After the Wayfair ruling in 2018 many businesses took a deeper look at their exposure on a state by state basis, and now that work has shifted almost exclusively to a remote work environment those conclusions need to be reevaluated. South Dakota v. Wayfair defined that for sales tax purposes the physical presence test is not the only way to fall under a state’s sales tax jurisdiction, so many businesses now have to reconsider their conclusions of just a few years ago with the dispersion of their employees now working from home.
State guidance for payroll tax withholding
There have been a few states that have released guidance and circumstances for companies to identify when they are required to withhold payroll taxes on employee wages in their state. As one can imagine not just the guidance but the supporting details differ from state to state, so it is important to confer with your professional service providers to make sure that you are covering your bases.
In New England, Massachusetts has indicated that nexus is not created by employees working from home or a location other than their primary office location, and withholding is not required by the company for Massachusetts residents who are telecommuting to other states. Massachusetts specifies that withholding is not required in Massachusetts for employees working from home as long as the employer is still obligated to withhold in the state of the employee’s primary work location. The exception to the rule is for Massachusetts nonresidents who were performing services in Massachusetts prior to the COVID-19 pandemic, in which case Massachusetts would still require withholding. We have yet to see guidance from any other states in the region.
Income tax implications
In recent years many states have adopted a single sales factor approach for income tax apportionment, but for the states who still utilize a three-factor (sales, payroll, and property) apportionment method companies may see significant shifts in their payroll apportionment due to employees working from home. Massachusetts has stated that wages for employees who do not usually work in the state, and are working from home in Massachusetts temporarily, will not be included in the payroll apportionment factor during the pandemic, but most other states have not disclosed their approach yet.
For service companies operating in states that utilize a single sales factor apportionment method it is important to understand whether the state takes into consideration the location of the employees providing the service, or if it is based on where the customer receives the benefit of the service. If a state, for example New York, takes into account the location of the employees providing the service then the employees temporarily working from home in the state could have a significant impact on the income sourced to that state.
Finally, due to the pandemic many states have eliminated the requirement to register and withhold income taxes for businesses performing disaster recovery work. If you feel that you are subject to additional state filing requirements let us know and we can schedule a time to review all of your filing requirements.
Sales tax implications
Similar to the payroll and income tax guidance, information regarding the sales tax implications in states has been sparse. New Jersey, which subjects out of state sellers with employees working in the state to its sales tax, is temporarily waiving that standard, but we have not seen much guidance from other states. It is important to monitor which states your employees are working from because their physical presence could create a sales tax collection and filing requirement that you otherwise may not be subject to.
As state and local economies remain in varying levels of suppression the need for additional revenue becomes more and more evident. With many companies adopting remote work environments not just for the short term, but many into late next year, we anticipate state departments of revenue will continue to try and impose their taxes on remote workers. We will continue to monitor new convenience rules and update our clients as they are released.