Bloomberg Tax
Dec. 4, 2020, 9:00 AM

As the Pandemic Spreads, So Does the Reach of State Nexus

Heidi R. Schwartz
Heidi R. Schwartz
Cozen O'Connor
Joseph C. Bright
Joseph C. Bright
Cozen O'Connor

As the coronavirus rages on, employees who once commuted long distances to their jobs are enjoying little or no commute to their home work spaces. While the shorter travel time may be a boon for employees, it can create reporting challenges and potential tax bills for employers in jurisdictions that they didn’t think they would have tax obligations to.

Before the pandemic, there frequently was an issue whether a particular employee worked at home for his or her convenience or for the convenience of the employer. If an employee worked from home for his or her convenience, he or she would still owe income tax in the jurisdiction of the employer’s workplace. Employers now may take the realistic view that during a pandemic when the employee is ordered by a government or an employer not to work in the office, the employee’s wages are not subject to tax at the employer’s empty workplace. Now another issue may arise: whether the employer is doing business at the employee’s workplace.

Generally, a state or municipality can impose business income taxes on a business when it has a physical location or employees operating within the jurisdiction’s boundaries. In some jurisdictions, even a single employee working in a state may be enough to create nexus, meaning a sufficient connection between a state or municipality and a business that allows the state or municipality to impose a tax on the business.

In response to the coronavirus public health crisis, many states and local departments of revenue have relaxed their nexus policies so that an employee teleworking in their jurisdiction will not, alone, trigger nexus between that jurisdiction and the employer. For example, while the Governor’s stay-at-home order, N-33-20, is in effect, the California Franchise Tax Board will not treat an employee teleworking in the state due to coronavirus as, alone, sufficient to establish nexus for the state’s franchise tax. The Maine Department of Revenue has issued similar guidance.

Not all states have taken such a relaxed approach. For example, as of the date of this article, Kentucky has not modified its nexus requirements and will review state income tax nexus determinations on a case-by-case basis. A case-by-case rule is not much help to the HR department of a business. Michigan and Montana will likely treat employees teleworking in their jurisdictions as a basis to assert nexus with an out-of-state employer. In these jurisdictions, out-of-state businesses with employees teleworking within the state boundaries would likely be subject to business taxes in addition to withholding requirements for their employee(s).

Businesses should be equally wary of employees working in states that have not issued revised nexus policies for employees teleworking there due to the coronavirus. Florida, Connecticut, North Carolina, New Hampshire, Virginia, and Tennessee are among the states that have not done so. It is not yet clear whether an employee teleworking in one of these states will trigger nexus with an out-of-state businesses.

States with nexus policies that end at a certain date also present a potential tax liability. For example, the Pennsylvania Department of Revenue recently updated its nexus guidance to state that its Covid-19 nexus policy will end at the earlier of June 30, 2021 or 90 days after Governor Wolf’s Proclamation of Disaster Emergency ends. Until then, the department will not seek to impose corporate net income tax nexus or sales and use tax nexus solely on the basis of an employee temporarily working from home in the Commonwealth due to the Covid-19 pandemic. The Oregon Department of Revenue stated that, for purposes of Oregon’s corporate excise tax and income tax, employees teleworking in Oregon between March 8, 2020 and Dec. 31, 2020 will not be treated as a relevant factor in evaluating nexus if the employee(s) in question are regularly based outside Oregon. It is unclear right now how teleworking employees will be treated after Dec. 31, 2020.

On the Horizon

Businesses need to closely monitor where their employees are teleworking and what the policies are in the states that they are teleworking in. If a state or jurisdiction has a policy, businesses should ensure that they comply with it and know whether it has an end date. Further, businesses should look out for any local city or municipality tax filing or withholding requirements that may be triggered by their teleworking employees, and create a plan to be prepared for issues in states that have not issued coronavirus nexus guidance.

State and local coronavirus nexus policies are usually not set by statute, and are subject to administrative discretion as to how to enforce them. They can be changed at any time. With looming revenue shortfalls and no clear end in sight to the public health crisis (notwithstanding the new vaccines), asserting nexus with out of state businesses may become more appealing to states and local jurisdictions, and the rules applicable to nexus should be watched closely by businesses.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Joe Bright is a member and Heidi Schwartz is an associate at Cozen O’Connor in Philadelphia.

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