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COVID-19 impact on remote work and state tax policy

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The fallout from COVID-19 continues to have a significant impact on the way employers conduct business, with many employees continuing to work on a remote basis much longer than initially anticipated. As the consequences of long-term remote work continue to grow in prominence across the country, many states and localities continue to issue guidance regarding the income tax treatment of teleworking employees and business tax nexus policies. However, several controversial policies have invited lawsuits as the states continue to grapple with the long-term effects of a remote workforce. This alert explores the latest state tax developments and issues to be considered as taxpayers continue to navigate the remote work environment.

Recent state income tax withholding guidance and litigation Since the onset of the pandemic, many employees have been required to work from home or another remote location instead of their traditional work location, due to the issuance of state and local emergency declarations or stay-at-home orders. In the case of employees who traditionally commuted across state borders to work in the office, employers may be required to withhold state personal income tax based on the employee’s home location instead of the office, requiring employers to register for payroll taxes in additional states.1 While guidance from the states regarding the treatment of this issue has become less frequent in recent months, it is apparent that states are taking different approaches to the enforcement of tax obligations on remote workers.

State income tax withholding guidance Many states have issued specific guidance over the last several months addressing the income tax withholding treatment of telecommuting employees working remotely from a different state as a result of the pandemic. States such as Maine, Georgia, and Pennsylvania have indicated that employer state income tax withholding requirements will not change during the time that employees are working remotely.2 In other words, wages paid to nonresident employees normally working in one state before the pandemic are considered income earned in that state and are thus subject to tax withholding. Conversely, these states have indicated that if an employee normally works in another state and is temporarily working in their resident state due to the pandemic, wages earned during this period would not be subject to tax withholding in the resident state.

In a similar fashion, the Massachusetts Department of Revenue on October 16 finalized a regulation addressing the sourcing of income for nonresidents telecommuting during the pandemic.3 Breaking with previous guidance, the regulation provides that compensation received for services performed by a telecommuting nonresident who worked in Massachusetts prior to the COVID-19 state of emergency declaration, and who is working outside the state due to the pandemic, will continue to be treated as Massachusetts source income subject to personal income tax.4 The rule clarifies that nonresident workers who were telecommuting before the onset of the pandemic may apportion income to the state according to either: (i) the percentage of work days in Massachusetts from January 1 through February 29, 2020; or (ii) an apportionment percentage arrived at based on the employee’s 2019 income tax return.5 The regulation applies to the sourcing of wage income from March 10, 2020, through the later of Dec. 31, 2020, or 90 days after the governor ends the COVID-19 state of emergency.6

After remaining silent on the issue for a number of months, the New York State Department of Taxation and Finance released an FAQ on Oct. 19 clarifying its position on the sourcing of income for New York nonresidents working outside the state for the duration of the pandemic.7 Specifically, the guidance states that for nonresidents whose primary office is located in New York, days spent telecommuting during the pandemic are considered days worked in the state unless the employer has established a bona fide employer office at the nonresident’s telecommuting location. The guidance aligns with New York’s often rigid application of its “convenience of the employer” rule, under which a nonresident employee is subject to New York personal income tax on income earned when the employee works from a nonresident location at the employee’s convenience, rather than as a requirement of the employer.8 The New York guidance differs from jurisdictions such as Philadelphia, which also applies a “convenience of the employer” standard, but has specified that nonresident employees working for Philadelphia-based employers are not subject to Philadelphia Wage Tax during the time they are required to work outside of Philadelphia, including during the pandemic.9

Similar issues arise with respect to the sourcing of income for local earned income tax purposes, which matters in states that have significant levels of municipal income taxation. For example, Ohio enacted legislation in March providing various tax relief measures in response to the pandemic.10 The law includes a temporary provision that, for purposes of municipal income tax withholding, treats a day on which an employee works remotely during the period of the state’s COVID-19 state of emergency (and 30 days after the state of emergency is lifted) as a day performed at the employee’s principal place of work. Subsequent legislation has been introduced to repeal the law’s local tax sourcing provisions, but has stalled in the Ohio legislature in recent weeks.11 In contrast to Ohio, other states with local earned income taxes, including Pennsylvania, have yet to issue specific guidance addressing the income sourcing treatment for employees working remotely during the pandemic.

Litigation over state remote work tax policies The state telecommuting tax policies adopted in both Massachusetts and New York have raised concerns in neighboring northeastern states, to the extent that states have begun challenging these rules in court. In the most high-profile litigation to date, on Oct. 19, New Hampshire filed a motion for leave to file a bill of complaint with the U.S. Supreme Court in response to Massachusetts’ recently finalized income sourcing regulation for nonresident telecommuters.12 In the bill of complaint, New Hampshire alleged that the regulation unconstitutionally imposes income tax on New Hampshire workers who lack a connection with the state during the pandemic. Alleging a Commerce Clause violation, the state contended that the regulation fails the four-part test established by the Court in Complete Auto Transit, Inc. v. Brady.13 New Hampshire also argued that its resident workers receive no benefit from the protections and services offered by Massachusetts, constituting a Due Process Clause violation. Notable for lacking a personal income tax, New Hampshire contended that Massachusetts is seeking to override the state’s sovereign discretion over its own tax policy. While New Hampshire argued that the Court lacks the discretion to reject a case of original jurisdiction arising between two states, the Court has yet to decide whether it will hear the case.

Concurrent with the New Hampshire litigation, the New Jersey legislature is considering legislation that would direct the state treasurer to study New York’s taxation of New Jersey residents and the long-term fiscal impact on the state, given the possibility that residents may continue to work from home after the pandemic.14 According to the legislation, the treasurer will also consider the merits of joining the litigation between New Hampshire and Massachusetts. Connecticut and other northeastern states, including Rhode Island and Vermont, have also indicated that they are considering intervening in the litigation, based on the number of residents that worked in Massachusetts and now work remotely.

In response to Ohio’s municipal tax sourcing law enacted in March, a nonprofit organization and three of its employees filed a complaint in state court against the city of Columbus, asking the court to invalidate the law. The complaint alleges that the city’s taxation of employee income working outside the city’s borders violated the due process clauses of both the U.S. and Ohio Constitutions, because “there is neither nexus nor fiscal relation between the city and the income being taxed.”15 In response, Columbus argues that the law simplifies the administration of Ohio local tax laws by maintaining the status quo for remote workers, and that it prevents further fiscal difficulties for Ohio cities that rely on income taxes from nonresident commuters.

Business tax nexus and apportionment guidance Employers have also been faced with the challenges of potential additional business tax filing obligations as a result of employees telecommuting from jurisdictions in which the employer does not otherwise have a physical presence or other nexus. In response, approximately one-third of the states have issued guidance providing for the temporary suspension of corporation income tax and/or sales and use tax nexus thresholds where the pandemic has forced certain employees to work remotely in a state in which the company would otherwise not have nexus. States such as Massachusetts and South Carolina specifically announced that their nexus waivers will last through Dec. 31, 2020, while Pennsylvania recently updated its teleworking guidance to extend nexus relief through the earlier of June 30, 2021, or 90 days after the governor’s state of emergency proclamation is lifted.16 Other states, including California, have not provided a specific end date to their temporary guidance, explaining that the waivers will remain in effect for the duration of the states’ emergency declarations or stay-at-home orders.17 California, Georgia, and others have announced that an out-of-state taxpayer will not lose the protections of Public Law 86-272 if the corporation’s only presence in a state is an employee who is currently teleworking in the state due to the pandemic.18

Certain states have also issued specific guidance regarding the impact of telecommuting employees on the apportionment of corporate or pass-through business income. Many states may not consider temporary changes in an employee’s physical work location to alter the apportionment of income during the periods in which temporary telework requirements are in place, or through a specific end date. Some states requiring apportionment of income using a three-factor formula consisting of receipts, payroll, and property have specified that employees working in their state due to the pandemic will not increase the numerator of their employer’s payroll factor.19

Proposed federal legislation Since the spread of the pandemic in March, Congress has introduced several bills in attempts to provide uniformity in addressing the state income taxation of interstate remote workers. The Multi-State Worker Tax Fairness Act of 2020 proposes that remote workers should only be taxed by their state of residence on the income earned while working remotely.20 The legislation advances a simple rule that a state may tax a nonresident individual on their compensation only if the income is earned due to the nonresident’s physical presence in the taxing state. In doing so, the bill would preclude a state’s attempt to circumvent the physical presence requirement through a “convenience of the employer” test.

In contrast, the Remote and Mobile Worker Relief Act was originally part of the U.S. Senate’s COVID-19 relief bill introduced in June 2020.21 The legislation, which has been considered by Congress numerous times for more than a decade, imposes a single, national standard for traveling employees liable for nonresident income taxes. The current version of this bill is updated to provide special relief during the pandemic. Specifically, the bill establishes a 90-day threshold for working in a particular jurisdiction before a remote worker may become subject to tax in a nonresident jurisdiction during 2020, while switching back to a 30-day threshold for the 2021-2024 calendar years. The legislation also clarifies that remote work due to the pandemic cannot be sufficient to establish a taxable nexus for the employer. Despite congressional efforts to provide uniformity in this area, both of these federal bills have gained minimal traction to date.

Commentary Although the concept of remote work is not a new issue to state and local tax, the COVID-19 pandemic has considerably amplified the tax and business consequences of telecommuting employees in recent months. Given the prolonged length of the pandemic and the adjustment to remote work for both employers and employees, remote work may very well become a regular part of business operating and hiring models for the foreseeable future, with many employers allowing or requiring their employees to work remotely on a part-time or even a permanent basis. While states and localities initially issued guidance generally providing for a “status quo” method of taxation for nonresident employees traditionally working in their states, many are struggling with the longer-term effects of telecommuting employees who no longer physically work within their jurisdictions.

The prolonged effect of the public health crisis raises the question of how long the states will continue to adhere to temporary “status quo” tax withholding policies or business tax nexus waivers, even after state emergency declarations or stay-at-home orders are lifted. Given the fact that many states continue to face substantial budget deficits for the 2021 fiscal year as a result of an uncertain economic environment, they are looking for ways to maintain revenue collections, including from nonresident employees who remain an important source of revenue for states such as New York. For jurisdictions following the “convenience of the employer” standard, extensive remote work has challenged the application of such rules during a pandemic, raising the question of whether these states may legally tax the income of nonresidents who begin telecommuting on a permanent basis.

The recent New Hampshire and Ohio litigation has given increased focus to the taxation of nonresident workers, highlighting the growing importance of the issue in the state tax context. While the lawsuits are in their early stages and the outcomes are far from certain, the litigation raises important constitutional questions regarding the ability of jurisdictions to tax the income of employees working beyond their borders during the pandemic and beyond.

Against this backdrop, employers should pay close attention to tracking employee locations for payroll tax withholding and business tax purposes, given that the state in which an employee is working during the pandemic may not be consistent with the employee’s primary work location. Depending on the facts and circumstances, there may be additional payroll tax withholding and business tax filing obligations based on an employee’s new remote work location. In many cases, employers often lack the proper resources and systems to track employee travel and work locations on a daily basis for purposes of accurate payroll tax withholding and reporting, along with their state business tax filing footprint. Employers may also need to consider other payroll implications such as unemployment insurance withholding, worker’s compensation and disability.

At the same time, employees may not be aware of the state and local tax consequences of working remotely in a different state, including the potential for compensation to be taxed at different rates.22 Moreover, individuals working outside their state of domicile beyond a period of six months may unintentionally become a statutory resident of the second state under that state’s tax residency rules.23 Such dual residents who become subject to personal income tax by two states should consider the implications of potential double taxation on wages and unsourced income.

For employers located in jurisdictions following the “convenience of the employer” rule, the specific wording of employer policies regarding remote work may determine whether a nonresident employee is in fact required to work from home rather than for their own convenience. As businesses begin to reopen their offices at limited capacity, employers should be vigilant in understanding the implications of making the office available to employees even on a sporadic basis. Given the often fact-specific nature of employee work arrangements, the communication and execution of employer policies can be critical in determining the tax and other business consequences of an employee’s work location.

Beyond employer withholding, unemployment insurance and business tax nexus considerations, prolonged remote work has the potential to impact other aspects of state and local tax, notably business income tax apportionment. Unless a jurisdiction has issued temporary guidance stating otherwise, remote employees may impact how businesses apportion their taxable income due to changing receipts and payroll factors. For example, businesses may experience a shift in the sourcing of service revenue in states that follow a cost of performance sourcing methodology, especially where labor costs are a significant cost component. Conversely, a shifting customer market may impact the sourcing of tangible goods or service revenue in those states following a market-based sourcing approach. For those states that continue to apportion income using a payroll factor, employers may be faced with the decision of whether to source payroll to the employer’s base of operations or the location where the work is performed. Companies should also consider whether payroll sourcing rules differ from employer withholding rules. Such apportionment issues warrant consideration, especially if remote work arrangements are expected to persist well beyond the length of the pandemic.

Finally, businesses benefitting from existing state or local incentive programs or agreements will need to evaluate the impact of a remote or reduced workforce on the ability of the business to satisfy specific job creation or employment requirements. Beyond offering temporary relief during the pandemic, states may consider the long-term effects of the pandemic on traditional incentive programs.

In the near-term, employers should closely monitor state and local guidance issued on remote working, as it continues to evolve rapidly. In the long-term, however, the shift to remote work should give employers plenty to think about in terms of their state income tax withholding and other business tax policies and procedures, given the different and often conflicting approaches taken by the states.



1 For an earlier discussion of state income tax withholding policies and earlier guidance issued during the COVID-19 pandemic, see GT SALT Alert: “State tax impact for telecommuting employees.”
2 See Coronavirus Tax Relief FAQs, Georgia Department of Revenue, May 2020, https://dor.georgia.gov/coronavirus-tax-relief-faqs; Maine Tax Alert, Maine Revenue Services Announces Tax Relief Updates for COVID-19 Emergency Period, Maine Revenue Services, Oct. 2020, https://www.maine.gov/revenue/sites/maine.gov.revenue/files/inline-files/ta_oct2020_vol30_iss19.pdf; Telework During the COVID-19 Pandemic, Pennsylvania Department of Revenue, Nov. 9, 2020, https://www.revenue.pa.gov/COVID19/Pages/Telework.aspx.
3 MASS. REGS. CODE tit. 830, § 62.5A.3, effective Oct. 16, 2020.
4 MASS. REGS. CODE tit. 830, § 62.5A.3(3)(a).
5 MASS. REGS. CODE tit. 830, § 62.5A.3(3)(b).
6 MASS. REGS. CODE tit. 830, § 62.5A.3(1)(d).
7 Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax, New York Department of Taxation & Finance, updated Oct. 19, 2020, https://www.tax.ny.gov/pit/file/nonresident-faqs.htm.
8 The “convenience of the employer” rule was affirmed by the New York Court of Appeals in Zelinsky v. New York Tax Appeals Tribunal, 801 N.E.2d 840 (N.Y. 2003).
9 Wage Tax policy guidance for non-resident employees, Philadelphia Department of Revenue, updated Nov. 5, 2020, https://www.phila.gov/media/20201105092132/Wage-Tax-non-resident-COVID-19-guidance-110520.pdf.
10 H. 197, Laws 2020.
11 S. 352, introduced Aug. 11, 2020; H. 754, introduced Aug. 31, 2020.
12 New Hampshire v. Massachusetts, U.S. Supreme Court, No. 22O154, filed Oct. 19, 2020.
13 430 U.S. 274 (1977). Under Complete Auto, a state tax must be: (i) applied to an activity with a substantial nexus with the taxing state; (ii) must be fairly apportioned; (iii) cannot discriminate against interstate commerce; and (iv) must be fairly related to services provided in the state in order to survive scrutiny under the Commerce Clause. The complaint alleges that under the regulation, tax is imposed solely based on an employer’s location without regard to where the employee conducts work, and that New Hampshire residents may be subject to double taxation.
14 S.B. 3064, A.B. 4897.
15 The Buckeye Institute et al. v. Kilgore et al., No. 20CV-4301, Franklin County Court of Common Pleas (complaint filed July 2, 2020).
16 See TIR 20-10, Massachusetts Department of Revenue, July 21, 2020; SC Info. Letter 20-24, South Carolina Department of Revenue, Aug. 26, 2020; Telework During the COVID-19 Pandemic, Pennsylvania Department of Revenue, Nov. 9, 2020.
17 COVID-19 frequently asked questions for tax relief and assistance, California Franchise Tax Board, updated Sept. 11, 2020, https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/help-with-covid-19.html.
18 See, e.g., Coronavirus Tax Relief FAQs, Georgia Department of Revenue, May 2020; COVID-19 frequently asked questions for tax relief and assistance, California Franchise Tax Board.
19 See, e.g., Advisory No. 2020-24, Rhode Island Division of Taxation, May 28, 2020; SC Info. Letter 20-24, South Carolina Department of Revenue, Aug. 26, 2020.
20 H.R. 7968, 116th Congress 2nd Sess. (2020).
21 Sec. 403 of S. 4318; S. 3995, 116th Congress, 2nd Sess. (2020).
22 In fact, a recent survey indicated that 71% of employees who have worked remotely during the pandemic were unaware that remote work in another state may impact the amount of state tax owed. Sam McQuillan, Remote Workers Unaware of State Tax Consequences, BLOOMBERG DAILY TAX REPORT: STATE, Nov. 5, 2020.
23 Many states define a “statutory resident” as an individual who maintains a permanent place of abode in the state and is present in the state for more than 183 days per year. See, e.g., CONN. GEN. STAT. § 12-701(1); N.Y. TAX LAW § 605(b)(1)(B); N.J. REV. STAT. § 54A:1-2(m)(2); 72 PA. STAT. § 7301(p).



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