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By Barbara Ashorn, CPA, MST – Tax Shareholder

The COVID-19 pandemic has changed nearly every aspect of traditional business operations –  managing the workforce included. Prior to the pandemic, working from home was a limited perk employees relished in for many businesses. Enter 2020. The abrupt and widespread adoption of government-mandated closures, stay-at-home orders and social distancing requirements shifted remote working to the norm for millions of Americans. The rise in teleworking has led to many employees working across state lines, leaving businesses vulnerable to an entirely new set of state and local tax nexus elements.

Exposed to The Elements

A remote workforce has a significant impact on a company’s nexus footprint, often without them even realizing it. In general, businesses with employees working remotely would create nexus and subject the business to taxes imposed by that state, such as income, gross receipts, franchise, and sales and use, based on the presence of the employee and not a physical location.

Nexus rules are established by individual states and every state defines them uniquely – only increasing the ambiguity for employers. Many states have released temporary guidance on the treatment of personal income tax, business tax nexus and corporate apportionment as a result of the increased remote workforce due to COVID-19. However, there are still many that have remained silent to this point – furthering employer confusion and apprehensiveness about their potential tax liabilities. In these instances, one must assume regular state and local tax requirements apply.

Today, just about 40% of the states have provided temporary relief to businesses with the suspension of corporate income tax and/or sales and use tax nexus thresholds. This allows employers who would otherwise not have nexus in the state to avoid additional tax liabilities while dealing with remote employees during the pandemic. In some instances, states are extending these graces through the middle of 2022, while others will uphold them for the duration of their state of emergency.

When it comes to income tax withholdings, employer obligations remain unchanged. Wages paid to non-resident employees are still considered income and are subject to payroll withholdings.

State-By-State Nexus Breakdown

Here is a breakdown of the states that have provided temporary nexus tax relief if the only connection the business has with the state is the presence of workers telecommuting from the state.

Temporary COVID-19 Nexus Relief

  • Alabama
  • Connecticut
  • Georgia
  • Indiana
  • Maine
  • Massachusetts
  • Minnesota
  • Mississippi
  • New Jersey
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • Wisconsin

Creates Nexus

  • Maryland

No COVID-19 Specific Guidance

  • Alaska
  • Arizona
  • Arkansas
  • Colorado
  • Delaware
  • Florida
  • Hawaii
  • Idaho
  • Illinois
  • Kansas
  • Louisiana
  • Michigan
  • Missouri
  • Montana
  • Nebraska
  • New Hampshire
  • New Mexico
  • New York
  • Nevada
  • North Carolina
  • Ohio
  • Oklahoma
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
  • Wyoming

Temporary COVID-19 Corporate Tax Nexus Relief (No Sales and Use Tax Guidance)

  • California
  • District of Columbia
  • Iowa
  • Kentucky
  • North Dakota
  • Oregon

(Note: Kentucky will review corporate income tax nexus determinations on a case-by-case basis.)

Mitigating Your Risks

To avoid any nexus surprises, employers should take a proactive approach. Here are tips to develop a plan and mitigate nexus issues during the pandemic:

  • Take inventory of your remote workforce. Know where your employees are working from and monitor their time spent working in that location.
  • Monitor guidance issued by the states where you have employees working to assess potential nexus exposure, especially as orders are lifted and temporary relief expires.
  • Be sure to look at local business taxes since they are mostly managed by the local jurisdictions and not the states.
  • Determine if you’re subject to tax in each state where employees reside. Register, where necessary with respective states and withhold payroll taxes on wages.

Beyond the Pandemic

Once governmental orders are lifted, some employers may choose to maintain remote workforce arrangements to foster goodwill with their employees and take advantage of annual cost-savings that coincides with maintaining a physical location. But they could also face unwanted tax surprises.

As a business considers its post-pandemic work policies, it is important to keep in mind that states will likely begin imposing stricter tax laws. States, and even localities, will be seeking additional sources of revenue to make up for budget shortfalls – likely by targeting the remote workforce and their employers. Companies should assess the impacts of shifting the operating model to remote environment permanently, as it is bound to complicate matters. Consider performing tax modeling to understand the true tax implications before making such a big move.

Need help assessing the nexus state tax implications of your remote workforce? Doeren Mayhew’s state and local tax advisors can help analyze your current remote workforce tax obligations and develop a post-pandemic strategy to mitigate tax burdens moving forward. Contact us today for more information.