CAN COVID-19 GENERATE NEXUS ISSUES?

Owners of many small business that are close to the border of other states, as is common in our home state of New Jersey, may not have to worry about paying taxes to other states.  If all your work is being done in your home state, and business is just being conducted in your home state, then why should you have to worry about other state’s income and state taxes?  But what happens if your employees that live in those other states, and are working from home due to COVID-19?

Since your employees are doing work in another state, that may be enough to create nexus to that state and require you to pay sales and income taxes there.  In New Jersey, the case Telebright v. Director, Division of Taxation held that even one employee telecommuting for a foreign corporation while working in New Jersey meant that the corporation was subject to New Jersey taxation.  However, since this is worldwide pandemic and many people have been forced to work from home due to state lockdown orders, you would assume that states would be more lenient towards those rules for 2020.  Unfortunately, only some states ( August, New Jersey, Pennsylvania, Alabama, Iowa, Georgia, Massachusetts, Minnesota, North Dakota, Rhode Island, and South Carolina have issued guidelines), as of August, have issued guidance as to whether or not remote work due to COVID-19 will lead to an establishment of nexus.

The New Jersey guidance states that “The Division will temporarily waive the Sales Tax nexus standard which is generally met if an out-of-State seller has an employee working in this State”, as long as the other economic and physical presence nexus standards are not met.  Also, employee wages will be sourced according to the employer, and the employer is not required to change the employee’s status.  So, if you’re an employer, you should be able to continue withholding state taxes as normal.  If you’re an employee, it’s up to your employer to decide which state you were working in during your working from home period.  Of course, if the other state involved is Pennsylvania, the employee withholdings won’t change due to the reciprocal tax agreement between the states.

Pennsylvania also waived the nexus standard for Corporate Net Income Tax and Sales and Use Tax for people temporary working from home due to COVID-19.  However, guidance only waives the standard for the duration the state of emergency begun with Proclamation of Disaster Emergency on March 6th.  It is unknown when the state of emergency will end, and how nexus would be affected if people were still working from home after it does.  The waivers for several of the other states that issued guidance also tied their waivers to their states of emergency.  In South Carolina’s current guidance their waiver only covers the period of March 13th through September 30th, although the period may be extended as the end of September approaches.

Other states may choose to apply their nexus rules on a case by case basis.  Just because a state has not issued guidance yet, it doesn’t necessarily mean that you need to start filing returns in those states.  Hopefully, the situation will become clearer before the end of the year.

We will post additional information to our website, as it becomes available.  Check back here or contact us.

Learn more about our Tax Planning & Compliance services here.

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