The COVID-19 pandemic has resulted in many businesses changing the way they conduct their operations. Undoubtedly, one of the biggest changes is that employers now have a significant increase in remote employees, which is forcing employers to determine if they are complying with certain state tax compliance requirements. Specifically, this is an issue to the extent that these employees are working in a state that is different than the state in which they worked prior to the pandemic. Potential changes to state payroll tax reporting may be needed, and the business may be exposing itself to additional income and/or sales and use tax obligations due to having nexus in additional states. Some states have issued guidance addressing the issue. Most of this guidance reflects that the general compliance obligations will not be enforced if employees are working in the state on a temporary basis due to the pandemic. However, as the pandemic extends beyond what many may have anticipated, current state guidance or lack thereof is creating uncertainly for businesses and individuals.
Aronson addressed the state tax impact of temporary remote employees in a blog that was posted in April of 2020. At the time, only an handful of states had issued guidance. Since then, additional states have addressed the issue, largely through some form of informal guidance. However, many states have not issued any guidance, possibly due to a state taxing authority not necessarily having the authority to implement a policy that is potentially at odds with existing law. The guidance that has been issued largely entails a state addressing one or both of the following issues:
- State Income Tax Withholding on Employee Wages – a number of states have indicated that employers should continue to withhold the income tax of the state where an employee worked prior to COVID-19 outbreak despite the fact the employee is now working in a different state. Similarly, a nonresident working in a state temporarily due to a COVID-19 lockdown will not be subject to that state’s individual income tax.
- Nexus – a number of states have stated that it will not treat the temporary presence of an in-state employee that is working in the state during the pandemic as a nexus-creating activity for income, sales and use, or gross receipts tax purposes. Generally, an in-state employee, even one working from home, would result in a filing obligation for these tax types.
For example, on jurisdiction that has provided more detailed guidance is Massachusetts. On July 21, 2020, the Massachusetts Department of Revenue issued Technical Information Release (TIR) No. 20-10. The TIR updated prior guidance that established a temporary waiver for corporate income tax nexus and sales and use tax nexus for one or more employees working remotely in Massachusetts as a result of a pandemic-related circumstance (e.g., government lockdown order, remote work policy adopted by an employer, or a worker’s compliance with quarantine or advice). The main purpose of the update was to provide an expiration date for the waiver, which is the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted.
Massachusetts has established a similar expiration date for the sourcing and withholding rules applicable to employees who are telecommuting due to the COVID-19 pandemic. Until the earlier one of the dates referenced above, wages of a non-resident who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee working in Massachusetts, and who began working from a location outside Massachusetts due to a pandemic-related circumstance, will continue to be treated as Massachusetts source income subject to Massachusetts personal income tax and withholding. Massachusetts will also allow a resident working from home that usually worked in another state to a claim a credit for taxes paid to the extent that the other state is continuing treating the employee’s wages as in-state sourcing income.
Oregon is another state that has provided an expiration date related to nexus relief. For purposes of the state’ corporate income tax, Oregon will not treat the presence of teleworking employees of a corporation in Oregon between March 8, 2020 and November 1, 2020 as a relevant factor when making a nexus determination if the employees regularly based outside of state.
Although the expiration dates established by Massachusetts and Oregon are fast approaching, the guidance issued by these jurisdictions provide the certainty that is needed by practitioners and taxpayers. It’s likely that some other states will follow suit in providing expiration dates to relief that has been issued, but there will undoubtedly be states that issue no guidance. Given the likelihood that guidance will be lacking, businesses need to start considering when they should no longer treat the current remote work setup as temporary and being changing state tax reporting. As discussed above, reporting changes could span across multiple state tax compliance areas, including wage withholding, state unemployment tax contributions, business income tax return required in additional states, and collection of sales tax in additional states.
Two related issues that states have not seemingly addressed are new hires and income tax residency. The hiring of new employees that will start working in a remote location solely due to a COVID-19 lockdown, but eventually will work out of the employer’s office when it’s deemed safe to do so is not generally a scenario covered in the telecommuter relief guidance issued by states. For example, a small professional services firm with its only location in Virginia that hires two new employees from California will have payroll tax and income/franchise tax filing obligations in California to the extent that the new employees will work from California while the firm’s office continues to employ a remote work policy.
Regarding income tax residency, most states consider an individual to be a resident for income tax purposes if the individual (1) is domiciled in the state (i.e., their “home” is in the state); or (2) has a permanent living place and spends greater than 183 days in the state. These two tests are typically referred to as the “domiciliary” and “statutory” residency tests. Extended remote work by an individual in a state other than an individual’s state of domicile, could trigger statutory residency treatment in the remote work state and dual residency in two states. For example, an individual that lives and works in Pennsylvania that has been sheltering in place at a beach house in the Outer Banks (i.e., North Carolina) since the middle of March is now very close to the 183 day count for purposes of being considered a statutory resident of North Carolina. Assuming the 183 day count in this example is surpassed, the individual will be required to file a resident income tax return in both Pennsylvania and North Carolina. Depending on the make-up of the individual’s income and the credit for taxes paid rules in the states, there is a possibility that some of the individual’s income could be double taxed.
It’s possible that Congress will step in and grant some limited relief for the telecommuting issue. Income tax relief for the remote workforce has been an issue that Congress has attempted to address is prior legislative sessions, but with no success. However, the COVID-19 pandemic has elevated the importance of the issue. The next round of federal legislation addressing the economic impact of the COVID-19 pandemic, which is known as the “American Workers, Families, and Employers Assistance Act,” includes a provision introduced in the US Senate earlier this year that would address the issue. The Act (S. 4318) would create a 30-day threshold for purposes of determining when an employee temporarily working in a different state would be subject to non-resident income tax in that state and for purposes of defining when an employer will have to withhold income taxes in that work state. In an attempt to accommodate the current situation, the Act increases the threshold to 90 days for calendar year 2020. Many remote workers are well beyond the 90 day threshold for 2020 due to the pandemic, so it’s a bit unclear how many works could benefit from the legislation if it’s enacted.
The hope is that additional states will issue clear guidance for practitioners and taxpayers, but there is little chance that all will be willing to do so. Thus, taxpayers, especially multistate businesses, need to monitor developments in states where their employees are located. Regardless of whether a state issues guidance or not, may businesses may decide to develop a policy that balances compliance with pragmatism so as to not create numerous additional filings that may only last a matter of months. In this case, employers should make themselves aware and be comfortable with the risks of employing such a policy.
If you have any questions about the state tax issues presented by your remote workforce, please contact your Aronson Tax advisor or Michael Colavito at 240.630.0702.