Corporate State Nexus & New Corporate Tax Liabilities for Corporations

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Corporate Tax and the Remote Workforce

July 23, 2020

Chau H. Tran, Managing Director, SALT Income & Franchise Tax

30-Second Summary:

  • Many businesses have been able to quickly transition personnel to remote working environments amid the COVID-19 pandemic
  • Although we’re several months into this “new normal”, businesses may still be in for some unexpected surprises in the form of corporate taxes
  • This article shares states’ responses to remote workforces in the form of temporary reprieves for nexus to date; predictions on the state of the remote workforce moving forward; and updates to physical presence nexus.

During the infancy stage of the COVID-19 pandemic, most states in the U.S. issued swift stay-at-home orders to reduce community transmission and combat the spread of the virus. The abrupt and prolonged nature of this directive has significantly impacted businesses on multiple levels, leaving some scrambling to implement a functional infrastructure to facilitate working-from-home.  However, many businesses were able to quickly transition personnel to remote working environments through the use of cloud and collaboration technologies and by providing the necessary equipment for staff to work efficiently and effectively from home. Although we are several months into this “new normal”, the full impact of transitioning to a remote workforce has yet to be felt by businesses, and they may be in for some unexpected surprises as they relate to corporate taxes.

State Responses: Temporary Reprieve for Nexus

The mass transition to remote workforces will certainly create unforeseen tax issues for businesses, particularly through the unintended creation of nexus for corporate income and franchise tax purposes. Employees working remotely in states where the employer did not previously have a physical presence nexus pre-COVID-19 could potentially establish nexus, and therefore create additional filing obligations which often come with additional tax liabilities.

While many jurisdictions have waived nexus for businesses with a temporary presence of remote employees due to COVID-19, many jurisdictions have not addressed the issue. In addition, the temporary nature of the relaxed nexus rules opens the door for situations where a company’s individual work-from-home mandate extends beyond the window provided by the states, essentially leaving them unprotected from creating nexus. Following are the states that have issued a temporary hold on nexus:

Northeastern United States

Massachusetts

For the duration of the Massachusetts COVID-19 state of emergency, the Department will not consider the presence of one or more employees working remotely from Massachusetts solely due to the pandemic to be sufficient in and of itself to establish corporate nexus.  In addition, such presence will not, by itself, cause a corporation to lose the protections of PL 86-272.[1]

New Jersey

As a result of COVID-19 requiring people to work-from-home as a matter of public health, safety, and welfare, New Jersey is temporarily waiving the legal threshold which treats the presence of employees working from their homes within New Jersey as sufficient nexus for out-of-state corporations. Furthermore, if employees are working from home solely as a result of closures due to the Coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.[2]

Pennsylvania

As a result of COVID-19 requiring people to temporarily work-from-home as a matter of safety and public health, the department will not seek to impose corporate net income tax nexus solely on the basis of this temporary activity occurring during the duration of this emergency.[3]

Philadelphia

Philadelphia will temporarily waive the legal nexus threshold of the Business Income and Receipts Tax (BIRT), which considers the presence of employees working temporarily from home within Philadelphia as establishing sufficient nexus for out-of-Philadelphia businesses. The waiver only applies when an employee works from home solely as a result of the COVID-19 pandemic.[4]

Rhode Island

For the duration of Rhode Island’s coronavirus state of emergency, the Division of Taxation will not seek to establish nexus for Rhode Island corporate income tax purposes solely because an employee is temporarily working from home during the state of emergency, or because an employee is temporarily working from home during the state of emergency and is using property to allow the employee to work from home (e.g., computers, computer equipment, or similar property) temporarily during the state of emergency. Such in-state presence and/or activity will not in and of itself trigger nexus for Rhode Island corporate income tax purposes. In addition, “the performance of any services by such employees within Rhode Island will not, of itself, cause their employer to lose the protection of Public Law 86-272.”[5]

Southeastern United States

Alabama

Alabama will not consider temporary changes in an employee’s physical work location during periods in which temporary telework requirements are in place due to the pandemic to impose nexus or alter apportionment of income for any business.[6]

District of Columbia

The Office of Tax and Revenue will not seek to impose corporation franchise (income) tax or unincorporated business franchise tax nexus solely on the basis of employees or property used to allow employees to work from home (e.g., computers, computer equipment, or similar property) temporarily located in the District during the period of the declared public emergency and public health emergency, including any further extensions by the Mayor.[7]

Georgia

The temporary relocation of employees due to COVID-19 will not create nexus or cause an employer to exceed the protections provided by Public Law (P.L.) 86-272.  The temporary protections will extend for periods of time where there is an official work-from-home order issued by an applicable federal, state or local government unit, or pursuant to the order of a physician in relation to the COVID-19 outbreak, or the employee working at home to an actual diagnosis of COVID-19.  In addition, the subsequent 14 days (considered to be the standard length of time for quarantine) are included in the timeframe to allow for a return to the employee’s normal work location. Finally, if the person remains in Georgia after the temporary remote work requirement has ended (whether voluntarily or if required by the employer), the normal rules for determining nexus, the employee’s wages, and the employer’s income tax withholding obligation will apply.  As such once the temporary work requirement ends, the company will be considered to have inadvertently created nexus.[8]

Maryland

The Comptroller’s Office does not intend to change or alter the facts and circumstances it has consistently used to determine nexus or income sourcing. As has always been the case, the Office reviews and considers the specific facts and circumstances of each taxpayer to make a fair determination. In doing so going forward, the Office understands that many businesses have been required, or otherwise found it necessary during the COVID-19 health emergency to temporarily alter their workplace model and deployment of their employees. The Office further understands that this was done in order to comply with the various gubernatorial executive orders and health department and the Center for Disease Control and Prevention (CDC) recommendations on social distancing.[9]  Consequently, the Office will respect the temporary nature of a business’ interim workplace model and employee deployment in light of the pandemic and not use these measures to impose business nexus, to alter the sourcing of business income, or to impose additional withholding requirements on the employer.

South Carolina

The Department will not use changes solely in an employee’s temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period (currently stated to be March 13, 2020 through September 30, 2020) as a basis for establishing nexus (including for PL 86-272 purposes) or altering apportionment of income.[10]

Mid-Western United States

Indiana

Indiana will not use an individual’s relocation due to the COVID-19 pandemic as the sole basis for establishing Indiana nexus or for exceeding the protections provided by P.L. 86-272 for the employer of the temporarily relocated employee.  The temporary protections will extended for periods of time where there is an official work-from-home order issued by an applicable federal, state or local government unit, or pursuant to the order of physician in relation to the COVID-19 outbreak or due to an actual diagnosis of COVID-19, plus 14 days to allow for a safe return to normal working locations.  If the person remains in Indiana after the temporary remote work requirement has ended, nexus may be established for that employer based on current law.[11]

Iowa

While Iowa’s state of emergency response to COVID-19 (or similar declared state of emergency in the state where an employee normally worked pre-COVID-19) remains in effect, Iowa will not consider the presence of one or more employees working remotely from within Iowa borders solely due to the COVID-19 pandemic, by itself, sufficient business activity to establish corporate income tax nexus.  Iowa will also not consider the presence by non-sales employees due to the pandemic sufficient, by itself, to cause a corporation to lose the protections of PL 86-272.[12]

Minnesota

The Department of Revenue will not seek to establish nexus for any business tax solely because an employee is temporarily working from home due to the COVID-19 pandemic.[13]

North Dakota

If the telecommuting is attributable to a direct response to COVID-19 and is intended to be temporary in nature, North Dakota will not assert income tax nexus on that basis alone.[14]

Looking Ahead: Permanent Remote Workforces

Businesses should be aware that if remote workforces become the new business standard – and early data indicates that it might — temporary nexus waivers will not indefinitely protect a company from future filing obligations and tax liability. Even as states begin to lift stay-at-home orders and ease the restrictions placed on businesses, many employees are indicating that they are uncomfortable physically returning to an office environment for a number of reasons, including the lack of an effective COVID-19 vaccine, ill or at-risk family members, and the simple comfort and convenience of working from home.

In a recent survey by the data intelligence company, Morning Consult, 32% of employees working remotely said they preferred to work from home every day post-pandemic, 43% indicated they would prefer to continue working from home at least 1-4 days a week, and only 24% would return to the office every day.[15]

Many employers predict – and may also prefer – that employees will continue working remotely once restrictions are lifted. Not only are many employers concerned with potentially exposing their employees to the virus; they also face increased costs associated with implementing safety measures to prevent the spread of the virus in the office.  Many businesses are also reevaluating leased space needs and how maintaining a remote workforce could favorably impact a company’s bottom line through reduced rent expenses and associated overhead costs. Additionally, employee productivity may be increased by employees working remotely; 49% of employees surveyed by Morning Consult indicated they were more productive working from home. According to recent studies, nearly 40% of today’s jobs can be performed remotely, and firms anticipate the number of employees working remotely to eventually triple pre-COVID-19 numbers.[16] Businesses have come to recognize what many millennials and working parents have said for years; that their work can be effectively and efficiently performed from anywhere. As a result, employees who are working from home may be given the option to continue to work from home even after restrictions are lifted.

State Nexus: Physical Presence

In general, a state may tax an out-of-state, or “foreign corporation,” engaged in interstate commerce if that corporation has nexus with the state.  There are various types of nexus standards that a state may use to subject an out-of-state corporation to its corporate net income or franchise tax, including the long-standing physical nexus standard.

Businesses with employees working from home offices have clearly created a physical presence in those states.  Absent a specific exemption (such as the COVID-19 pandemic), businesses with employees who continue working from home once state restrictions are lifted will no longer be exempt from the state’s taxing authority.  To the extent the COVID-19 temporary exemptions expire this year and employees continue working remotely, businesses should consider whether a tax liability will be due for the 2020 tax year so that appropriate registrations, estimates and extensions can be made.

As the implications of the COVID-19 pandemic continue to unfold, Global Tax Management (GTM) is closely monitoring these developments and will continue to update you on any significant changes as they occur. You do not have to face this new world alone as we are here to help you navigate this ever-changing and complex landscape we live in today. For more information, please contact Chau Tran, GTM’s SALT Practice Leader, at CTran@gtmtax.com.

[1] Mass Dep’t of Revenue Technical Information Release No 20-05 (4/21/2020).

[2] New Jersey Division of Taxation Telecommuter COVID-19 Employer and Employee FAQ, May 6, 2020.

[3] Pennsylvania Department of Revenue Online Customer Service Center, April 3, 2020.

[4] Philadelphia Department of Revenue Business Income & Receipts Tax (BIRT), Net Profits Tax (NPT) Nexus and Apportionment Policies Due to the COVID-19 Pandemic, April 22, 2020.

[5] R.I. Div. of Tax. Advisory 2020-24 (5/28/20).

[6] ADOR Operational Updates Due to COVID-19, Alabama Department of Revenue, May 12, 2020.

[7] D.C. OTR Notice 2020-05.

[8] Coronavirus Tax Relief FAQs, Ga Dep’t of Rev. 2020.

[9] Md. Comptroller Tax Alert 5-4-20.

[10] SC Information Letter #20-11.

[11] COVID-19 FAQs, Indiana Department of Revenue as of 4/22/20.

[12] Iowa FAQs  6/08/2020; https://tax.iowa.gov/COVID-19.

[13] Minnesota COVID-19 FAQs for Businesses, 4.18.20.

[14] N.D. Office of State Tax Commissioner Income Tax & COVID-19 Impacts, FAQS (4/15/20).

[15] Morning Consult. https://morningconsult.com/form/pandemic-remote-work-preferences/

[16] https://www.frbatlanta.org/blogs/macroblog/2020/05/28/firms-expect-working-from-home-to-triple

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