Many employees are now telecommuting due to the COVID-19 outbreak. In our previous blog post, we discussed employers’ potential withholding issues as a result of employees working remotely. In this blog post, we will discuss potential nexus and apportionment issues due to employees working remotely.
In the corporate income tax context, out-of-state employers should consider whether an employee working from home will create nexus, exceed Public Law 86-272 protection, or impact the employer’s apportionment factor. Prior to the COVID-19 outbreak, states had become increasingly aggressive about accounting for remote employees. Even a single employee working from home within a state could potentially trigger nexus in certain states. Additionally, employers who availed themselves of Public Law 86-272 protections could encounter challenges if remote employees conducted unprotected activities from their homes. Employees working from home could also impact the employer’s state income tax apportionment factor (particularly in states with a payroll factor). In addition, employers could face additional filing obligations for business activity tax, sales and use tax, payroll tax, unemployment tax, or local tax as a result of employees’ telecommuting arrangements.
Presently, many telecommuting requirements are a temporary measure in response to COVID-19. However, employers should consider the nexus implications of extended telecommuting situations or permanents shifts to employees working remotely. It is unclear how long it will take for the bulk of the American workforce to transition back from a remote telecommuting to a traditional office environment. The transition could conceivably take several months as governments (and employers) seek to prevent a second wave of COVID-19 infections. For example, it is possible that employers will stagger employees’ return to the traditional office setting as a means of social distancing (such as limiting the number of employees on site based on square footage). Therefore, some employees may continue to telecommute for an extended period or the majority of the fiscal year, while others may return to the office after only a few months. Furthermore, some employers may adapt to employees working remotely and either allow or require some employees to continue working remotely to reduce office overhead. No matter the cause, telecommuting arrangements may persist well past the peak of the COVID-19 crisis, which could result in state tax issues for years to come absent specific state guidance.
Fortunately, a few states are starting to announce temporary relief in response to the COVID-19 health crisis. On March 26, 2020, Mississippi’s Department of Revenue issued guidance stating that it will not use any changes in employees’ temporary work locations due to COVID-19 to impose nexus or alter apportionment of income for any businesses. On March 30, 2020, New Jersey’s Division of Taxation issued guidance temporarily suspending its rule that work-from-home employees trigger corporate income tax nexus. Pennsylvania and Washington, D.C. tax officials also announced at a recent webinar that employees telecommuting as a result of COVID-19 will not create nexus for their employers. Most recently, the Indiana Department of Revenue announced that it will not use an employee’s temporary relocation due to certain COVID-19 circumstances as the basis for establishing nexus or for exceeding the protections provided by Public Law 86-272.
Even if a state does not announce specific nexus or apportionment relief in response to the COVID-19 outbreak, employers may be able to avail themselves of various equitable arguments.
Employers should carefully consider their state and local tax nexus and apportionment computations and should continue to monitor state guidance regarding COVID-19 relief.