Convenience of the Employer,” to address employees residing in a different state than the employer’s office location. In these states – which include Connecticut, Delaware, Nebraska, New York, and Pennsylvania – employees who work in a different state but spend at least some time at their employer’s office may be considered to have either all or part of their income sourced to the company office location. In these cases, no rule change would be appear to be needed regarding income withholding.
The State and Local Tax Team at Goldin Peiser & Peiser will continue to monitor any state tax changes concerning nexus and telecommuting. We work with business owners to understand shifting tax policies that may impact your tax obligations or your company’s nexus. Our priority is to minimize penalties through proactive state tax planning that can help you leverage savings opportunities.
For more information, please contact Alita Stratton, CPA, at (972) 818-5300.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.