Many employees continue to telecommute due to the COVID-19 outbreak.  As discussed in our previous blog post on state tax nexus and apportionment issues, out-of-state employers may need to consider whether a telecommuting employee’s activities could create nexus, exceed Public Law 86-272 protections, or impact the employer’s state income tax apportionment factor (particularly in states with a payroll factor or a sales factor where receipts are sourced based on cost of performance).

And although companies are rightly focused on the immediate issues with COVID-19 and telecommuting, these issues are likely to persist even after the states of emergency are over.  Employers may either allow or require some employees to continue working remotely due to safety concerns or to reduce the costs of operating an office.  Telecommuting arrangements will likely persist past the peak of the COVID-19 crisis and require clear rules from the states.

To date, seven jurisdictions have announced temporary nexus relief in response to the COVID-19 health crisis: Indiana, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, and Washington, D.C. (and two of these jurisdictions, Mississippi and North Dakota, also announced corporate income tax apportionment relief).  However, taxpayers will need to consider the extent of each jurisdiction’s nexus relief.  In some jurisdictions (e.g., Pennsylvania), the relief may be limited to the duration of the governor’s declared state of public emergency, while in other jurisdictions (e.g., New Jersey), the relief may apply as long as the employee is working from home due to either a forced closure or the employer’s social distancing policy.  Notably, no state has publicly announced that they are not granting such relief.

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 the pandemic” 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.  New Jersey’s guidance specifies that the nexus relief will apply during the periods that employees work from home as a result of closures due to the COVID-19 outbreak and/or the employer’s social distancing policy.  New Jersey’s willingness to consider an employer’s social distancing policy in its nexus determination will provide employers with much-needed leeway to protect the health and safety of their employees without incurring unexpected tax liabilities.

On April 6, 2020, 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.  The Department’s guidance indicates that the nexus relief will be available during the periods of time where: 1) there is an official work from home order issued by an applicable federal, state or local government unit; or 2) employees work from home pursuant to the order of a physician in relation to the COVID-19 outbreak or due to an actual diagnosis of COVID-19, plus 14 days to allow for return to normal work locations.

At an April 1, 2020 webinar, tax officials from Pennsylvania and Washington, D.C. announced that their respective jurisdictions would not impose nexus based solely on an employee working from home due to COVID-19.  Both tax departments subsequently published nexus relief guidance.  On April 3, 2020, the Pennsylvania Department of Revenue published guidance that an employee working from home during the governor’s proclaimed state of emergency will not create corporate income tax nexus or sales tax nexus.  On April 10, 2020, the Washington, D.C. Office of Tax and Revenue published guidance that it will not impose Corporation Franchise Tax nexus due to employees telecommuting during the D.C. mayor’s proclaimed state of public emergency.

Notably, both Pennsylvania’s and D.C.’s published guidance appear to limit the nexus relief to the respective jurisdiction’s proclaimed state of emergency.  Therefore, taxpayers with nexus concerns in these jurisdictions should carefully monitor the jurisdiction’s plans to lift its state of emergency.  In Pennsylvania, there is already a push to reopen the state: the Pennsylvania house and senate recently passed a bill (SB 613) that would have allowed many businesses to reopen.  Pennsylvania’s governor is expected to veto this bill, but it is only a matter of time before jurisdictions begin to reopen, and it does not appear that this will be done in a coordinated manner.

When a jurisdiction reopens, it is unclear whether nexus relief will apply if an employee continues to work from home due to the out-of-state employer’s social distancing policy or forced closure.  For example, if Pennsylvania reopens before New York, would an employee that continues to work from home in Pennsylvania create nexus for a New York employer?  We believe this result would be inconsistent with the intent of Pennsylvania’s nexus relief guidance, but the answer is currently unclear.  We encourage more jurisdictions to consider other jurisdictions’ forced closures and employers’ social distancing policies in determining whether to impose nexus.

Most recently, Minnesota’s and North Dakota’s tax departments announced that they would not impose corporate income tax nexus due to employees temporarily working from home during the COVID-19 pandemic.  Notably, neither jurisdiction limited its relief to the duration of the governor’s public emergency declaration.  North Dakota’s tax department also provided apportionment factor relief by announcing that if payroll would normally be assignable to another state, but the employee is temporarily telecommuting from North Dakota due to the COVID-19 pandemic, the employer can continue to exclude the payroll amount from the numerator of its North Dakota payroll factor.

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.

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