Survey of States’ Approach to COVID-19 Telecommuting Reveals Uncertainty Around Sales and Use Tax Nexus

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.

The shift to telecommuting is noteworthy from a sales and use tax nexus perspective because it returns the concept of physical presence to the forefront. Before the 2018 decision of the U.S. Supreme Court in South Dakota v. Wayfair, an out-of-state seller did not have “substantial nexus” with a state sufficient to satisfy the Commerce Clause of the U.S. Constitution unless the seller had some physical presence, through its activities, agents, or property, in the state.

Wayfair overturned the physical presence standard, establishing that nexus can arise from economic and virtual contacts. In the two years following the decision, states have been busy passing economic nexus laws that reach far beyond geographical boundaries. All but two states that impose a sales tax have enacted economic nexus thresholds; Florida and Missouri continue to look solely to physical presence.

States’ economic nexus schemes vary in detail, but all impose sales and use tax obligations on out-of-state sellers whose sales into the state meet a threshold measured by sales dollars or number of transactions, or both. As a result, many sellers find themselves subject to numerous state sales and use tax registration, collection, and remittance requirements (mitigated by the Streamlined Sales and Use Tax Agreement in member states).

On the flip side, these same schemes create small seller safe harbors for remote sellers whose sales do not exceed the economic nexus thresholds. Sellers that fall within a state’s small seller safe harbor and lack a physical presence in the state can be assured that no nexus exists with the state for sales and use tax purposes. Depending on the state, however, a third-party marketplace facilitator may be obligated to collect and remit sales tax on sales it facilitates for the seller.

The rise of mass telecommuting raises many questions. What happens if a state or business institutes an emergency work-from-home order due to the COVID-19 pandemic? Will an employee’s temporary presence in a state subject the seller to the state’s sales and use tax registration, collection, and remittance requirements? In the economic nexus era, these concerns are more likely to arise for smaller retailers, or for those whose taxable sales tend not to be multijurisdictional but usually occur in a single state.

Unlike economic nexus, physical presence nexus is not dependent on any threshold. Rather, having a single employee in the state may be sufficient to create nexus for sales and use tax purposes. There is no bright line test across the states. Some states may provide de minimis contact exceptions and other states may exclude employees not engaged in solicitation or other sales activities. A chart detailing the full state-by-state results of the survey follows.

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