If an employee works remotely in a state for an out-of-state business not otherwise subject to income tax in that state, the out-of-state business must assess whether such arrangement creates nexus with that state and triggers state income tax. For example, if a business is physically located in State A and has employees working remotely in State B, the business must assess whether it has business tax nexus in State B. As a result of the foregoing and in direct response to the rapid shift to remote work caused by COVID-19, several states have adopted interim policies to waive business nexus where employees are temporarily located in the state. Regardless of the foregoing relief, an out-of-state employer will still be required to withhold on non-resident employees working in the state because of COVID-19.
The Minnesota Department of Revenue has announced that it "will not seek to establish nexus for any business tax solely because an employee is temporarily working from home due to the COVID-19 pandemic." Therefore, based on the above example, if the business was physically located in Wisconsin and it now has employees working remotely from Minnesota due to COVID-19, the Department of Revenue will not assert business tax nexus against the Wisconsin business.
Similarly, the Indiana Department of Revenue has announced that it "will not use someone's relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis," to assert nexus. The temporary protections will extend only where (i) there is an official work from home order issued by an applicable federal, state or local government, or (ii) the person is located in Indiana as a result of a doctor’s order or to a COVID-19 diagnosis, plus 14 days.
Recently enacted Ohio legislation, HB 197, offers a limited statutory safe harbor for municipal income tax purposes. Any day an employee works in a telecommuting arrangement, either at home or at a location other than the normal principal place of work, due to the COVID-19 emergency and for 30 days after the emergency expires, the employee is deemed to work at the employer’s principal place of business. Among other changes, HB 197 also automatically extended the filing date for 2019 Ohio personal income, municipal income, and net profits tax returns, to July 15, 2020. Nexus and other filing considerations for Ohio’s Commercial Activity Tax (CAT) remain unchanged.
In addition to Minnesota, Indiana, and Ohio, New Jersey, Mississippi, Pennsylvania, North Dakota, and the District of Columbia have also issued guidance waiving business tax nexus associated with remote work during the COVID-19 pandemic.
For further information, please contact Dimitrios Lalos, Nathan Hagerman, James Duffy, Don Mottley or another member of Taft’s Tax Practice Group.
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