The global pandemic has catalyzed the use of remote workforces. As previously discussed in this article, there are challenges and intricacies for employer nexus and employee withholding, and many states have continued to expand and extend relief granted to companies with employees working remotely due to the COVID-19 pandemic.
However, while this relief varies from state to state, it is entirely temporary. The implications for a remote workforce that is no longer temporary are generally nexus and wage withholding in any state with a permanent employee. There may also be filing and withholding requirements at the local level, as well.
An amicus brief has been filed with request for commentary by the Acting Solicitor General of the Supreme Court of the United States on certain states’ aggressive withholding requirements. In the meantime, it is strongly recommended that employers with a remote workforce assess their potential exposure and implement a standard written policy for employees to request or notify the employer of a change to remote working location.
State Tax Nexus and Public Law 86-272
Most states will assert nexus on any company “doing business” in their state, which typically includes the activities of an employee in-state. This generally applies to sales tax nexus as well as income tax nexus.
States that apply a “bright-line” nexus threshold including payroll amounts essentially provide a de minimis threshold for employees whose aggregate payroll in the state is below the threshold amount ($50,000 in most states).
In the narrow case of employees whose only activity in-state is the solicitation of sales of tangible personal property, Public Law 86-272 may prohibit a state from imposing income tax, even if nexus has been established. Note that the protections afforded under P.L. 86-272 are very fragile and can be easily lost if the employees perform any unprotected activities beyond a de minimis amount. Further, P.L. 86-272 is a guard against the imposition of income tax only and does not prevent nexus determinations. That is, a company may still have a technical filing requirement even if no income tax is due under P.L. 86-272, and no protection is afforded against sales tax nexus.
Wage Withholding and “Convenience of the Employer” Tests
States generally require withholding based on the employee’s state of residence. States also generally require withholding based on the location where work is performed by an employee, barring some reciprocal agreement with the state in which the employee is performing the work (e.g., a resident of Iowa, Kentucky, Michigan or Wisconsin performing work for an Illinois employer within Illinois).
A growing minority of states utilize “convenience of the employer” rules to determine the source of a nonresident employee’s wages. That is, if the employee is only working remotely for the “convenience” of the employer, rather than out of necessity, then the state will presume the wages are appropriately sourced to the primary work location (i.e., the employer’s office), rather than the employee’s home office.
New York, for example, has outlined clear standards by which an employee must establish a “bona fide employer office” at their remote work location outside of New York before an allowance is provided against the wages sourced to the employer’s office within New York State. The state even went a step further by clarifying on its FAQs page that teleworking due to the pandemic does not by itself satisfy the “convenience of the employer” test.
The changes mentioned above will have a direct impact on employers across every industry with employees working remotely in other states. If you would like to discuss how your business may be impacted, contact Bennett Thrasher’s state and local tax experts by calling 770.396.2200.
The content of this article is intended for general purposes only. This article is not intended to provide accounting, tax, legal or other professional advice.