The pandemic ushered in a remote working environment unlike anything companies had ever experienced. Some companies already had remote employees pre-pandemic, while others were forced to adapt almost overnight.
Either way, remote work became commonplace across the country beginning in March 2020. Many employees are enjoying the flexibility remote work provides. Meanwhile many employers have realized their employees are productive at home and that significant overhead can be cut without employees being physically in the office five days a week.
Thus, for many companies remote work is here to stay. Yet, many companies do not have a plan—particularly a tax plan—for what parameters can and should be set for remote workers. For instance, employers should be prepared to answer whether remote employees must work from their state of residence, whether the employee is permitted to move to other states, whether the employee can work from “anywhere,” and how an employer knows where its employee is actually located.
Why is a plan and information so important? A basic principle of state and local taxation is nexus. There must be a substantial connection between a taxpayer and the taxing state seeking to assert a tax obligation on the out-of-state taxpayer. Remote workers can create that substantial nexus by virtue of their physical presence, working from home (or elsewhere), within a taxing jurisdiction for as little as one day. For sales tax purposes, any tax not properly collected becomes a liability to the company under audit. In establishing a plan and determining where remote employees can work, consideration should be given to the administrative burden a new state or local sales and use tax obligation may have on a company.
A company’s plan should consider the impact the remote worker may have on subjecting a company to a state’s income, franchise, or gross receipts tax, and any requirement to register to do business in the state. In addition, the company should consider the effect the remote employee will have on its apportionment calculations both in the company’s state and the remote employee’s state. For those states that employ a three-factor formula, remote employees can clearly affect the payroll and property factors. Moreover, the sales factor can be implicated by the remote worker in certain situations. Companies should proactively assess these issues when establishing a plan to address remote work.
For those states in which a company claims the protection of Public Law 86-272, the company should proceed with extreme caution. Public Law 86-272-protected companies need to be diligent in ensuring their remote workers do not engage in tasks on behalf of the company that go beyond the solicitation of orders. Otherwise, companies may be at risk for losing the valuable protection of Public Law 86-272, i.e., no income tax.
When crafting a plan, companies should also consider local business taxes. While a company may already have nexus with a state, that does not mean it necessarily has nexus with a local jurisdiction—many of which impose various business taxes. When allowing an employee to work remotely, companies should determine whether business taxes exist within the jurisdictions in which their remote employees reside and the impact such taxes will have upon the company. Some local business taxes are minimal and may be nothing more than a nuisance to a company, while others could be quite significant.
Additionally, companies should be mindful of the obligation to withhold for their employees’ personal income taxes, since an employer can be held liable for tax not properly withheld. The majority rule among states is that the employer withholds from the state where the employee works, with many states imposing a withholding obligation once an employee has worked in a jurisdiction for a certain period of time. But, with employees working remotely, a company may need to withhold based on the employee’s residence, not where the employee works. To further complicate matters, companies need to be mindful of the “convenience of the employer rule” in certain jurisdictions. If an employee is working remotely for that employee’s convenience, jurisdictions that employ a “convenience of the employer rule” require withholding based upon the employer’s location, regardless of whether the employee works from home outside of the employer’s taxing jurisdiction.
In response to the pandemic, several jurisdictions adopted policies addressing remote worker tax issues, including the temporary suspension of withholding requirements and brief nexus waivers where employees working from home created a temporary presence due solely to the pandemic. But these policies are short-term and widely divergent from state to state, and likely to be litigated in the future. Employers should determine whether they are in compliance with these ever-changing tax laws.
Given the varying tax rules, a company’s plan should include the adoption of specific policies and procedures that address remote workers, being mindful of the tax implications of such policies and the data they will require from employees to report their remote work location. Audit inquiry will likely not be for several years, so it is crucial that companies have adequate data regarding their employees’ whereabouts to be able to present proper substantiation and defense on audit.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jennifer Karpchuk is the co-chair of the State and Local Tax (SALT) Controversy and Planning practice at Chamberlain Hrdlicka. She may be reached at email@example.com. Katherine Noll is a shareholder in the San Antonio office of Chamberlain Hrdlicka. She can be reached at firstname.lastname@example.org.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.