Out-of-State Remote Workers may Create Substantial Nexus as COVID-19 Protections Expire

In response to the COVID-19 pandemic, as work-from-home became the norm, many states provided safe harbors such that remote workers teleworking in the state would not create nexus for corporate income tax and sales / use tax purposes. Thus, businesses with teleworking employees were not burdened with additional state tax obligations during the pandemic. Now that COVID-19 restrictions are being lifted and people are returning to work, these nexus safe harbors are also expiring. However, working remotely, even if only partially, is certainly here to stay for many employees. Businesses must be aware of their state tax obligations that may be imposed as a result of allowing employees to work from home.

For instance, Pennsylvania had a nexus safe harbor in place during the pandemic, but has stated that beginning July 1, 2021, out-of-state businesses employing Pennsylvania residents working from home will have corporate income tax and sales tax collection obligations based on the employees’ activities in Pennsylvania. According to a Bloomberg survey, 37 states responded that teleworking employees in the state could create nexus for corporate income taxes (which would most likely require sales tax collection as well).

In addition to business-activity and sales / use taxes, businesses are likely required to withhold income taxes from its employees’ wages based upon where the employee is performing services. This creates compliance burdens when employees live in a different state from the business’ office or splits time between the office and home. The U.S. Supreme Court recently declined to hear a case that challenged Massachusetts’ ability to impose income tax on New Hampshire residents teleworking for Massachusetts employers, which could embolden states to use teleworking employees to increase tax revenue.

The rules concerning whether remote workers creates multistate tax obligations for businesses are changing as the United States pulls out of the pandemic and more offices open. Those businesses with employees working from their home out-of-state have particular compliance burdens.  These businesses must be cognizant of expiring nexus safe harbors to ensure they are not hit with surprise tax bills as a result of their employees’ presence in other states. If you have questions on how teleworking employees could affect your multistate sales and use tax and income tax obligations, please do not hesitate to contact us.

Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.

Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423

Nathan M. Fulmer is an associate in Buckingham’s Taxation Practice Group. He represents clients on a broad range of tax planning and controversy matters. His joint degree in taxation allows him to provide unique solutions when assisting clients on business matters. Nate can be reached at [email protected] or 330.258.6464.

About Buckingham, Doolittle & Burroughs:

Buckingham, Doolittle & Burroughs, LLC is a corporate law firm that counsels middle-market executives and business leaders all over Ohio and beyond. With offices in Canton, Akron, and Cleveland, Buckingham offers clients Business Law Reimagined through sophisticated and practical legal services. Serving the region for more than 100 years, Buckingham’s mission is to deliver meaningful experiences through the practice of law, exceed expectations in terms of service, counsel and business sense, and to offer continuous value to the industries, communities and clients they serve. For more information, news and updates, visit bdblaw.com.