Does working from home during COVID-19 pandemic create sales tax nexus?

Updated 5.13.2020

Many of us are sheltering in place these days, doing our part to slow the spread of the new coronavirus (COVID-19) pandemic. If we’re fortunate, we’re able to work from home — some of us for the first time. What does that mean for the company’s sales tax nexus footprint?

Nexus is a connection between a taxing jurisdiction, such as a state, and an entity. When a business has nexus with a state or city, it’s typically required to register with the tax authority and pay the applicable corporate, employment, excise, and sales taxes.

Having a physical presence in a state or city creates sales tax nexus in all states with a sales tax. (There’s no statewide sales tax in Alaska, Delaware, Montana, New Hampshire, or Oregon, though many jurisdictions in Alaska levy local sales taxes.) Most states define “physical presence” broadly. Thus, in addition to brick-and-mortar stores, offices, and warehouses, it can include attendance at trade shows, inventory stored in the state for sale, or traveling sales representatives.

And, of course, remote employees.

In an informal survey by Avalara, more than 84% of respondents said their businesses have employees working remotely because of COVID-19.

Employees who hunker down in another state to wait out the pandemic could create sales tax nexus — and other types of nexus — for their employers. Whether states choose to enforce nexus for temporary remote employees under these unique circumstances remains to be seen.

Joe Bishop-Henchman, Stephen P. Kranz, and Alysse McLoughlin of McDermott Will & Emery suggest state tax administrators “disregard remote work for tax purposes.” They argue having employees work from home due to public health concerns “should not be used as an ‘opportunity’ to create nexus for affected businesses and increase their filing, withholding, or payment obligations.”

At least a handful of states clearly agree.

The Pennsylvania Department of Revenue (DOR) will not seek to impose sales and use tax nexus “solely on the basis of” employees temporarily working remotely in the state because of COVID-19. Nor will it seek to impose Pennsylvania corporate net income tax “solely on the basis of this temporary activity occurring during the duration of this emergency.”

Similarly, the DOR would not consider the sourcing of an employee’s compensation a change for income tax purposes if a Pennsylvania employer has a nonresident employee temporarily working from home in another state, even in states that don’t have a reciprocity agreement with Pennsylvania. The employee’s compensation remains Pennsylvania sourced, and the employer is required to withhold on the compensation.

The following states have said they’ll temporarily waive enforcement of certain nexus laws for employees temporarily working from home during the COVID-19 emergency:

• Indiana
• Massachusetts
• Mississippi
• New Jersey (see also here)
• Washington, D.C.

All of the tax department notices make clear the above policies apply only during the duration of the COVID-19 emergency — though Indiana will give people who are diagnosed with COVID-19 (or required to shelter in place due to a physician’s orders) an extra 14 days to return to normal work locations.

On the other hand, New York Governor Cuomo says residents of other states temporarily working in New York will be liable for New York income tax.

Once stay-at-home orders are lifted, employees working from home in other states will likely establish nexus for their employers, as they did before the pandemic. And there’s a good chance more of us will be working from home in the months and years to come.

According to the 2019 National Compensation Survey from the federal Bureau of Labor Statistics, only about 7% of civilian workers in the United States had access to a flexible workplace before COVID-19 mandated social distancing and temporarily shuttered many offices. Even fewer state and local government employees — 4% — had that option. The federal government wasn’t included in the survey.

How the world has changed in just a few weeks. Since COVID-19 hit the U.S., Amazon, Apple, Facebook, Google, Microsoft, Twitter, and many other companies have made working from home compulsory, at least for a portion of the workforce. Many state departments of revenue have done the same, as have local government agencies in hard-hit areas.

The number of home-based employees will surely drop once COVID-19 restrictions are lifted, but they may never return to previous levels. According to a recent Gartner survey of 317 CFOs and business finance leaders, 74% plan to “move at least 5% of their previously on-site workforce to permanently remote positions post-COVID-19.” A quarter of respondents will keep 10% remote, and 4% expect half of their workforce to remain permanently remote.

As noted above, employees working from home in other states after the COVID-19 crisis passes will likely create nexus for their employers. Businesses considering expanding their remote workforce need to take that into consideration before making temporary remote workers permanent. 

Many states are providing sales tax and other tax relief for businesses impacted by COVID-19. It varies by state and includes filing or payment extensions and penalty or interest waivers. For more details, see our COVID-19 tax relief roundup. Information about global tax relief is available on our COVID-19 resource page.