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.
In addition to Minnesota and Indiana, 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 or another member of Taft’s Tax Practice Group.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.