Are Your Employees Creating Sales Or Income Tax Nexus Working From Home?
Many of us have been working from home and some of us may continue to do so for the foreseeable future or even permanently. Unexpectedly our employers are all facing questions about their new nexus footprint. Working from home can create nexus for multiple taxes including sales and income. Many states had originally said that temporarily working from home during the COVID-19 shutdowns would not impact taxes. However, as the months continue forward and employees are still working from home, some states are beginning to change their tune. In some regions states are at odds with each other. We see that "A battle over who gets to collect income taxes has broken out in New England and may soon spread, prompted by work-from-home edicts that show no sign of ending as the COVID-19 pandemic rages on."
General Implications from so many people now working from home
The term nexus means a link or connection. In tax terms, if a company has a link or connection with a state the state can require the company to collect its sales tax or pay its income tax. Having employees working in a state generally creates this link or connection with the state, which we call nexus. Some states are waving this during times of crisis, other states are not, or if they are, are doing so minimally. We talked briefly about some of these states in a video we put on YouTube here. The big question will be how many employees will continue working from home when the crisis is over, and will the states continue to see this as nexus creating, or will they continue to make exceptions.
We are seeing example after example as states address this current and up and coming issue. For example, North Dakota has said, “if the telecommuting is attributable to a COVID related response and is intended to be temporary, North Dakota will not assert income tax nexus on that basis alone.” This means that as long as telecommuting is temporary income tax may not apply.
In Massachusetts, they have been addressing employees since March who may have traveled to be closer to family, friends, etc when beginning telecommuting work. “The Massachusetts Department of Revenue (Department) has issued an emergency regulation setting forth the sourcing rules that apply to income earned by a nonresident employee who telecommutes on behalf of an in-state business from a location outside Massachusetts due to the COVID-19 state of emergency in Massachusetts. In doing so, the Department notes that income of a nonresident derived from a trade or business, including employment, carried on in Massachusetts generally is sourced to Massachusetts for personal income tax purposes. In this respect, this emergency regulation “sets forth an application of this general rule for the duration of the COVID-19 state of emergency in Massachusetts, and explains the parallel treatment that will be accorded to resident employees with income tax liabilities in other states that have adopted similar sourcing rules.” This implies that a Massachusetts resident who has traveled out of state will still be treated as a Massachusetts resident when it comes to income tax. However, now we see that New Hampshire Gov. Chris Sununu (R) has directed the state attorney general to investigate whether a recent Massachusetts income tax regulation results in the improper taxation of New Hampshire residents. We know that states are struggling with their budgets due to the revenue loss caused by the pandemic and it is no surprise to see them try and make up for that in anyway possible.
It is likely that when we are able to return to our workplaces remote employees in states with current exceptions will start to create nexus. The states will also likely be looking for ways to generate revenue so overall it is important to remain compliant. If you have questions about your nexus footprint please inquire about our services here.
The percentage of work from home employees has risen dramatically and some predict that a return to a shared workspace will be among the last things to return to “normal” with some people continuing to work from home indefinitely. This means that many businesses will be facing tax issues created by their employees in new work environments.
Policymakers will likely have to consider what this increase in remote workers will mean when it comes to creating nexus and companies will need to stay on top of policy changes. Sales, income tax, and even payroll tax requirements are evolving and potential liabilities can build quickly. If you need help determining how your requirements may have changed we are here to help.
By: Ellie Moffat
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.