SALT Blog - SALT Blawg

It has been a year since a large portion of the workforce was required to work from home almost overnight.  A majority of employers learned that they could function well remotely and many employees enjoyed the flexibility of remote work, including the ability to work from states different than their traditional work location. Since there seems to be light at the end of the tunnel, many employers are considering whether or not they will maintain a permanent remote workforce.  Such a decision should not be made without consideration of the state and local tax ramifications of a remote workforce.  We highlight some of the key issues to look for below and encourage you to join us on April 28, 2021 at 12pm Eastern/11am Central for an in depth discussion of these issues, along with international tax and employment law considerations surrounding remote workers (click here to register).

1. Nexus

Generally speaking, for purposes of state and local taxes, companies are considered to have nexus with a state if they have employees working in the state.  Where an employee is working from home, out of state, that employee is creating nexus – even if the employer does not otherwise have a location in the state. That nexus implicates a myriad of potential taxes – for instance, income, franchise, gross receipts, and sales and use taxes.  Additionally, the employee may subject the employer to certain business registration requirements.  Some states have adopted guidance providing for relief from usual nexus provisions during the pandemic, while others have not.  However, even for those who have provided relief, that relief is not indefinite – if the employee remains remote after the relief date, the employer will again have nexus considerations tied to the remote employee.

1. Sourcing

Out-of-state remote employees can create sourcing issues for purposes of the employer’s state income taxes too.  The majority of states have adopted market-based sourcing.  An employer’s remote workers should not affect the employer’s sales factor in those states and how revenue is apportioned.  However, there could be situations where the employer could need to adjust its sales factor sourcing where its customer’s employees are using the product from home in a different state.  Moreover, for costs of performance sourcing states, sourcing is based on where the income producing activity is performed.  The costs of performance analysis may change if remote out-of-state workers are generating the sale.

1. Withholding

With a remote workforce, the question arises as to where an employer should withhold tax when the employee is working from home.  The majority rule is that the employer withholds in the state from which the employee works.  With a number of employees now working from home remotely in a state different from where they once worked, this may result in an employer being required to withhold state personal income tax based on the employee’s home location.  However, there are certain states and localities – such as Delaware, Connecticut, Massachusetts, New York, and Philadelphia – that apply a convenience of the employer rule.  Pursuant to convenience of the employer or requirement of employment test, the employer must withhold all of the employee’s income for the employer’s location unless the employee can demonstrate that the work was done remotely due to a requirement imposed by the employer – not for the convenience of the employee.  The application of the convenience of the employer rule to a COVID-19 working environment presents unique considerations which states and localities are addressing in varied ways.

Federal legislation has been proposed to attempt to address some of the issues related to a remote workforce.  However, like many state and local tax related proposals that surface in Congress, it has gained little traction.  Additionally, many states have remained silent on their positions related to the treatment of the new (or present) working norm.  Employers and employees should be mindful of these issues and employers should consider adopting policies and procedures to proactively address some of the questions and concerns raised by their remote workforce.

If you have any questions about how today’s remote working environment affects you, please contact us.  Jennifer Karpchuk can be reached at jennifer.karpchuk@chamberlainlaw.com.  Katherine Noll can be reached at katherine.noll@chamberlainlaw.com.