The remote workforce continues to grow in the wake of COVID-19. With Coronavirus cases again on the rise and predictions of a challenging winter ahead, the return to a bustling office environment seems unlikely in the near future. While working in one municipality and living in another is not a new concept, the “new normal” of remote work raises the question of whether an individual or a business has established a tax presence in a different state.
When an employer has employees working outside of the state or states where the employer operates, it creates a “tax nexus”. Traditionally, employers have been responsible for all relevant business taxes imposed by the employee’s state such as income, franchise, gross receipts, and sales/use taxes.
Some states have announced that nexus won’t be established if employees are working from home due to COVID-19-related closures or quarantine measures. However, not all states have taken this position or provided specific guidance, which may result in unexpected consequences for employers managing extended remote workforces.
Further, the pandemic has brought about complexities regarding commuting and business travel. When employees work from their primary or secondary residence because of a stay-at-home order, do their home/s become temporary business locations or a second business location? According to the IRS, travel expenses for an employee commuting to their principal place of business generally are not deductible. However, travel expenses to temporary or secondary business locations are deductible.
Beyond the issue of physical presence is the issue of where services are performed and which state taxes the income. Some states have decided that nexus for the purposes of corporate income tax, and sales and use tax will not be established solely based on employees working remotely due to the pandemic.
For over a decade, businesses and accountants have been advocating for a simplified, uniform approach to the many compliance challenges facing employers with mobile workforces. Considering the impact of COVID-19, Congress finally may take decisive action to simplify compliance with state and local tax obligations.
In the meantime, as employers consider adopting long-term or even permanent work-from-home policies, they should pay close attention to the guidance issued by each state in which they have employees. A nexus-study may be helpful in the preparation of 2020 filings as tax consequences and financial effects may be significant.