In a recent blog, we discussed how the 2018 South Dakota v. Wayfair decision has been significantly impactful in altering the sales and use tax implications in majority of the states. As our readers know, the term “nexus” indicates the amount of contact necessary by a company in order to be obligated to collect sales tax in a state. In order to impose a tax obligation, nexus must be created – either by physical presence (for instance, employees, contractors, an office, or inventory in the state) or because of economic nexus, which measures the minimum amount of sales revenue or transaction volume that creates nexus and differs from state to state.
Nexus in a COVID-19 Environment
As the pandemic has forced employees to work from their homes, is it time to take a look at how that might unexpectedly create nexus for companies? Do teleworkers indeed create nexus for the businesses during a pandemic? Do states provide any exception to the physical presence rule for sellers who usually work in one state (the company location) but live (and now work) in another as a result of the COVID-19 pandemic?
The answer is, as often in the state tax world, it depends! In light of the coronavirus outbreak, we’ve seen states issue a variety of guidance for taxpayers. In states across the country, many employees have switched to working remotely from home to maintain their safety and follow the rules of ‘shelter in place’. This has raised the question of whether the businesses are obligated to start collecting and remitting sales tax in the states where their employees are now working. The short-term presence of employees in multiple states can lead to unforeseen tax burden for the businesses. Where a growing number of states have already agreed and issued guidance on temporary waiver of nexus laws during pandemic, other states like NY and Connecticut are yet to release any appropriate changes.
State Tax Guidance
Below, we provide a handful of states continuing the temporary suspension and modification of nexus laws due to COVID-19:
The District of Columbia has stated that the new teleworkers in the District where their companies lacked physical presence before COVID-19 pandemic won’t create nexus for sales tax purposes.
In response to the pandemic, Georgia, Indiana and Minnesota in their COVID-19 FAQs announced that someone’s relocation that is the direct result of temporary remote work requirements arising due to COVID-19 will not be used as a basis for establishing nexus in the state. Georgia went on to say that companies are not required to withhold Georgia income tax for employees temporarily working in the state.
The North Dakota and Massachusetts Departments of Revenue also announced that they will not assert nexus on companies solely on the basis of them having employees present in the state in a temporary telecommuting capacity where the telework is attributable to a COVID related response. Further, those same services will not be considered to increase the numerator of the employer’s payroll factor for corporate apportionment purposes.
The New Jersey Division of Taxation issued guidance on temporarily waiving the sales tax nexus standard as long as the out of state seller a) did not maintain any physical presence other than employees working from home in New Jersey due to COVID-19 pandemic, and b) is below the economic threshold for creation of nexus.
Effective from March 13, 2020, through September 30,2020, South Carolina will not use the temporary change of an employee’s work location during the COVID-19 relief period to impose a nexus and withholding requirement.
In a slightly different twist, the Illinois Department of Revenue has given a limitation of 30 working days to the Illinois teleworkers who are performing any services/work for an out-of-state business. After 30 working days, the nexus laws will apply for registering and collecting sales tax.
As we often see, while some states are quick to offer relief or guidance, there are states that have been silent on whether telecommuting during the pandemic will create nexus. States like Washington, California, New York, Connecticut, Texas and Arizona have still not stated their approach on remote workers. We hope that the limited exception to nexus imposed by some states will give a sense of relief to businesses in light of COVID-19.
It remains to be seen how long the new working conditions are going to remain part of the “new normal”. While everyone has adapted their new ways of working, it is challenging enough for both employers and employees to deal with the effects of the pandemic without having to also worry about whether that employee is creating nexus and now requires a business to begin to collect and remit sales tax.
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