The COVID-19 outbreak and the efforts to slow the spread of the virus have resulted in many employees working from home indefinitely. While many employees live and work in the same state, there is undoubtedly a portion of the workforce that is now working in a different state than they did prior to COVID-19 altering their daily work routine. Therefore, employers need to determine if this is the case with any of their employees, and if the shift in where their employees are working results in a change to any state tax obligations.
The first state tax obligation that likely comes to mind when considering this issue is employer wage withholding obligations, however, businesses should also be considering any impact to the company’s state unemployment contributions, income tax nexus, and sales tax nexus. When considering any potential reporting changes, businesses should first know the technical requirements for each tax type. Then when deciding whether to change its current reporting, practical considerations will be a significant factor in deciding how to address the issue. Some of the technical and practical considerations for businesses with respect to each tax type include:
- For state income tax withholding:
- Does the state the employee is working in even impose an income tax?
- Does an employee’s remote work state even result in a different state for withholding? In regions where bordering states have reciprocity agreements for nonresident commuters, the state of residence (which is also now the work state) is the state for which income tax was being withheld prior to the employee working from home. For example, Virginia residents that commute to Maryland for work would have had Virginia income tax withheld prior to working remotely from home due to the jurisdictions having a reciprocity agreement in place.
- What are the registration requirements, or is employer already registered for withholding in the state due to other employees already working in that state?
- Does the employee need to provide a withholding exemption certificate?
- Does the employer anticipate that the identified employees will be working in a state requiring a change to the state income tax to be withheld for at least another 30 days? Although most states do not have a bright-line threshold for when an employer is required to withholding or when an individual is subject to individual income tax, the anticipated length of the remote work location will be considered by most businesses prior to changing the withholding state.
- For state unemployment tax contribution:
- State unemployment tax rules generally require all of an employee’s wages to be reported to one state.
- The state to which an employee’s wages are being reported should only be changed to the extent that the remote work arrangement will be made permanent, or is anticipated to be so long that maintaining the position that the employee’s “base of operations” is still the state where the employer’s office is located is no longer reasonable.
- Income tax nexus:
- The majority of states have business income tax imposition laws that are broad enough to result in an in-state telecommuter being a nexus-creating activity for income tax purposes, or the state has issued guidance directly on point stating that such activity creates nexus.
- In considering whether to file an income tax return when your tax advisor says an obligation exists, businesses should ensure their advisor is informing them of the income tax exposure. This will largely be based upon the apportionment formula and the sales factor sourcing rules applicable to the state(s) at issue. For example, your business may be a services provider with a telecommuter in a state that uses a single-sales factor apportionment formula, sources receipts from services using a market-based sourcing rule, and not impose any minimum tax or fee. In this case, despite the business having nexus with the state, there is no income tax liability.
- Sales tax nexus:
- In this post-Wayfair environment, sellers should certainly be tracking whether they have economic nexus with a state, but cannot forget that states still consider an in-state physical presence (e.g., an in-state telecommuter) an activity that creates nexus for purposes of being required to collect sales tax on in-state sales.
- Determining if the particular state imposes it sales tax on the businesses’ sales will then dictate if sales tax needs to be collected on sales to that state. For example, sales of tangible personal property not sold to a reseller or to a tax-exempt entity are generally subject to sales tax, whereas sales of a service are less likely to be subject to tax.
Finally, as states respond to the COVID-19 outbreak, businesses need to monitor if relief offered by states include the waiver of certain tax filings due to in-state employee presence from extended telecommuting from home. At this time, it appears that the only state to offer any guidance is New Jersey, which issued a Telecommuter FAQ addressing employer withholding tax. New Jersey will not require employers to make any changes to withholding “during the temporary period of the COVID-19 pandemic in which the Division of Taxation.” The Division of Taxation, in a separate update issued on March 30, 2020, also stated that employees working from their New Jersey home “solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy” will not result in an out-of-state corporation being subject to the state’s Corporate Business Tax (CBT). Normally, New Jersey would impose the CBT on an out-of-state corporation with an in-state telecommuter.
The information above is intended to assist your business with determining if any changes to you state tax reporting should be changed during this unprecedented time of increased telecommuting. Discussing these issues with a tax advisor to fully understand the variation amongst the states will be critical in making these decisions.
If you have questions regarding the state tax impact of a prolonged telecommuting workforce, please contact Michael L. Colavito, Jr. or your Aronson tax advisor at 301-231-6200. For help guiding your business through the coronavirus outbreak, visit our COVID-19 resource hub.