When the COVID-19 pandemic forced much of the country to reevaluate their daily routines for safety reasons, reacting and adapting quickly were the top priorities. Many businesses closed temporarily, moved to a remote or hybrid model or dramatically reduced their staff. Some businesses with positions to fill hired employees virtually, while some employees relocated to other areas. Now that vaccines are readily available in the United States, many companies and individuals are beginning to define their “new normal” and determine which changes made during the pandemic will have permanency. Tax consequences for employers and employees should be a significant part of the conversation as these new determinations are made for the future.
Here are a few tax-related developments that should be considered:
Tax & Telecommuting
After proving to be effective during the pandemic, telecommuting has solidified its place in future plans for many businesses. Under normal circumstances, if a company located in one state has an employee who telecommutes from a second state, the physical presence of the remote employee in the second state often creates income and sales tax nexus and mandates employer payroll withholding tax responsibilities — liabilities affecting both the business and the individual taxpayer. However, at the onset of the COVID-19 pandemic as well as during the subsequent shelter-in-place orders, many states extended temporary relief from state tax nexus and payroll withholding obligations to out-of-state employers with remote employees working within a state.
Businesses should be aware that states are beginning to roll back these temporary exemptions and return to their original physical presence nexus statutes. The first state to end its temporary relief was Pennsylvania, which announced that as of July 1st, an out-of-state business that employs a state resident working from home will have sales and income tax nexus for 2021 and future years based on the activities of that employee. As a result, an out- of-state business that did not have any remote workers before the pandemic could be subject to Pennsylvania taxes.
Other states have followed suit. At the time this article was written, Indiana had issued similar guidance, whereas Louisiana is offering a unique incentive for telecommuting employees — a 50% income tax exemption (for up to two years, capped at $150,000 annually) to individuals who move to the state while working for an out-of-state employer. Of course, by having remote employees in Louisiana, the out- of-state employer will establish nexus with the state and be subject to the state’s tax regime.
Understand the Business’s Tax Exposure
To determine tax liabilities related to telecommuting employees, most states look at employees’ workdays, comparing the number of days worked in the company office to the total number of days worked. If an employee has been working remotely, then the day would typically be attributed to the state where the employee was physically present. However, several states, including New York, Connecticut, Pennsylvania and Delaware, have rules that source the day back to the company’s worksite state. Those states impose a “convenience rule,” which states that remote work for the convenience of the employee is subject to the business jurisdiction’s tax liabilities, and the pandemic was often not deemed to circumvent this rule. For employees who live in one state and work in another, this battle between physical presence and convenience rules can create instances of double-taxation. Some states offer provisions to offset these instances, but the situation is onerous, if not costly.
In the fashion industry, many companies will need to be near their customer base. While e-commerce is a force to reckon with, brick-and- mortar locations in populated areas are often a necessity to stay accessible to loyal customers. In this industry, many companies may not find a fully, or even partially, remote model viable. However, if moving to a remote work model is an option for a business, a solution to avoid the “convenience rule” is for remote employees to be assigned to a new office, or even a shared office, set up in the remote work state. Another option is to establish the employee’s residence as a bona fide home office.
How to Prepare
Businesses should prepare to navigate the tax implications of their telecommuting employees. In order to do this, companies should communicate with their employees about their work arrangements and locations on a prospective basis and create a “return- to-work” plan that will allow them to begin to properly assign employees to particular states as soon as possible. Businesses will then need to evaluate their income tax, sales tax and payroll tax compliances going forward.
Alan Goldenberg is a tax principal focusing in state and local tax and Marc Federbush is partner-in-charge of the fashion group at Anchin, an accounting firm specializing in the tax, audit and advisory needs of privately-held companies and high-net-worth individuals.
