This episode explores the huge implications for state and local taxes raised by workers more often untethered from the employer’s physical location, sometimes in another state. And now, during the COVID-19 pandemic, remote teleworking has become the rule for many professions.
Eileen Sherr, CPA, MT, and Mo Bell-Jacobs, J.D., bring us up to speed. Sherr is a senior manager with the AICPA’s Tax Advocacy team in charge of the AICPA State and Local Tax Technical Resource Panel, or SALT TRP, and Bell-Jacobs is a senior manager at RSM National Tax in Washington and a member of the SALT TRP.
What you’ll learn from this episode:
- How the trend — accelerated by widespread governmental orders during the pandemic — of increased working from home or another remote location can change where a worker owes state and local income taxes (and employers to withhold them).
- How the same phenomenon can also transform where a business itself has nexus and thus could owe any of a variety of state and local taxes, or could lose protection from state income taxes under a 1959 federal law.
- How important it is, therefore, for businesses to track where their workers are physically located.
- Why there’s new hope for passage of federal legislation to standardize some state and local tax effects of teleworking.
Play the episode below or read the edited transcript:
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.
For more AICPA coronavirus state and local tax resources:
- Recommendations on state tax administrative, filing, and payment relief
- State tax guidance chart
- Coronavirus (COVID-19) Tax Policy & Advocacy Resources page (advocacy-focused news, blogs, webinars, and podcasts)
- Coronavirus (COVID-19) Tax Resources page (client-facing tools, practitioner guidance, and learning)
For an earlier podcast with Eileen Sherr on state and local taxes during the pandemic, click here.
To comment on this podcast or to suggest an idea for another podcast, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-coma.com.
Paul Bonner: The rules in general, I think, Eileen, are that most workers are taxable for state income tax purposes in the state in which they reside, although I think many states also have some taxability of wages based on the number of days that they’re in that state and/or the amount they earn in that state over a de minimis amount. So, why is this such a problematic issue to begin with?
Eileen Sherr: It’s complicated, and each state has its own rules. Obviously, if you live in one state and you work in another state, you could potentially have to file in both states and then have to claim a credit for taxes paid to the other state. And some states have reciprocity so then you do not have to have withholding in the neighboring state that there’s an agreement, like Maryland and Virginia. In those cases you don’t, but then if there is no reciprocity agreement, then you would have to have withholding in the state where you’re working. And then you have to file a return for where you live and then also for where you had your withholding and a tax liability.
Bonner: Many workers are working at home, and sometimes their home is in a different state than where they, say, went to the office. Why is that a problem?
Sherr: It’s a problem because it depends where you had withholding before the pandemic and then where you’re working now, during the pandemic, and if the state has provided guidance and will just keep things the way it was before the pandemic. Or you may have to have a liability, file a tax return and owe state taxes where you’re actually working.
Bonner: This would be a problem for the employee to know where to pay income taxes, but also for the employer, I presume, to know how to withhold taxes, right? And for which state.
Sherr: Correct, yes, so there’s employer responsibilities as well as the employee. And they’ll probably have to track where they are and let their employer know where they are working.
Bonner: Yeah. So what has the AICPA and the SALT TRP been doing in particular with respect to these issues?
Sherr: We have come up with recommendations that we have suggested to the state CPA societies for them to advocate with their state tax authorities. And during the pandemic, we suggest that if the state can keep withholding where the person was working before the pandemic, for during the pandemic, that would be helpful. It would simplify things and not have to keep so much track and change withholdings. Thirteen states have come out with guidance that would do that, and we’re hopeful that more states will do that. There’s also some federal legislation that we also support, as well.
Bonner: You know, I can see that there are lots of competing interests in this; what’s most simple and convenient might not necessarily be best for, say, the taxpayer who [says], “I’m working from home, and I’m in a lower tax state than my office.” Shouldn’t they have some discretion in the matter?
Sherr: Yes, and if you can document it — well, it depends on what, obviously, the state guidance is going to be, but I would suggest you’re going to have to see where it is and what your particular state’s doing and where you previously worked, as well.
Bonner: Now, you mentioned also that some of the relief is for the duration of the pandemic, but that’s of course an indefinite period. Is that relief going to expire at a date certain in any states you know of, or maybe it already has expired or never was provided in the first place?
Sherr: Right, most of the states are following the executive orders, and as long as there still is an emergency declaration in the state, then I think the guidance would apply. Many states are encouraging telework if it’s possible. So, at least in those states, definitely, the guidance would apply; until the emergency and the pandemic’s gone, it should apply. You’d have to look at each particular state and what their guidance said.
Bonner: It’s up to the employer, pretty much, to determine this, too, I think.
Mo, Eileen mentioned tracking work locations, and I imagine that would become the responsibility of the employer, pretty much. What are CPAs recommending to their business clients who have employees to do to track those locations, and what other measures can they take during this pandemic when they might have to determine where their workers are taxable?
Mo Bell-Jacobs: Thanks, Paul. I think that’s a good question and it involves a number of considerations. So, I think, with the pandemic itself, the state income tax withholding — it’s a larger burden on employers, no question. What we’re seeing — and I’m going to get to your question — but I think what we’re seeing right now is what I’m calling virtual transformation. We have a lot of businesses, and they’re downsizing some of their office space; they’re considering relocating to lower-tax jurisdictions, maybe identifying new credits and incentives opportunities. And in many cases, I think businesses are thinking about making these temporary remote workforces permanent. So, as businesses encounter this so-called new normal, I think there are many things they need to be thinking about.
Now, from a client service perspective, I’ve seen employees do some really interesting things in the last five or six months. We’ve had employees move back home with their parents, we have some that are staying at their vacation houses, which are in different locations than where they live. We’ve even had a couple move overseas, maybe back home or just to a better jurisdiction. So I think for employers this is getting increasingly complicated and burdensome. And both employers and employees need to think about tracking where this goes and where the employee is working.
In addition, though, with income taxes in the employee’s state of residency, without any other specific relief, the employee may also owe income taxes in any jurisdiction they work during this time, whether that’s during the pandemic, before the pandemic, or after. This also applies to city and municipality income taxes, as well. In some cases, even if the employer doesn’t have a requirement to withhold, the employee may still owe income taxes in some of these jurisdictions. So you can see it gets very complicated very quickly.
Bonner: And with some risk to those employees who might discover only next April that they owe state income tax where they didn’t think they did.
Bell-Jacobs: That’s right, and I think one of the things we’re finding is, a lot of middle-market businesses, even larger businesses, they don’t track payroll like maybe attorneys or accountants do and not every day. Or they don’t have systems to track what the employee is doing every single day and where they are doing it. So, some businesses, they don’t have much insight into where their employees are. This becomes an issue when the employer has to think about, one, withholding, and, two, that might affect apportionment for their income tax purposes.
Bonner: Right, we’ll come back to apportionment in just a minute, but I wanted to ask you, Eileen, about one thing you mentioned earlier when we were talking, was the convenience-of-the employer rule, which is, I know, an issue in New York state. What does that mean, and why is that an added complication?
Sherr: The convenience-of-the-employer test — it’s been around for many years. And some states — it’s really only in Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania are those states where they say that, even if you’re teleworking, if you do it voluntarily, at the employee’s option, it doesn’t matter, you still have withholding at the employer’s work location even if you’re teleworking in a different state. It has to be unless the employer requires it. If the employer requires it, then you can have your withholding where you’re actually teleworking. So it complicates things.
Bonner: Yeah, not least of which is whether a recommendation by, or an allowance by the employer to work remotely — is that a matter of the employer’s convenience? It might not be a requirement; it might be somewhere in between a requirement and an allowance, right? How do businesses, especially in those convenience-of-the-employer states, parse out a requirement from an allowance?
Sherr: There’s been some court cases over it.
Bonner: I imagine so.
Sherr: It’s not easy.
Bonner: Yeah. OK. You mentioned that some states have followed the AICPA’s guidance, or suggestions in providing guidance. We’re up to how many now?
Sherr: There’s 13 states now that do say that the withholding would be where it was prior to the pandemic, like a status quo during the pandemic.
Bonner: You mentioned apportionment a moment ago. And I think we need to ask about also nexus that any business might have as a result of employees working remotely. Why should an employee working remotely affect where a business pays gross receipts or business income tax or sales tax?
Bell-Jacobs: I think that’s one of our main concerns. Because in state and local tax, the first question we always ask is, is there nexus? Because if that answer is no, there’s really no need for other analysis. Having these remote workforces in a lot of cases, for a lot of businesses right now, there are new remote workforces that can dramatically affect where a company has a state tax nexus footprint.
A business is generally considered to be doing business and subject to a state’s tax laws if the business is physically located in the state or maybe if the business has employees in the state. So businesses with employees working remotely as maybe they would have in an office location, those businesses could find that they’re subject to a new state’s tax laws, based merely on the fact that their employee is now working full-time at home.
So, establishing nexus through a remote workforce, this can cause a number of state and local tax considerations. It can impact income tax, franchise tax — certainly, you mentioned, gross receipts taxes — and also sales-and-use tax obligations. An employee living in a different state would not normally create nexus for the employer — and we’re talking about where the employee sleeps at night — that’s generally not a nexus consideration. But we’re in a different environment now. We have a lot of employees working from home. So they’re doing their normal office duties at their home location. Because of that, those activities might attribute nexus to the employer now where the employer may not already have nexus.
Bonner: So, Eileen, I believe you’ve mentioned that the AICPA has also made some recommendations regarding nexus?
Sherr: Yes, we have. We’ve encouraged the state societies to work with their states’ tax authorities to provide that an employee in a state due to shelter-in-place restrictions would not create nexus and apportionment for tax purposes, and 14 states [plus the District of Columbia and City of Philadelphia; see “State Guidance Chart” linked to above and below] have adopted those recommendations. So the business and employers are protected there if they do have remote workers during the pandemic in those states.
Bonner: I think that’s good. Now, Mo, I was also wondering, again, about Public Law 86-272.
Bell-Jacobs: Some businesses may have nexus in a state, and this is after that first question, is there nexus. In this case, some businesses that will already have nexus, but they were not otherwise subject to an income tax liability in that state because of this federal law called Public Law 86-272. And, essentially, what this law is, it’s from 1959, from a different era, it’s basically a federal safe harbor prohibiting a state from imposing a net income tax on a seller’s business activity if that activity is essentially limited to the solicitation of orders for sales of tangible personal property. That’s a mouthful, and there’s a lot to unpack there, but it’s a narrow safe harbor involving tangible personal property, and a lot of businesses these days are service businesses, so it doesn’t apply as much as it used to back in 1959.
Now, what’s important here is an employee working remotely from their residence, so they’re working in their residence in a state where maybe a business had a Public Law 86-272 protection. Because that employee is now doing their normal business duties at their home, that may cause that protection to be lost. I think what’s important there is, Eileen mentioned that there are  states that have come out with some guidance that says, “We’re going to give you a nexus safe harbor during this COVID period.” But not all those states have addressed 86-272, so even if there is some nexus safe harbor or withholding safe harbor of some sort, that may not apply to the 86-272 protection. So, if an employee’s activity working from their home office goes beyond that protection, that business may now have an income tax liability where they didn’t before.
Bonner: Yeah, because that employee is doing something other than soliciting orders for tangible personal property.
Bonner: Part of what could bring some order to this slightly chaotic system, I understand it, is some federal legislation that is pending at this point but has been introduced and in at least one case, I think, is in a pending bill that has been put forward as perhaps the next pandemic relief bill, right, Eileen?
Sherr: Yes, we’re excited. It is Section 403 of S. 4318, the HEALS Act, that was introduced by the Senate Republicans. It includes the mobile workforce provision that AICPA has been supporting for many years that really would provide consistency and uniformity and certainty to the whole variety of withholding rules. And days that you have to be in a nonresident state working before you’re taxed. And it would provide, normally, a 30 days de minimis rule before a nonresident would have withholding or owe state taxes in a nonresident state where they’re working. And during the pandemic, it would extend it to 90 days. So that gives quite a bit of time to be working in a state before you would owe withholding and an income tax liability.
Also, there’s another part of the bill that would basically do what AICPA had suggested and say your withholding is where it was before the pandemic, at your employer’s work location. Or you could have the option — it does give a lot of flexibility — and the employer could withhold at the remote location, if that’s what the employee and employer [are] doing and they were able to track that, then that would be OK. And it would last the pandemic, either the earlier of the end of 2020 or when 90% of the workers return to the office at the same time. It gives a significant amount of time that it would work. And it would also [apply] after the pandemic ends — which it hopefully does eventually end — as of now, the 30-day rule would last at least through 2024, is what the bill’s proposed.
Bonner: I see. What are the chances of it passing; does anyone know?
Sherr: We’re hopeful; it’s made it this far. We’re happy to see it in the Senate Republican proposal.
Bonner: That’s farther than it’s gotten before, I suppose, right?
Sherr: It has passed the House several times. It obviously didn’t have the pandemic provision; it was just the 30-day de minimis rule. But AICPA has been supporting it for quite a while, and it’s passed several times in the House.
Bonner: OK. Thank you both for being with us on this podcast. This is a very complex matter, having to do with so many states, I know, and many of our listeners and readers, I’m sure, can benefit, but they’d want to know what’s going on in my state, wouldn’t they? How can they find out?
Sherr: They can look at our guidance chart that we’re keeping track of; it’s posted on our website, in the Tax COVID website on aicpa.org. And also we have a Tax Advocacy COVID page that also has information. There’s blogs, there’s newsletters, The Tax Adviser — definitely check out all the publications from AICPA — and we will keep track of what’s going on.
Bonner: Mo and Eileen, thank you both so much for being with us today, and best of luck to you.
Sherr: Thank you, thank you for having me.
Bell-Jacobs: Thank you.