In the early stages of the pandemic, state revenue forecasts anticipated losses of approximately $370 million (a decrease of over 40%). Amidst these changes, states looked to evolve their existing tax laws to bridge the anticipated budgetary shortfalls. For sales tax, states continued to adopt economic nexus laws, tighten e-commerce taxation policies and expand their list of taxable sales. In addition, the remote workplace led to increased consideration given to payroll taxes and consequences of companies deemed in-state physical presence with remote employees. While these efforts resulted in states reporting record surpluses, the compliance burden has proven more than challenging for finance teams to manage, with the risk for non-compliance never being higher.
Rising E-Commerce Transactions Change Retail Risk
The rapid rise of e-commerce has been the subject of discussion for well over a decade, but COVID-19 shifted the landscape. For many, e-commerce platforms once deemed as merely convenient became integral and necessary to everyday life. The increased consumer spend on e-commerce platforms gives rise to various tax considerations – namely US sales tax.
Since the Wayfair decision, states’ sales tax economic nexus laws present potentially significant tax compliance burdens. That said, integrated tax software programs have emerged as a viable solution for many companies to effectively automate sales tax collections and filings. However, therein lies steep learning curves as these solutions are not generally “set it and forget it” or “one size fits all” technology solutions. While automating tasks and implementing software solutions adds efficiency, there is still a need for incorporating a layer of leadership with a high level of sales tax-savvy expertise to implement real-time updates and decipher nuanced needs.
E-commerce platforms are afforded some relief by states’ marketplace facilitator laws. As previously discussed, marketplace facilitator laws require third-party platforms (e.g., Amazon) to collect and remit sales taxes on behalf of sellers using the online marketplace or forum. These laws allow states to receive sales tax from one taxpayer rather than from dozens to hundreds of smaller taxpayers. To date, every state that imposes a sales tax has adopted a marketplace facilitator law.
Navigating the State Tax Impacts of a Remote Workforce
In the early stages of the pandemic, many states offered remote employee relief with respect to income tax nexus and payroll withholding; however, most of these relief provisions have since expired. As a result, companies are now forced to assess the withholding and income tax filing implications for maintaining a remote workforce.
Remote employees are likely to establish an income tax filing requirement for their employers. Most states will assert income nexus on any company “doing business” in their state, which typically includes an in-state employee. Alternatively, some states apply a “bright-line” nexus threshold that can provide a de minimis threshold for employees whose aggregate payroll in the state is below the threshold amount ($50,000 in most states).
Remote workforces also carry Public Law 86-272 considerations. Specifically, Public Law 86-272 may prohibit a state from imposing income tax, even if nexus has been established, where a company’s only in-state activity is the solicitation of sales of tangible personal property. However, 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. As such, companies that have historically claimed or may otherwise qualify for protection under Public Law 86-272 must now assess whether the presence of remote employees and their in-state activities would effectively prevent the Company from claiming Public Law 86-272 in those states.
For payroll taxes, companies should be aware that states generally require withholding based on the employee’s state of residence with carve out withholding based on the location where work is performed by an employee. Also, a growing minority of states (e.g., New York) are now imposing “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. For example, the New York Department of Taxation and Finance considers a nonresident employee telecommuting during the COVID-19 pandemic for a company with a primary office in New York to be days worked in New York absent evidence to the contrary.
Amidst the considerable tax reforms and COVID-19 relief initiatives at the federal level, the state and local tax landscape presents considerable pitfalls, uncertainty and opportunity. Contact our state and local tax experts to help evaluate and advise on leveraging sales tax automation or evaluating state considerations with your remote workforce.