Ever since the coronavirus pandemic began impacting the United States, businesses around the country have responded by instituting work-from-home policies. While it is unclear how much longer the nation will be in the grips of the crisis, social distancing is likely to remain in place for many organizations. Some of the country’s most recognizable brands, including Facebook and Google, have already announced a work-from-home option that will extend through July 2021 for all of their employees, while others have made the ability to work remotely permanent.
As more and more organizations make the decision that their staff members can work from home either permanently or on a long-term basis, they may need to take a closer look at how nexus will be addressed — especially as several state governments are beginning to address work-from-home employees in terms of nexus and on tax revenue.
Traditionally, a state tax obligation is established when a business has a physical presence within its borders. That is what creates nexus. If a Floridian goes to New York for a temporary job placement they have an income tax obligation in New York for the money that they earn there, and if a California company places employees in Texas then the company would have an obligation to follow Texas laws and pay Texas sales tax.
While New York’s Governor Andrew Cuomo explicitly continued that practice when COVID-19 struck, making temporarily remote employees in New York liable for state income tax, several states (including Massachusetts and Pennsylvania) made clear that the virus-related remote work would not trigger nexus obligations, at least until official work-from-home orders or states of emergency lasted. As mandates are being lifted but companies continue to allow or enforce work from home, those states are beginning to reconsider their position.
We are providing the guidance below regarding Congress’ stated position thus far regarding nexus, as well as the position of several states that have published their position. Please contact us if you have any questions.
While not every state has begun to address the tax ramifications of working-from-home due to COVID-19, Congress has begun to address the issue, and on July 27th, 2020 new legislation was introduced with the goal of limiting the amount of state income tax that could be charged on income earned in state to residents of another state. The proposal revises Section 403 of the American Workers, Families and Employers Assistance Act (S. 4318), which says in part:
“No part of the wages or other remuneration earned by an employee who is a resident of a taxing jurisdiction and performs employment duties in more than one taxing jurisdiction shall be subject to income tax in any taxing jurisdiction other than: (A) The taxing jurisdiction of the employee’s residence (B) Any taxing jurisdiction within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned.”
The revision would extend the 30 days in part (B) to 90 days for calendar year 2020 “in the case of any employee who performs employment duties in any taxing jurisdiction other than the taxing jurisdiction of the employee’s residence during such year as a result of the COVID-19 public health emergency.”
Indiana Addresses Nexus Rules Following COVID-19
The Indiana Department of Revenue recently posted information regarding the intersection of nexus and COVID-19 on its website. Their post indicated that they would “not use someone’s relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis, as the basis for establishing Indiana nexus or for exceeding the protections provided by P.L. 86-272 for the employer of the temporary relocated employee.”
Despite this assurance, the department went on to explain that nexus could be established for an out-of-state employer if their employee “remains in Indiana after the temporary remote work requirement has ended,” and that the employer could not “assert that solely having a temporarily relocated employee in Indiana [due to an official work-from-home order or a physician’s order related to a COVID-19 outbreak or diagnosis] creates nexus for the business or exceeds the protections of P.L. 86-272 for the employer.”
If your clients do business or have employees in Indiana and you need more information, visit the website of the Indiana Department of Revenue for more details.
Massachusetts Addresses Nexus Rules Following COVID-19
The Massachusetts Department of Revenue proactively announced new rules regarding nexus well before the full weight of the COVID-19 crisis was felt, and their anticipation of the changing landscape has led to them again issuing a statement to preempt any questions regarding taxation. The department issued rule TIR 20-05 with the intent of minimizing the impact of the COVID-19 state of emergency on employers and employees alike. It read in part:
“One or more employees working from home solely due to the COVID-19 pandemic will not subject a business to a sales and use tax collection obligation or to the corporate excise by reason of that fact” from March 10 until the conclusion of the state of emergency. That rule has now been revised with the intent of ensuring “that businesses have sufficient time to prepare for the cessation of these temporary rules.”
Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic makes clear that TIR 20-05 will be in effect “until the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted. As of that date, the rules set forth in this TIR will cease to be in effect and the presence of an employee in Massachusetts, even if due solely to a Pandemic-Related Circumstance... will trigger the same tax consequences as under Massachusetts law more generally.”
The new guidelines go on to define a pandemic-related circumstance as including:
- A COVID-19-related government order
- A COVID-19-related remote work policy adopted by an employer in good faith compliance with federal or state government guidance or public health recommendations
- A worker’s COVID-19-related compliance with quarantine, isolation directions relating to a COVID-19 diagnosis or suspected diagnosis, or a physician’s advice.
The new guidance indicates that any business asserting that it qualifies for an exemption based on these definitions will be responsible for substantiating and documenting any evidence supporting their claim, and that without that verification the nexus exemption may be denied.
If your clients do business or have employees in Massachusetts and you need more information, visit the website of the Massachusetts Department of Revenue for more details.
Oregon Addresses Nexus Rules Following COVID-19
While the state of Oregon’s Department of Revenue has provided an exemption of corporate excise/income tax for COVID-19-related teleworking employees between March 8, 2020 and November 1, 2020, the explicit indication of the exemption ending on November 1st makes plain that traditional imposition of nexus will resume on November 2, 2020.
The Oregon Department of Revenue has also clarified how employees temporarily based in the state because of COVID-19 may affect nexus. The department explains:
“For the purposes of Oregon corporate excise/income tax, the presence of teleworking employees ... in Oregon between March 8, 2020 and November 1, 2020 won’t be treated by the department as a relevant factor when making a nexus determination if the employee(s) in question are regularly based outside Oregon.”
If your clients do business or have employees in Oregon and you need more information, visit the website of the Oregon Department of Revenue for more details.
South Carolina Addresses Nexus Rules Following COVID-19
Much like the finite period of time that the Oregon Department of Revenue has provided for the suspension of normal nexus rules, the South Carolina Department of Revenue issued its Letter #20-11 which outlines its suspension of establishing nexus, with the southern state’s expiration falling on September 30th, 2020.
If your clients do business or have employees in Indiana and you need more information, visit the website of the South Carolina Department of Revenue for more details.