COVID-19 has added several new tax challenges to everyone’s plate this year. One of the less commonly discussed problems has been the impact of the sudden increase of remote workers on the company’s various state income and sales tax obligations.
Nexus, a business’s economic connection with a tax jurisdiction, is determined by several different factors and regulated by state and federal law, as well as the US Constitution. The Supreme Court’s decision in Wayfair vs South Dakota broadened state nexus standards by overturning the “physical presence” requirement for sales and use tax nexus and allowing states to impose sales taxes on business for economic contacts and extensive virtual presence. Even after the Wayfair case, the most common trigger for both sales and income tax nexus is the physical presence of employees in a state.
With Covid-19 changing the work environment, many businesses with employees who are living in and teleworking from other states are finding that they have filing obligations in states where they had never anticipated doing business or filing tax returns. With all the other crises at hand, states have been slow to address this issue and in most cases have not given any guidance to this matter.
As of July 30th, the following 11 states have confirmed to one degree or another that they will be waiving both sales and income tax nexus related to COVID-19 telework.
- Alabama
- Georgia
- Indiana
- Massachusetts
- Minnesota
- Mississippi
- New Jersey
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
The following 3 states have confirmed that they will be waiving income tax nexus related to COVID-19 telework to some degree, but have not addressed sales tax.
- Washington, DC
- Iowa
- North Dakota
Additionally, Maryland has confirmed that it will not be altering its nexus standards, and will impose nexus based on the presence of all remote employees, while Kentucky has stated that they will review income tax nexus determinations on a case by case basis and have not addressed sales tax nexus.
The remaining states have not formally commented on this issue, though many have informally responded to surveys indicating that it is being considered and that guidance will be forthcoming.
It’s important, especially as the end of the year approaches, to consider any potential new filing obligations as a result of temporary work from home arrangements and get ahead of these issues.
If you have any questions about how telework may affect your filing obligations, please contact your local Blue & Co. advisor.
