The pandemic has prompted shelter in place orders across the country, meaning many employees have been working from home to contain COVID-19. Some of your workers may have also chosen to work in second homes or with different family for a multitude of reasons ranging from comfort to avoiding hot spots of the outbreak.
Either way, the result is more workers in locales longer than anyone intended when the year began.
The definition of physical nexus includes employees working from home in tax jurisdictions different from your office locations. Will widespread lock downs create physical nexus for your company, igniting new tax obligations and potential liabilities down the road?
A possible precedent
Residency for personal state income tax purposes can be based on where someone works, maintains bank accounts, maintains a driver’s license or votes, as well as by numerous other details of connection with a state or jurisdiction. (California is especially aggressive at this.) More to the point during this pandemic, many states have statutory resident rules that kick in if your worker is physically present and living in that state for a certain number of days.
The big question for nexus purposes: Will states use residency requirements to determine your company’s nexus during lockdown? Telecommuting employees based in a different state could give your company a presence there, opening potential state corporate income tax and sales tax obligations.
Combine this concept with states being cash-strapped as tax revenues plunge during the pandemic, and you have a new tool that states could start using to claim you have nexus.
There is hope
The IRS has provided some relief to those whose domestic or international tax residence might be affected by the pandemic (their rule is that up to 60 consecutive calendar days of presence in the U.S. might stem from COVID-19 travel disruptions). Some states have also modified their assessment of income tax (perhaps a forerunner of how they’ll eventually decide to assess sales tax nexus.)
In most scenarios, states are doing their best to work with businesses to not cause more harm. Some states have already provided guidance that they will not enforce their state tax rules for remote workers; other states are debating legislation to modify their approach. Examples:
Massachusetts: “For the duration of the COVID-19 state of emergency in Massachusetts, the presence of one or more employees that previously worked in another state but, solely due to the COVID-19 pandemic, are working remotely from, will not in and of itself trigger nexus for sales and use tax collection purposes,” the Commonwealth has said.
Alabama: “The Alabama Department of Revenue issued guidance that the agency "will not consider temporary changes in an employee's physical work location during periods in which tempoary telework requirements are in place."
Rhode Island: Presence of one or more employees that previously worked in another state but, solely due to the state of emergency, are working remotely from Rhode Island, will not in and of itself trigger nexus for the state’s sales and use tax purposes (nor will property temporarily located in Rhode Island during the state of emergency).
New Jersey has temporarily waived treating the presence of employees working from their homes in the state as constituting nexus.
Mississippi has made similar rules to New Jersey
Will other tax jurisdictions follow suit? We can only hope so as the pandemic drags on. But it won’t take many states not following suit to cause a real headache for your company.
Contact us to find out if your business could be impacted by changing nexus and to gain a better understanding of your nexus footprint and help alleviate the burden of sales tax compliance.