Working from home, once a perk at many companies, has become the norm for employees across the country. COVID-19 has forced businesses to quickly allow their employees to work remotely. The state tax implications of having a remote workforce should not be overlooked, especially as many businesses transition from temporary teleworking policies to permanent ones. Today’s blog will focus on a state tax issue many taxpayers will need to focus on as we enter the second half of 2020: nexus.
“Nexus” is a term used to describe when a taxpayer has a presence in a state. Once nexus is created with a state, the taxpayer will likely need to register to do business in that state and will be subject to the various state tax return filing requirements. Each state has different nexus standards and within a state there may be different standards for different types of tax, i.e., sales taxes vs. income taxes. Having an employee working in a state typically creates nexus for the employer in that state for both sales tax and income tax.
This simple example illustrates how nexus works:
A Pennsylvania S-Corporation sells goods at just one physical location in PA. It sells no products online and it has a single owner who is also a resident of PA. Based on these facts alone, this business only has nexus in PA and thus would only file sales and income tax returns in PA. If, however, the business hires a remote employee who will only work out of their home office in New York, the business now has nexus with New York and will need to register to do business in New York and file the appropriate tax returns in both PA & NY.
With so many employees working remotely in the current environment, employers need to know where their employees are working and if nexus is created in those states because of the new remote work arrangements. Some states have issued guidance to indicate that nexus will not be created because of temporary teleworking during the pandemic. Most states, however, have been silent on the issue. And one state, Maryland, has indicated that it does not intend to change its current nexus standards. Remember that even if an employee is working in a state that has issued a “nexus waiver” during the pandemic, that waiver may only be valid during a government-mandated shutdown. As businesses reopen, a nexus waiver may no longer apply.
Businesses should revisit their teleworking policies and should consider the following:
Are employees allowed to work “anywhere” or can they only work in their state of residency?
Do employees use employer-owned property in their home offices?
In which states are the employees currently working?
Tax Warrior Perspective
State nexus rules are extremely complicated, are very specific to each state, and guidance is being updated daily. There is even a proposal in the next federal stimulus bill regarding state nexus relief, so we expect even more changes in the nexus arena. Nonetheless, business owners should discuss their teleworking policies with their tax advisors to understand how nexus issues could affect their tax situation. Thoughtful planning now can help minimize tax implications of a remote workforce. If you need help determining how you may be impacted by state nexus issues, call on us. The Tax Warriors® at Drucker & Scaccetti have decades of experience developing client solutions to state and local tax issues.