COVID-19: State and Local Tax Implications – Part 2: Nexus and Income Tax Withholding Guidance

April 22, 2020

By Jeff Glickman, SALT Partner

A month ago, one of the big unknowns in the SALT world was the potential state tax impact to companies that started having employees working from locations where the company was not otherwise doing business due to mandated “shelter-in-place” or similar governmental orders.

For example, if a resident of New Jersey, who commuted to New York City each day for work, was now required to work from home, how would that effect the New York City business that otherwise never had any activity in New Jersey that gave rise to a tax obligation there?

In late March, the New Jersey Department of Taxation (“NJDOT”) published several “F.A.Q.’s” on its website addressing these issues.  For purposes of employer withholding and personal income tax purposes, the NJDOT website states that:

New Jersey sourcing rules dictate that income is sourced based on where the service or employment is performed based on a day’s method of allocation. However, during the temporary period of the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.

In addition, for purposes of corporate tax nexus, the NJDOT website states that:

As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, the Division will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.

Mississippi issued a press release on March 26, 2020, addressing withholding and nexus issues:

During the period of national emergency, Mississippi will not change withholding requirements for businesses based on the employee’s temporary telework location. Mississippi residents are taxable on their total income, regardless of where they work. However, we will not impose any new withholding requirements on the employer. Mississippi will not use any changes in the employees temporary work locations due to the pandemic to impose nexus or alter apportionment of income for any business while temporary telework requirements are in place.

The Indiana Department of Revenue’s website provides the following response to an F.A.Q. about nexus:

In response to the new remote work requirements associated with the COVID-19 pandemic, the Indiana Department of Revenue will not use someone’s relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis, as the basis for establishing Indiana nexus or for exceeding the protections provided by P.L. 86-272 for the employer of the temporary relocated employee.

The temporary protections provided under this guidance will extend for periods of time where:

  1. there is an official work from home order issued by an applicable federal, state or local government unit, or
  2. pursuant to the order of a physician in relation to the COVID-19 outbreak or due to an actual diagnosis of COVID-19, plus 14 days to allow for return to normal work locations.

If the person remains in Indiana after the temporary remote work requirement has ended, nexus may be established for that employer.

However, not all states are providing clear nexus and withholding relief.  Maryland Tax Alert 04-14-20B states:

Maryland employer withholding requirements are not affected by the current shift from working on the employer’s premises to teleworking because taxability is determined by the employee’s physical presence. . . .  Compensation paid to a Maryland nonresident who is teleworking in Maryland is Maryland-sourced income, and therefore, subject to withholding.  The Comptroller’s Office does not intend to change or alter the facts and circumstances it has consistently used to determine nexus or income sourcing. . . .  the Office will consider the temporary nature of a business’ interim workplace model and employee deployment in light of the current health emergency in making a nexus determination, whether the business correctly sourced income, and whether the business properly withheld and reported employee state withholding.

Other jurisdictions that have issued administrative guidance regarding the impact of COVID-19 on nexus and/or withholding obligations include the District of Columbia, Minnesota (see here regarding nexus and here regarding withholding), Pennsylvania, and Philadelphia.  In addition, Ohio Governor Mike DeWine signed H.B. 197 on March 27, 2020, which will attribute an employee’s work location to his or her principal place of work despite being forced to work elsewhere during the pandemic.  This rule applies only to municipal income tax withholding, and it covers the period during which the state’s emergency declaration is in place and for 30 days after the declaration is lifted.[1]

Taxpayers need to read each jurisdiction’s information carefully to understand how and when it applies, and for income tax withholding, businesses should check whether the state has tax reciprocity with other states.

Despite the uncertain economic environment and the many financial and operational concerns facing businesses, paying attention to your tax obligations, including state and local tax requirements, is still a crucial business function that must remain a top priority.  Aprio’s SALT team is closely monitoring the state and local tax landscape and is ready to help you identify tax savings opportunities and stay in compliance so that your business does not incur unexpected tax liabilities.  Please reach out to your Aprio advisor or you can contact us here.

[1] Ohio H.B. 197, section 29.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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