by Matthew G. Pickelle, J.D.
Stay-at-home orders prompted by COVID-19 have forced a sudden and massive relocation of the U.S. workforce from company offices to employee living rooms. When one of those living rooms is located in a state where the business is not otherwise subject to income tax, the company must consider whether the change in working arrangements creates nexus with that state and triggers a state income tax filing obligation. Consider this scenario:
A business is physically located in State A and, prior to recently issued stay-at-home orders, had employees commuting to work from neighboring State B. Due to COVID-19, employees are now working from their homes in State B. Will State B attempt to claim that the State A-based employer of these temporary telecommuters now has corporate income tax nexus with State B?
Based on recent guidance, if “State B” in the above fact-pattern is Indiana, Mississippi, New Jersey, Pennsylvania, or the District of Columbia, corporate income tax nexus will not be asserted against the out-of-state business.
Indiana. In an FAQ posted on its website, the Indiana Department of Revenue announced that it will not seek to impose corporate income tax nexus against an out-of-state business based on the relocation of employees to Indiana “that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis.” In addition, a taxpayer’s P.L. 86-272 protection will not be lost due to an employee’s need to telework from Indiana during the covered time period. (P.L. 86-272 provides limited protection from taxation for a company that would have nexus with a state solely due to in-state solicitation and other listed activities.)
Indiana’s relaxation of its typical nexus posture is temporary and applies only while an official federal, state, or local government work-from-home order is in effect. Indiana will extend this period if an employee’s relocation to Indiana is due to a doctor’s order or to a COVID-19 diagnosis, plus 14 days. (DOR Coronavirus Information, Ind. Dept. of Rev., 04/06/2020.)
Mississippi. On March 26, 2020, Mississippi’s Department of Revenue announced that it will not assert income tax nexus based on any coronavirus-necessitated changes in an employee’s temporary work location. Also, Mississippi will not alter income apportionment based on such a relocation. These rules apply only while telework requirements are in effect. (Mississippi Department of Revenue Response Response to Requests for Relief, Miss. Dept. Rev., 03/26/2020.)
New Jersey. On March 30, 2020, New Jersey’s Division of Taxation announced on its website that, for corporation business tax purposes, it will “waive the [nexus-creating] impact” on out-of-state corporations with employees temporarily required to work from their New Jersey homes. This waiver applies only if the employees are teleworking “solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy.” (Telecommuting and Corporate Nexus, 03/30/2020.)
Pennsylvania. On April 3, 2020, the Pennsylvania Department of Revenue indicated that, for corporate net income tax purposes, employees temporarily working from home in the Commonwealth due to COVID-19 will not create nexus for their out-of-state employer. This change in nexus policy applies while the governor’s Proclamation of Disaster Emergency is in effect. (Pennsylvania Customer Support Answers – Corporate Nexus, Pa. Dept. of Rev., 04/03/2020.)
District of Columbia. On April 10, 2020, the District of Columbia’s Taxpayer Advocate posted OTR Tax Notice 2020-05 on its website, which provides that the D.C. Office of Tax and Revenue will not claim nexus, for corporation franchise tax or unincorporated business franchise tax purposes, based solely on the temporarily relocation of employees in the District during the declared public emergency period (currently in effect through April 24, 2020) and including any extensions. The protection offered by the Notice also specifically covers “…property used to allow employees to work from home (e.g., computers, computer equipment, or similar property) ….”
Other states. Additional states are likely to announce similar policies in the coming weeks. Developments will be reported in Checkpoint’s State Tax Update.