Taxing Tomorrow: States reshape nexus laws for remote employees

Summary: States reconsider how nexus laws apply to remote workers as mandatory work-from-home orders transition to voluntary work-from-home decisions.

No one knows how long the current coronavirus pandemic will last, whether a vaccine will be effective, or how much longer businesses (and individuals) will be able to endure social distancing requirements. But we do know Google employees can now choose to work from home until July 2021, and that other companies will allow at least some employees to work from home permanently in the wake of COVID-19.

Like Google, states are reevaluating work-from-home policies. Yet, while Google CEO Sundar Pichai made the decision in part so employees with families could “plan for uncertain school years that may involve at-home instruction,” state tax authorities are focusing on tax revenue and the impact of new work-from-home policies on nexus.

Under normal circumstances, having a physical presence in a state establishes nexus — a connection that creates a tax obligation — with that state. A California-based business with remote employees in Texas would have to comply with Texas franchise, sales, and other tax laws. A resident of Florida temporarily working in New York would be liable for New York income tax. And so forth.

When stay-at-home orders first led businesses to allow or mandate new work-from-home policies, Massachusetts, Pennsylvania, and several other states said they would not seek to impose nexus “solely on the basis of” employees temporarily working remotely in their states because of COVID-19. An outlier, New York Governor Cuomo said temporary remote employees would be liable for New York income tax.

The longer the pandemic endures, the more states may follow New York’s lead.

Indeed, some states made clear from the outset that protections from nexus would apply only so long as official work-from-home orders (issued by an applicable government agency) or states of emergency were in effect. Once those expire, normal nexus enforcement will likely resume. 

According to new coronavirus information on the Indiana Department of Revenue website, the department “will not use someone’s relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis, as the basis for establishing Indiana nexus or for exceeding the protections provided by P.L. 86-272 for the employer of the temporary relocated employee.” P.L 86-272 limits how states can tax the income derived from business activities in the state by out-of-state businesses.

However, the department also asserts, “If the person remains in Indiana after the temporary remote work requirement has ended, nexus may be established for that employer.” Furthermore, “an employer may not assert that solely having a temporarily relocated employee in Indiana [due to an official work-from-home order or a physician’s order related to a COVID-19 outbreak or diagnosis] creates nexus for the business or exceeds the protections of P.L. 86-272 for the employer.”

See the Indiana Department of Revenue for more details.

The Massachusetts Department of Revenue was one of the first states to adopt new rules (TIR 20-05) “to minimize disruption for employers and employees during the COVID-19 state of emergency.” It explained, “One or more employees working from home solely due to the COVID-19 pandemic will not subject a business to a sales and use tax collection obligation or to the corporate excise by reason of that fact” from March 10 until the conclusion of the state of emergency.

Recently, the department issued Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic (TIR 20-10). Its purpose is to “ensure that businesses have sufficient time to prepare for the cessation of these temporary rules.”

The rules presented in TIR-20-10 are effective “until the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted.  As of that date, the rules set forth in this TIR will cease to be in effect and the presence of an employee in Massachusetts, even if due solely to a Pandemic-Related Circumstance, … will trigger the same tax consequences as under Massachusetts law more generally.”

A "Pandemic-Related Circumstance" includes:

• A government order issued in response to the COVID-19 pandemic;
• A remote work policy adopted by an employer in good faith compliance with federal or state government guidance or public health recommendations relating to COVID-19; or
• A worker’s compliance with quarantine, isolation directions relating to a COVID-19 diagnosis or suspected diagnosis, or a physician’s advice relating to COVID-19 exposure.

Businesses claiming a nexus exemption because of “Pandemic-Related Circumstances” are required to “maintain written records sufficient to substantiate the existence of a Pandemic-Related Circumstance with respect to the employee(s).” Without proper documentation, the state may not grant the nexus exemptions.

See TIR-20-10 for more details.

The Oregon Department of Revenue has also clarified how employees temporarily based in the state because of COVID-19 may affect nexus.

The department explains  “For the purposes of Oregon corporate excise/income tax, the presence of teleworking employees … in Oregon between March 8, 2020 and November 1, 2020 won’t be treated by the department as a relevant factor when making a nexus determination if the employee(s) in question are regularly based outside Oregon.”

Presumably, the state intends to return to its normal nexus standard starting November 2, 2020. See the Oregon Department of Revenue for more details.

Similarly, South Carolina Department of Revenue Information Letter #20-11 explains, “The Department will not use changes solely in an employee’s temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period (March 13, 2020 – September 30, 2020) as a basis for establishing nexus1 or altering apportionment of income.”

What will happen if the pandemic continues to impact work locations after September 30 hasn’t been addressed. 

State tax authorities aren’t the only ones thinking about the nexus implications of work-from-home policies triggered by COVID-19. Legislation seeking to limit state taxation of income earned in a state by residents of other states was introduced in Congress on July 27, 2020.

Section 403 of the American Workers, Families and Employers Assistance Act (S. 4318) reads, in part: “No part of the wages or other remuneration earned by an employee who is a resident of a taxing jurisdiction and performs employment duties in more than one taxing jurisdiction shall be subject to income tax in any taxing jurisdiction other than —

• (A) The taxing jurisdiction of the employee’s residence; and
• (B)  Any taxing jurisdiction within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned.”

However, for calendar year 2020, the 30 days in part (B) would be extended to 90 days “in the case of any employee who performs employment duties in any taxing jurisdiction other than the taxing jurisdiction of the employee’s residence during such year as a result of the COVID-19 public health emergency.”

Tax policies responding to COVID-19 are still very much in flux, both in the United States and abroad. Visit Avalara’s COVID-19 tax info hub for up-to-date information and insights.