The World Health Organization has officially declared the coronavirus outbreak to be a pandemic. In addition to the cost on human life, the rapid spread of COVID-19 has left a trail of economic damage affecting business revenues. COVID-19 has caused complete or partial shutdown of factories, supply chain disruptions, and labor shortages, and has impacted demand in certain industries. This impact will also be felt by U.S. state, and local governments.

At the federal level, White House officials are working to pass an economic stimulus package that would include targeted tax cuts to help alleviate economic uncertainty, specifically through a payroll tax suspension. This comes after the biggest one-day stock market selloff since the 2008 financial crisis.

At the state and local level, scarce resources and economic losses are already being felt and have, for some states, been a constant in recent years. In the short term, states may respond to COVID-19 using the same tools for relief often used in the aftermath of a natural disaster. For example, as a result of Hurricanes Harvey and Irma, the Florida Department of Revenue granted tax relief in the form of the postponement of return due dates. With April 15th less than five weeks away, we expect states are considering similar postponement relief. Additionally, Washington—which has been hit particularly hard with the virus—adopted emergency rules enhancing the flexibility of unemployment insurance to support workers and businesses impacted by COVID-19. California has also taken action by issuing a news release allowing employers that have been directly affected by COVID-19 to request up to a 60-day extension to file and pay their state payroll reports without penalty or interest. Other states may follow suit, taking steps to ease the burden of COVID-19 and compliance with laws amidst a shifting workforce.

In the longer term, businesses and individuals should expect to see some change at the state and local level as state legislators respond to any resulting economic decline and its impact on state budgets. As state legislative sessions heat up, we may see governments attempt to fill revenue gaps.

Looking at the actions states have taken during and after past economic downturns may provide guidance as to how states will respond to recover lost revenue after COVID-19. Common tools state legislators have used include tax rate increases, postponing or limiting tax deductions (like net operating losses), eliminating tax exemptions and credits, and broadening tax bases. Some states may also take a more proactive step to avoid revenue shortfalls resulting from fluctuations in revenues. For example, after the 2008 financial crisis, California started a so-called “rainy day” fund to minimize the impact of revenue instabilities due to the state’s heavy reliance on its personal income tax. That reliance has made the state susceptible to significant revenue reductions when capital markets are negatively impacted. The rainy day fund is projected to total $18 billion this fiscal year, but the market impact of COVID-19 may require dipping into that fund. Reserves in any state are critical to the state’s budget and help cushion the impact of the budget problems that emerge in the face of economic decline. As a result, other states may attempt to increase revenues coming out of the current pandemic to plan for future events.

Additionally, the measures taken by businesses to ensure the health and safety of their employees could have unintended state tax consequences. For example, employers are encouraging their employees to work from home in order to help slow the spread of the virus and reduce the burden on local health networks. However, remote employees may create nexus for employers. While telecommuting is a less obvious means of establishing nexus, states are increasingly aggressive about accounting for remote employees. Even a single employee working from home within a state has the potential to trigger nexus for out-of-state employers. Additionally, taxpayers who avail themselves of Public Law 86-272 protections should be mindful of employees who may now be conducting unprotected activities from their homes. Practically, employers may be faced with additional filing obligations for business activity tax, sales and use tax, payroll tax, unemployment tax, and local tax purposes as a result of these work at home arrangements. In the withholding context, corporations that previously qualified for de minimis exceptions, or were below the statutory thresholds, may now find themselves above those thresholds. Such work from home arrangements may also impact apportionment in the state business activity tax context. For example, will there be impacts on how states look at where services are performed (in the receipts factor sourcing context) or on the computation of the payroll factor (which has seen an overall decline in importance in recent years)? We hope states will view each of these items with an eye towards equity and would consider appropriate relief for companies.

As the COVID-19 outbreak continues to progress and evolve, it is challenging to predict the full extent and duration of its economic impact. However, this legislative season, we expect states to take certain measures to ease the impact on local businesses and take steps to ease the burden of future events like COVID-19 that have significant impacts on state revenues. Nevertheless, corporations should also be conscious of the state’s competing objectives of grappling with budget shortfalls and be mindful of any impact on their filing footprints that their responses to COVID-19 may create.