Hawaii Tax Ruling Signals Tax Liabilities for Remote Workers and their Employers

By: Tina M. Chunn, SALT Senior Manager

At a glance

• The main takeaway: Individuals who have worked remotely in different states since the beginning of the pandemic, and the businesses the employ them, may face new state tax burdens and increased complexity.
• Why it matters to you: Your business may be subject to tax obligations in new states as a result of remote employees having worked in or continuing to work in those states.
• Next steps: Aprio’s State and Local Tax (SALT) team can help your business determine any new state tax compliance requirements so that you don’t get hit with unexpected penalties.

Schedule a free consultation

The full story:

Throughout the COVID-19 pandemic, states have issued a variety of executive orders to shut down businesses and require folks to stay at and work from home to help mitigate the spread of the virus. As a result, people have worked from different locations, even outside of their home state.

Subsequently, some state taxing authorities began issuing guidance to provide relief from certain tax consequences of these temporary work situations. For example, states explained that companies would not have nexus based on employees working in states due to COVID-19 orders, nor would employees be subject to income tax on those wages. However, many states remained silent, suggesting that their current rules would be applied regardless of the circumstances.

The new letter ruling out of Hawaii, explained

On July 26, 2021, the Hawaii Department of Taxation (Department) issued a letter ruling in which it determined that a nonresident individual performing personal services from a vacation home in Hawaii would not be considered a resident of Hawaii, but that the income they earned while in Hawaii would be subject to the state’s personal income tax.[1]

The taxpayer purchased a vacation home in Hawaii in 2016 and typically spent three to four months there each year (normally starting at the end of December through early April). Outside of this period, the taxpayer resides in another state and treats that state as his state of domicile (i.e., where he owns a home and vehicles; is registered to vote and actually votes; and holds licenses).

In December 2019, the taxpayer traveled to Hawaii, as in previous years, and was scheduled to return to his domicile state on April 23, 2020 (spending a total of 117 days in Hawaii). During this period, the taxpayer made some short trips out of the state for work purposes but returned afterward.

When the COVID-19 pandemic began, the taxpayer proactively changed his plane ticket to leave on March 25, 2020. However, the governor of Hawaii issued a stay-at-home order on March 23, 2020, which took effect on March 25, 2020. As a result, and out of concern for his health and safety due to the rapid spread of the virus in his domicile state, the taxpayer chose to stay in Hawaii. The taxpayer attempted again to schedule flights to return home on July 1, 2020, and July 3, 2020, which were subsequently cancelled by the airline.[2]

The taxpayer was an independent contractor performing advisory work for one company and serving on the board of directors for three other companies. All of these companies are based outside of Hawaii.  Income from these services is reported as business income on Schedule C of the taxpayer’s federal income tax return. During 2020, the taxpayer worked a total of 171 hours; 22 hours were performed in-person outside the state of Hawaii prior to the pandemic, while the remaining 149 hours were performed in Hawaii through video conferences and phone calls with management and other board members.

In Hawaii, a taxpayer is considered a resident if they are domiciled in Hawaii or are in Hawaii for other than a temporary or transitory purpose, and there is a rebuttable presumption that an individual is a resident if they are in the state for more than 200 days of the taxable year.[3] This presumption can be refuted if the individual has a permanent residency outside of Hawaii and is only in Hawaii for a temporary or transitory purpose.

Although the taxpayer in this case was in Hawaii for more than 200 days, the Department agreed that he was in Hawaii for a temporary or transitory purpose due to COVID-19, and thus would not be considered a Hawaii resident.[4]

However, a nonresident is subject to income tax on income from sources within Hawaii, including income from personal services performed within the state.[5] The state did not adopt special rules for telecommuters, nor did it issue any COVID-19 tax relief due to stay-at-home orders. Therefore, the Department determined that it is bound by existing statutes regarding the sourcing of income, and that any changes must occur through legislation. As such, the Department ruled that the taxpayer’s income from the performance of services must be allocated to and taxed by Hawaii based on a reasonable allocation method.

The bottom line

In many states that issued tax relief during the COVID-19 pandemic, that relief was tied directly to the existence of state health emergency executive orders. As those orders expire, so too does the tax relief associated with them. Therefore, businesses may be subject to tax obligations in new states as a result of employees remaining in those states.

Aprio’s SALT team is experienced with these issues and can help your business determine any new state tax compliance requirements so that you do not incur unexpected liabilities or penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina M. Chunn, SALT Senior Manager, at tina.chunn@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the September 2021 SALT newsletter.

[1] Haw. Dept. of Taxation, Letter Ruling No. 2021-01 (July 26, 2021).

[2] The ruling does not specify if/when the taxpayer left Hawaii.

[3] HRS section 235-1.

[4] Hawaii does not have a bright-line, 183-day residency rule, but if it did, it is likely that the state would have treated the taxpayer as a resident.

[5] HAR section 18-235-1.02(a); HAR section 18-235-4.03.

Disclosure

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.