Businesses are calling on state tax agencies to release guidance on several issues tied to the Covid-19 pandemic, including the tax treatment of remote workers, the taxability of federal relief payments, and President Trump’s payroll tax holiday.
Representatives of large multi-state corporations, including retail giant Walmart Inc. and cable operator Charter Communications Inc., also called on the states to create uniform rules for transfer pricing arrangements, which companies use to set prices for transactions between their own subsidiaries.
Employers and tax practitioners told the Southeastern Association of Tax Administrators Thursday that they are particularly troubled by inconsistent guidance governing the treatment of workers telecommuting during the pandemic from states beyond their employer’s home base. With millions of Americans working remotely, significant issues have emerged about tax withholding duties in multiple states for the same employee, and the possibility of “tax nexus”—sufficient contacts to make a business subject to tax laws in the telecommuter’s state.
At a minimum, the states must address how to tax mobile workers during the pandemic, said Joe Huddleston, a managing director of EY LLP’s state and local tax practice.
Longer-term, Huddleston said the states should consider legislation or permanent guidance dealing with mobile workforce issues because the pandemic has likely accelerated the work-from-home business model. He pointed to a model law drafted by the Multistate Tax Commission as a guidepost.
“I would encourage the states individually to look at that and see what makes sense in your jurisdiction,” Huddleston said during a SEATA panel discussion.
“And if you don’t solve it in your states, the feds are going to solve it for you,” added Julie Magee, director of tax regulatory affairs at the credit monitoring company Credit Karma. She pointed to moble workforce legislation in the U.S. Senate (S.3995) that would preempt the states.
Are Relief Checks Taxable?
In addition, Magee said a handful of states need to pass legislation addressing the tax treatment of the $1200 economic impact payments distributed at the beginning of the pandemic by the federal government. While most states and the federal government acknowledge the payments are not taxable, some have not.
The payments are currently taxable in Alabama, Iowa, Louisiana, Missouri, Montana and Oregon, according to an analysis by the Tax Foundation.
President Trump’s plan for employers to defer payroll tax for the remainder of the year is another area crying for federal and state guidance, said Charles Collins, vice president of government affair at the payroll processing giant ADP Inc.
Payroll processors are willing to begin withholding, but employers have been reluctant because the Treasury Department and the states have not issued guidance, Collins said. Businesses are also reluctant because the program is merely a deferral, potentially leaving workers or employers with large liabilities when the holiday ends Dec. 31.
“If Congress doesn’t repeal it or exempt it later on, it will be due at some point either by the employee or the employer,” Collins said. “So they’re being very careful until they get some guidance.”
On the corporate income tax front, several speakers called for greater uniformity in how businesses use transfer pricing.
Jesse Hereford, director of state tax controversy at retail giant Walmart Inc., suggested wider state adoption of the legal and procedural rules embedded in the “arm’s length standard.” The standard, enshrined in federal tax code Section 482, specifies parent companies and affiliates must price intercompany transactions as if the parties weren’t related.
“There is a huge body of preexisting case law and regulations,” Hereford said. “The challenge is to just get everyone to agree on the front end and say, ‘Yup, we’re going to follow that body or rules.’”
Practitioners also expressed support for uniformity across rules for adding affiliate income back into the tax base and rules for compelling multi-state businesses to file combined returns.
Jamie Fenwick, vice president for strategic tax at telecommunications company Charter Communications Inc., said uniform audit procedures would also help taxpayers.
Transfer pricing audits can become “adversarial very early,” Fenwick said, “because the auditor may come in with a preconceived notion about how much tax the taxpayer should be paying before they get a good understanding of the business.”
Standard audit procedures would even out the wrinkles and bring audits to a quicker conclusion, she said.