By Jason C. Skrinak, CPA
For many businesses, workers entering various states and the impact of their activities from a nexus perspective, as well as from a personal income tax and nonresident withholding perspective, have been a growing concern. Having an employee enter a state in which the business was not already registered for tax-filing purposes results in potential exposure for the business and the employee. The physical presence within a state could give rise to an income and/or sales and use tax filing requirement for the business and open the possibility of the state seeking nonresident personal income tax from the employee and withholdings from the business.
From the personal income tax perspective, an example of potential exposure would be New York State. New York does not have a de minimis standard for work being done within the state, and it expects withholding for nonresidents starting with the first hour within the state. Although New York seems extreme, many states take a similar stance. The various positions taken by states in this matter has led to support of creating a Mobile Workforce statute that would provide a de minimis standard in which an employee would be allowed in a state for work purposes and not require nonresident withholding or filing of a nonresident personal income tax return. Recent proposals would allow for a 30-days or less standard before requiring reporting and withholding for an individual. The legislation would have no impact on whether the business itself has a state tax filing requirement.
The possibility of getting a Mobile Workforce law into the books was picking up steam … then COVID-19 hit. Just like everything else in our lives, we have had to pivot and address other issues. With businesses seeking to provide a safe working environment for employees and government stay-at-home orders, the numbers of individuals working at home are staggering. In addition, with the future and the work environment unknown, we may have a significant number of workers that continue to work remotely full-time or, at the very least, in a partial capacity.
We must consider now the state and local ramifications revolving around remote employees. The state and local tax issues are minimal or nonexistent when the worker at home is in the same state and local jurisdiction as the employer; but what if they are not? Having an employee working remotely in a state in which a business is not filing tax returns (such as a New Jersey resident working from home for a Pennsylvania company) creates a scenario where the company would be deemed to have a physical presence in the state and a tax-filing requirement. Many states have identified this scenario and have provided that an employee working from home based upon shelter-in-place restrictions will not create nexus. Sixteen states have provided specific guidance for not imposing nexus based upon remote employees because of COVID-19. The guidance provided by states address either corporate net income tax nexus, sales and use tax nexus, or both; but the guidance being offered is narrow in focus and informal in nature.
Although some states have provided guidance with regard to the status of remote employees due to COVID-19, it is uncertain how other states will treat remote employees – opening up the possibility of creating nexus for business taxes. In addition, it is not certain how states will treat remote employees going forward. Businesses and individuals have realized that they can perform much of their work duties from home, and this realization could have a lasting impact regarding how employees and employers alike view the need to be physically present to perform job responsibilities.
My hope is that states realize this shift in how we work in the United States and appropriately adjust nexus standards, not just currently but going forward. Concerns over the safety of employees and a flexibility convenience should not create undue tax burdens. However, the reality I see will be that states will be quickly shifting gears away from their understanding during a crisis to raising much-needed revenue. The easiest target in many cases is by increasing the tax base and casting a larger net to pull in more taxpayers. I hope I am wrong, but only time will tell.
It is imperative that businesses have a grasp on the following:
- Does your business have remote employees caused by the COVID-19 pandemic in states and localities where the business does not currently have a tax obligation?
- Do the states or localities in which they do not file currently provide for nexus relief for remote employees, and how long does this relief last?
- Will business operations provide for permanent remote workplace options and, if so, how will this impact state tax nexus and business tax calculations?
Being proactive and understanding the possible state and local tax issues you may face from widespread work-from-home policies is paramount.
Jason C. Skrinak, CPA, is the founder of Pivot Strategic Consulting in Harrisburg, Pa., and is a member of the PICPA Legislation and State Taxation committees as well as the PICPA Conference on PA Taxes Subcommittee. He can be reached at firstname.lastname@example.org.
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