Tax Nexus: Unexpected Coronavirus Tax and Filing Consequences of Workers Staying Home
A business that is incorporated or has a home office in one state, but is active in another state, may incur a variety of tax obligations to the second state, depending on the “nexus” between the business and the second state.
A business with nexus to Connecticut is required to register with the Connecticut Department of Revenue Services and pay or collect certain taxes and an individual with nexus may be required to pay Connecticut personal income tax.
While the rules vary widely from state to state and depend on the type of tax in question, nexus may be established by a variety of factors, including, under some circumstances, an employee who works in the second state.
States have grappled with the issue telecommuting between states for some time. As telecommuting has become more prevalent, many states have ruled that telecommuting does, indeed, create nexus for certain purposes, while other states have not. Even in the same state, the answer may depend on the type of tax involved. For example, the Connecticut regulations governing nexus for corporate income tax purposes have not been amended since 1984, and therefore don’t directly address this issue. On the other hand, the law for personal income tax was changed effective January 1, 2019 to include in the calculation of income derived from sources in Connecticut, income from days worked outside of Connecticut for the employee’s convenience if the employee’s home state uses a similar test.
Previously, a business whose employees all worked in person at a single office in one state may not have been too concerned with the nexus rules. Now, in the COVID-19 era, almost every employee who can work from home, is working from home, and some may live in a neighboring state. This calls into question the nexus rules. Inadvertently, sheltering-in-place may have the effect in many states of forcing companies to create nexus. As with much about work and life in the COVID-19 era, this is a fluid situation; often there is no clear answer.
It has been reported that the District of Columbia, Indiana, Minnesota, Mississippi, New Jersey, and Pennsylvania have all released specific telecommuting guidance pertaining to COVID-19 to the effect that if employees are temporarily working from home as a matter of safety and public health, these states will not seek to impose nexus solely on the basis of the temporary activity, for the duration of the emergency. Many jurisdictions have not directly ruled on this issue, but it is expected that more states will release guidance in the upcoming weeks.
Contact your tax advisor to address any questions regarding the telecommuting effect on nexus or any other tax matter.