Has Remote Work Altered Your Nexus?
A growing concern for many businesses is workers moving to different states and the impact of their activities from a nexus perspective, as well as from a personal income tax and nonresident withholding perspective. Having employees enter a state in which the business is not already registered for tax-filing purposes results in possible exposure for not only the business, but for the employee as well. An employee who lives in a different state than your business could create income or sales and use tax filing requirements for the business, as well as open the possibility of the state seeking nonresidential personal income tax and withholdings from the business.
How is Each State Handling Nexus with a Remote Workforce?
Each state has handled this differently, which has led to large support for the creation of a Mobile Workforce statue that would provide a standard that would allow employees to be allowed in a state for work purposes and not require nonresident withholding or filing of a nonresident personal income tax return. The most recent proposals on the matter would allow for a 30-days or less standard before requiring reporting and withholding for an individual. There has not been much movement on this recently due to COVID-19.
Businesses Pivoting to a Remote Workforce Need to Consider State and Local Tax
With many employers pivoting to a remote workforce, businesses now need to consider state and local ramifications revolving around remote employees. If the employee resides in the same state and local jurisdiction as the employer, there is relatively no issue. The issue stems from the employees who reside in a different state and jurisdiction than their employer. This creates a scenario where the company would be deemed to have a physical presence in the state the employer is residing, and the employer may now have a tax filing requirement in that state.
Many states have provided an interim solution for this issue as it relates to the pandemic. If an employee is working from home, based upon shelter-in-place restrictions, it will not create nexus. Sixteen states have provided specific guidelines for not imposing nexus upon remote employees because of the pandemic. The offered guidance is a temporary solution as it relates to the COVID-19 pandemic, not a permanent solution. For example, Pennsylvania’s telework guidance associated with the pandemic expired June 20, 2021 and Pennsylvania’s policy will revert to Pennsylvania telework employees creating nexus for a business located outside Pennsylvania.
Outlook for Nexus and Remote Workforce
It is uncertain how states will treat remote employees going forward, which opens the possibility of creating nexus for employers. Now that many employers and employees have realized that they can perform most of their work duties from home, there could potentially be a lasting impact on the traditional work environment. Both employees and employers alike may view the need to be physically present to perform certain job responsibilities as unnecessary.
Businesses should consider if they have remote employees in states and localities where the business does not have a current tax obligation. Furthermore, if that is the case, businesses should investigate whether nexus relief is provided for remote employees within those states where no current tax obligation exists.
As we move into a COVID-19 recovery phase, businesses will need to consider whether a remote workforce is a permanent solution for them. If so, it is important for businesses to consider what the impact will be on state tax nexus and begin to prepare for those changes.
If you have questions, please reach out to your BSSF advisor or contact us today!