When the COVID-19 pandemic prompted widespread stay-at-home orders, companies all over the country suddenly found themselves managing a largely mobile workforce. Remote work has become the new normal for much of the U.S. economy – at least for now. Many companies are discovering that this massive shift in work behavior may also have unforeseen tax implications.
While businesses may focus on the potential for new income and activity tax liabilities, they should be aware that indirect tax responsibilities may be affected as well. In some states, for example, a single employee working in the state can trigger sales and use tax collection obligations for their employer, even if the company does not have any other physical presence in the state and its sales into the state do not trigger dollar or volume thresholds that would otherwise necessitate collection. A few states have issued guidance temporarily waiving sales and use tax consequences of workers who are temporarily forced to telecommute from the state due to COVID-19, but most have not.
In response to the fluid and uncertain situation that many businesses are facing, Checkpoint Catalyst conducted a comprehensive survey of state tax agencies to find out how individual states are managing tax issues related to COVID-19 worker displacement. The results of the Checkpoint Catalyst Survey of States’ Approach to Temporary Telecommuting survey show that the business tax consequences of COVID-19 telecommuting for companies large and small are unclear in most states. This article will consider the national impact on sales and use taxes in individual states, but filing corporate income tax and apportionment are also affected by the unforeseen gaps in state tax law that have been exposed by the COVID-19 pandemic.
Since the publication of the original Checkpoint Catalyst report, we have continued to publish updates on this topic. Click here for the latest Checkpoint update on our COVID-19 telecommuting survey (subscription required).
Economic nexus vs. physical presence nexus
At issue in these circumstances is the concept of a tax nexus, or connection, with the state. In 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair that companies can be subject to tax obligations even if they only have “economic nexus” with a given state – if, that is, their sales into the state are extensive, and the dollar amount or number of transactions within that state meets a certain threshold.
Before Wayfair, nexus depended on a company’s “physical presence” in the state, which could be established through, for example, an office building or storefront, a third-party repair person, or an employee engaged in solicitation.
In most states, a sales tax nexus “safe harbor” exists for small sellers whose remote sales do not exceed the dollar or volume threshold established by the state, often $100,000 and 200 transactions. However, the shift toward telecommuting during the COVID-19 pandemic has returned physical presence to the forefront, as small businesses consider the possibility that they may have unexpected sales and use tax collection obligations in states from which employees are newly telecommuting.
In a state that considers the presence of an employee sufficient to establish nexus, economic nexus thresholds would be irrelevant. The physical presence is enough. A business is required to register and collect applicable sales and use taxes on all taxable transactions once physical presence nexus is established, so a single telecommuter in a state can have significant consequences.
In the era of COVID-19, sales and use tax nexus issues arising from telecommuters have raised many other important questions. For example, some states have indicated that workers who are telecommuting because of the pandemic, or because emergency orders give them no other choice, will not trigger sales and use tax nexus. But what happens when those emergency orders expire? And what will be the nexus consequences of remote workers who previously commuted into an office if, after the pandemic subsides, they choose to telecommute indefinitely?
Inconsistent COVID-19 guidance on sales and use tax nexus
Companies potentially impacted by telecommuting nexus complications include small to medium-size retailers whose physical footprint is limited to one or two states, and whose sales to/transactions with customers in most states do not otherwise exceed economic presence thresholds. Unfortunately, clear answers to COVID-19-related tax questions are few and far between. Guidance varies from state to state, if there is any guidance at all, and nothing close to a standard approach has been established because nexus laws vary so widely.
For example, both New Jersey and Illinois have legal precedents on the books indicating that, in some circumstances, a single telecommuter working in the state could trigger sales and use tax obligations. Currently, Illinois has decided to approach remote workers on a case-by-case basis while they are displaced by the pandemic, and New Jersey has said that it will “temporarily waive” its usual sales tax nexus standard for remote work made necessary by COVID-19, but has not indicated exactly when or under what conditions the waiver will expire. These waivers only apply if the seller does not maintain any physical presence in the state other than the telecommuting employees and the seller’s sales into the state do not exceed the state’s economic nexus thresholds.
Like Illinois, the states of Hawaii, Idaho, South Dakota, and Texas are all considering COVID-19-related tax relief on a case-by-case basis. And while some states (e.g., Massachusetts, Minnesota, New Jersey, Pennsylvania, and Rhode Island) have formally announced that the temporary presence of telecommuters in their states due to the pandemic will not create sales and use tax nexus for some period of time, several other states (e.g., Arkansas, Colorado, Idaho, Louisiana, Maine, Michigan, Nebraska, Ohio, Tennessee, Utah, Virginia, and the District of Columbia) have reported that there are no changes to existing nexus policies for sales and use taxes to date.
To complicate matters further, most of these waivers of sales and use tax nexus are tied to emergency orders that may or may not expire or have already expired, depending on the local course of the pandemic. The message to sellers transacting business in most states that impose a sales tax is “stay tuned.”
Remember: Companies seeing an increase in online sales due to COVID-19 and the changing economy should carefully track sales to see if they now exceed economic nexus thresholds in new states, regardless of telecommuting employees.
Differing considerations from COVID-19 uncertainty around sales and use tax nexus and income tax nexus
The complete Checkpoint Catalyst Survey of States’ Approach to Temporary Telecommuting survey contains a state-by-state breakdown of how tax authorities are treating income tax nexus, income tax apportionment, and sales tax nexus considerations for COVID-19 teleworkers. Not all states provided complete responses, however, and a few large states (including Florida and New York) did not respond to the survey at all. The majority of responding agencies only offered nexus guidance for income tax, not sales and use taxes, and several indicated that their stance on the issue may or may not change, depending on the duration and severity of the pandemic, or that the waivers are contingent on official government orders.
For companies with employees who are temporarily telecommuting from across a state border, or who are considering making such arrangements permanent, the takeaway is: seller beware. Sales and use tax guidance on COVID-19-related telecommuting is inconsistent, uncertain, and subject to change, depending on factors that are themselves fluid and evolving.
Companies large and small should check with state authorities to find out what the applicable guidelines are, if any, and make sure no hidden tax traps are lurking in the confusion surrounding COVID-19.
A trusted indirect tax software solution can also help your sales and use tax team keep up with changes and ensure that you pay the correct amount of tax. Check out our article on how to choose the right sales tax automation software for you.