Nexus & COVID-19: Will Your Remote Workforce Affect Your Tax Liability?
In just under a year’s time, the COVID-19 crisis has changed nearly every aspect of traditional business operations. For many businesses, working from home was a limited perk prior to the pandemic. Enter government-mandated closures, social distancing requirements, stay-at-home orders, and essential/non-essential designations, and the norm rapidly shifted to a remote workforce. The rise in telework led to more employees working across state lines. Since every state has its own sales, use, and income tax laws, employers are facing new nexus issues.
The state tax nexus is evolving.
A tax nexus forms when a business establishes a tax presence in a particular state. While some states base nexus laws on physical presence, businesses don’t always have to rent or own a facility in a state for a tax nexus to occur. Some neighboring states eliminate double taxation through reciprocity agreements, while others offer taxpayers a credit for taxes paid to another state. The pandemic has presented taxpayers with entirely new nexus concerns.
Despite taxpayer inquiries and requests for nexus guidance, many states have remained silent, while others have issued temporary guidance. Initially, lawmakers likely didn’t anticipate the state of emergency being in effect this long. Because these plans are causing some states to lose revenue and differing opinions have caused litigation, even temporary guidelines continue to evolve.
Employers need to take inventory to access their remote workforce.
For employers with a remote workforce, taking inventory of your employees is an excellent place to start. In which states do your remote workers reside? Are there states where more than one of your remote workers reside? How long have these employees been working remotely? What services are they performing, and were they issued devices or equipment to use at home?
Based on your inventory, you can make a plan to mitigate nexus issues. Employers should monitor the laws applicable to their state tax nexus on a continuous basis. You are still required to comply with state tax laws, even when the path to definitive guidance proves less than ideal. For each state where you have remote workers, determine if you’re subject to their withholding requirements and income, sales, and use tax laws. Corporations and LLCs may need to “qualify” to do business in other states or file occupation permits at the state, county, or city level.
Massachusetts nexus rules lifted under temporary guidance.
Massachusetts nexus law generally uses the physical presence rule, but the Commonwealth issued temporary guidance that was recently revised. The guidance is now effective from March 10, 2020, until 90 days after the Massachusetts COVID-19 state of emergency is lifted. During that time, out-of-state employers still withholding their own state’s income tax on employee wages earned for services performed in Massachusetts are not required to withhold Massachusetts income tax. Massachusetts is providing credits for residents who typically commute to work in another state but are required to work from their residence because of the pandemic. Out-of-state residents working remotely for a Massachusetts employer are currently subject to Massachusetts employment taxes. Because the State of New Hampshire has no income tax, they filed a lawsuit alleging this guidance violates their sovereignty.
Employers need a plan of action.
Based on your nexus requirements, consider creating or revising your telework policy Thinking beyond the pandemic, you may need to clearly define whether employees are permitted to work from home or work from anywhere. Establish your remote worker policies for fringe benefits, such as office equipment expenses or internet service subsidies.
The tax professionals at L&H understand the challenges businesses are facing during the COVID-19 pandemic. My team can help your business navigate the complexities specific to your state tax nexus. Contact me today to talk about your strategy.
by Steven J. Haynes, MBA
Steven J. Haynes, MBA, is an administrative partner at Livingston & Haynes and specializes in bookkeeping, payroll, and business advisory services for privately-held businesses. Steve founded Emerging Business Partners (EBPI) in September 1992, and his firm became an affiliate of L&H in 2007. Today, EBPI broadens the bookkeeping, payroll, and tax consulting services available to L&H clients.