Work From Home Arrangements Arising From the COVID-19 Pandemic Could Trigger New or Additional State and Local Tax Liabilities

To comply with shelter-in-place orders arising from the COVID-19 pandemic, many companies implemented work from home arrangements with employees who, in some cases, live in a state other than where the company has a taxable presence. The presence of even a single employee in a state could trigger an employer’s obligation to collect a state’s income, sales or withholding taxes. While some states have indicated that they will temporarily not enforce tax obligations arising from work from home arrangements during the COVID-19 pandemic, it is uncertain how long this grace period will last. Given the economic crisis the states are experiencing, it seems likely that at some point they may pursue enforcing potential tax obligations arising from work from home arrangements. This tax release explains the current situation and suggests actions companies can take now to identify and potentially mitigate potential new state and local tax filing obligations and liabilities.

Nexus and Tax Filing Requirements – Income, Sales and Withholding Taxes

The U.S. Constitution requires that a business exceed a certain threshold of activities within a state before the jurisdiction can consider the company to be doing business within its borders. A state may deem a company that meets this threshold as having a taxable presence or nexus with its jurisdiction. Under normal circumstances, states consider a company to be doing business within their borders and thus have nexus that gives rise to one or more state tax filing obligations if the company has one or more employees working in the state. In a large number of states, the presence of even a single telecommuting employee is enough to trigger filing requirements. In addition, some states specifically base nexus determinations on a certain threshold of payroll in the state, which can be exceeded through the presence of just one employee.

A federal law protects an out-of-state company from becoming subject to a state’s income tax filing requirement if the telecommuting employee located in the state is only engaged in activities related to the solicitation of sales of tangible personal property. For the law to apply, the orders must be sent outside the state for acceptance and, if accepted, the goods must be delivered from a point located outside the state. This protection is limited. It does not extend to solicitation of sales other than tangible personal property, such as sales of services or intangibles and is limited to income taxes. It does not apply to franchise, gross receipts, withholding or sales taxes. Therefore, a company with one or more telecommuting employees could find itself required to file franchise, gross receipts, sales and employment taxes in the state as well as any applicable local taxes.

In response to the COVID-19 shelter-in-place orders, 18 jurisdictions (Alabama, the District of Columbia, Georgia, Illinois, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Jersey, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, and South Carolina) have issued some guidance as to whether employees working from home will give rise to tax filing requirements or withholding obligations. The states have generally recognized the temporary nature of the orders and provided relief from nexus and filing obligations due to work from home arrangements solely as a result of COVID-19-related measures. The guidance issued in most of the states has cautioned that nexus will result if the employees continue to work from a home in their jurisdiction beyond the conclusion of the COVID-19-related restrictions. For example, some states such as South Carolina, Massachusetts, and Nebraska have cited September 30, 2020, December 31, 2020, and January 1, 2021 respectively as the date after which withholding requirements will result if a telecommuting employee continues to work from home in the state. For more information on the impact of work home arrangements arising from COVID-19 and state withholding requirements, see this tax release.

Given the evolving nature of the response to the pandemic, it is not entirely clear at what point the other states will consider the restrictions lifted and begin asserting nexus. However, companies and their employees should be aware that those who continue to work from home beyond the end of temporary COVID-19 measures could trigger nexus and new tax filing obligations and liabilities in new states.

How Andersen Can Help

Companies can take action now to identify and potentially mitigate potential new state and local tax filing obligations and liabilities arising from the current situation. Andersen can help you to:

• Document employee roles and locations and determine whether each employee’s work from home arrangement is temporary or long term
• Create a timeline and identify the steps by which employees working from home plan to return to the physical office location
• Evaluate tax filing responsibilities for income, sales, withholding and other taxes in states for which you have not previously filed returns and from which one or more employees are working from home
• Determine the amount of income tax that is owed in the states for which you have previously filed returns and from which employees are working from home
• Establish whether employees working from home in another state could jeopardize previously granted tax credits or trigger clawbacks
• Understand the potential state and local tax consequences that may arise for work from home arrangements that extend beyond the COVID-19 crisis and possible mitigation measures

For help in navigating this fluid situation, please reach out to your Andersen advisor.