Checkpoint Catalyst Survey of States’ Approach to Temporary Telecommuting

By Kathryn Burns (J.D., LL.M.; Editor, Checkpoint Catalyst), Tom Cornett (J.D.; Editor, Checkpoint Catalyst), Rebecca Newton-Clarke (J.D.; Senior Editor, Checkpoint Catalyst), and Emily Porter (J.D.; Editor, Checkpoint Catalyst)

The COVID-19 pandemic has sparked a sudden and unexpected shift to working from home. Even as states ease restrictions, many employees continue to telecommute. A handful of prominent companies have permanently authorized remote work, and media reports suggest that many CFOs are considering the same approach. Yet some of the new teleworkers are performing their jobs from states in which their employer does not otherwise have a taxable presence.  

As our comprehensive survey of state taxing agencies reveals, the business tax consequences of COVID-19 telecommuting for companies large and small including income tax nexus, apportionment, and sales and use tax nexus, remain murky in many states.

The primary issue for these businesses is nexus: whether a telecommuter working from their residence in a state due to COVID-19 will establish a sufficient presence to give the state tax jurisdiction over their out- of-state employer. For example, Lauren usually works from her office at her employer’s sole business site, in State A, but is telecommuting from her home in State B due to the pandemic. Will her activities in State B on behalf of her employer create income tax nexus for the employer? By extension, would the employment- related activities in State B exceed the scope of P.L. 86-272 protections afforded to sellers of tangible personal property? For sales and use tax purposes, if Lauren’s employer does not exceed State B’s small seller safe harbor or otherwise have sales and use tax nexus with State B, will her presence establish nexus for the employer, requiring that the business register and collect applicable sales or use taxes on taxable remote sales?

The concept of economic nexus has predominated since the 2018 decision of the U.S. Supreme Court in South Dakota v. Wayfair (South Dakota v. Wayfair, 585 U.S. - 2018), but physical presence remains the linchpin of nexus determinations.

Over the past two months, a number of state tax agencies have issued guidance establishing that nexus will not arise for income and/or sales tax purposes during the COVID-19 pandemic merely because an employee is temporarily working from home in the state. A majority of tax agencies have not yet addressed the issue, however, and in some cases, the guidance is tied to emergency orders that may soon be lifted.

In our survey, a number of agencies surveyed declined to provide a general rule. Some noted that they will consider a business’ circumstances on a case-by-case basis. Others observed that they are bound by current laws that may mandate an aggressive approach to nexus, and that any deviation would require legislative action. A few states informally offered assurances that COVID-19 telecommuters would not, in and of themselves, create nexus for a business. Many states did not respond. Below we discuss the results, and related apportionment considerations. A chart detailing the full state-by-state results of the survey follows.

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