Will Telecommuting Due to COVID-19 Trigger State Income Tax Nexus?

As businesses cope with a variety of unique challenges as a result of nationwide “stay-at-home” orders, one emerging concern facing multi-state businesses is whether employees telecommuting from a neighboring state will trigger income tax nexus there.

Given states’ move towards economic nexus with statutory sales volume and frequency triggers, many large national businesses already have nexus across the country. However, for businesses with more specific markets that straddle certain states, telecommuting workers have the potential to trigger nexus where it otherwise would not exist.

Further, this issue is particularly problematic for businesses that may have substantial sales in a neighboring state with which their only connection is the solicitation of sales, an activity protected from income taxation under P.L. 86-272. Many businesses are rightfully concerned that the temporary presence of an employee or employees telecommuting from their residence because of COVID-19 may constitute a physical nexus with the neighboring state and cause them to lose the protection of P.L. 86-272.

Other questions arise as well over income tax apportionment. If the presence of temporary telecommuters does trigger a filing obligation in a state that includes payroll in its apportionment formula, the wages of telecommuting employees may need to be included as an apportionment factor.

As of April 16, four states — New Jersey, Mississippi, Indiana and Pennsylvania — and the District of Columbia have issued guidance stating that they will not assert income tax nexus on a business based on the temporary presence of its employees telecommuting from within the state due to COVID-19 restrictions. Mississippi further announced that the state will not use the temporary presence of any telecommuter during the crisis to alter a businesses’ income apportionment.

It is unclear when and how other states will respond. In light of this uncertainty, businesses with employees working from home during the current crisis should pay close attention to where their remote employees are working, especially if they are located in a state where the business historically has had no nexus.

Even if a business has telecommuters working from states that have issued a waiver policy, such as the jurisdictions identified above, a careful reading of the local government’s announcement is necessary, because each states’ leniency may have unique limitations. For instance, Indiana has waived the assertion of nexus for periods of time when “an official federal, state, or local government work-from-home order is in effect” or that are “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.” New Jersey’s waiver, by comparison, applies to telecommuting “solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy.” Clearly, the waiver periods in New Jersey and Indiana could have substantially different endpoints, and other states are likely to come out with their own rules as well.

To that end, businesses should consider developing plans for clearly and effectively communicating with telecommuting employees regarding how and when to return to their workplaces depending on local laws and regulations.

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.