If your company had to close its doors as a result of the pandemic, you should find out if remote working creates nexus for your business. Nexus is a term used when a company deals with any aspect of its business outside of its own state. To put it simply, nexus is another word for connections that have a taxing jurisdiction.
It essentially allows you to subject your business to different tax laws, depending on what municipality, state, or country you have nexus in. Nexus laws constantly change, so it’s important to keep yourself updated on the topic if it’s relevant to you and your business.
How to Know If Remote Working Creates Nexus
The pandemic has resulted in a lot of remote working and nexus for companies that might not have had either in the past. If your company has employees who went out of state to quarantine in their own homes or other locations with family members or friends, chances are they’ve created nexus.
We are in a unique situation, one that has surely resulted in more businesses having nexus in a variety of new places. What does this mean for your company? Well, if you had an employee who worked for you from another state, it could result in you needing to pay withholding on wages for employees working in that specific area. It could be collecting sales tax on sales, dealing with income tax, licenses, etc.
As the IRS extends tax filing and payment due dates, there have been issues as a result of states conforming or not conforming to current circumstances. There are some possible problems that may come from employees working outside of the state they were hired to work in.
Individual Income Tax Payment And Withholding
Any individual income tax and related payroll withholdings are usually sourced to the state where the employee performed their work. As many employees are now telecommuting due to COVID-19, certain states and cities have adopted the ‘Convenience of the Employer’ test.
This means that the wages of those remote workers are sourced to the employer’s location unless it was decided to have the employee in another state based on the employer’s necessity, rather than the employee’s convenience. For example, Philadelphia-based employers who are working outside the city are exempt from the city’s wage tax for the days spent working.
Apportionment
There’s also the issue of apportionment; many states still use a three-factor method of property, payroll, and sales to help calculate the business tax apportionment factor. As employees are now working from home, states could insist that the compensation paid is creating a payroll factor numerator.
This topic hasn’t been addressed explicitly during COVID-19 by all states, but those states who are facing it have said that they won’t adjust a company’s apportionment percentage due to the result of employees telecommuting from the state in question.
State Taxes
When it comes to the physical presence of employees in multiple states, the state taxes that a business pays could be affected. Under normal circumstances, a business would have nexus for state tax purposes if it has a physical presence in a state. This would affect things like income, sales, use, receipts, gross, and franchise tax.
Now, however, employers have very control over where their employees work from. These could be normal conditions for the foreseeable future; until this pandemic is over employers might be hesitant to gather all of their employees in one place again.
Even though dozens of states have announced that they won’t impose nexus on employers, there are still many gray areas surrounding the issue. There’s no specific guidance around COVID-19 related telecommuting and whether states will end up creating nexus for tax purposes. The guidance issued seems to be temporary, so the future of this issue is up in the air.
What States Are Doing
As of September 16, 2020, each state is on its own in regard to telecommuting and nexus during the pandemic. For Alabama, there’s no nexus to be introduced, yet Arkansas has not released a statement whatsoever. Neither Florida nor Hawaii have issued guidance either, as seems to be the case for quite a few states.
On the other hand, there are those who have imposed nexus, like Nebraska and Utah. It’s also interesting to see a few states saying yes to some and no or maybe to others, depending on circumstance. For example, Arizona has said ‘no’ to Nexus being imposed for corporate income tax but a ‘maybe’ for transaction privilege tax.
It seems that there’s still a lot of uncertainty and confusion for employers whose employees are currently working from a variety of places. As COVID continues to affect working conditions, it doesn’t seem like this is an issue that will disappear anytime soon.
If remote working creates nexus for your company as a result of COVID-19, you might consider partnering with a team of CPA experts to help you figure out what might be your most complicated tax year to date.
Contact us at Insogna CPA for help with all of your business accounting needs.