Businesses Face Unexpected State Income Tax Nexus Assertions

Nexus trigger: Remote worker location vs. physical business location

What’s changed in the sales compliance world lately? Businesses with employees working from home because of state Covid-19-related stay-at-home orders likely face corporate income tax nexus in states or territories where they don’t have physical locations.

Why should companies with remote workers be concerned? Employers that now have employees working from home as the result of Covid-19-related stay-at-home orders in states in which they don’t have a physical presence need to be very concerned about taxing authorities now asserting corporate income tax nexus. This nexus requires businesses to file income tax returns and pay income taxes due. Most states have not passed legislation or issued guidance that would give businesses not physically located in their states a pass on these restrictive requirements.

Tax experts working with state taxing authorities

Tax experts have been working closely with state governments and their taxing authorities to convince them to provide relief to businesses and their employees from the nexus rules that are now in play due to Covid-19-related stay-at-home orders issued by states. These orders have resulted in many employees working from home in locations where their businesses do not have physical locations. If these rules weren’t in place, and employees weren’t forced to work from home in these states, these businesses would not have income tax nexus there. However, much of the states’ reluctance to grant such relief is driven by the enormous revenue shortfalls most of them are now experiencing and that will only get more extreme.

Some states providing guidance

To date, Indiana, Minnesota, Mississippi, New Jersey, and North Dakota have formally indicated that they will not assert the nexus based on employees who are working from home due to the COVID-19 pandemic. Please note that this list could change frequently as additional states adopt and officially communicate such provisions.

Unofficially, Pennsylvania’s Department of Revenue and the District of Columbia’s Office of Tax Revenue have said they don’t plan to assert nexus because an employee is working remotely as a result of COVID-19 state orders. However, until official guidance in writing is issued, businesses can’t rely on these unofficial verbal statements.

Wolters Kluwer Tax & Accounting offers expertise

Tax expert and influencer Mark Friedlich, CPA, Esq., Senior Principal, Wolters Kluwer Tax & Accounting North America, is available to discuss issues.

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