Back to the office: When can we stop paying sales tax in states our remote workers have left?
The vast expansion of remote work triggered by the COVID-19 pandemic has changed where and how we work, live — and pay and collect taxes.
Now, as some companies start reeling their far-flung employees back to the office, that’s going to have tax implications too.
This leads to a question: After my employees leave a state, how long is it before I can deregister and stop collecting sales tax within a state?
Pandemic spawned major change in how Americans work
Suburbs and exurbs have seen an influx of new residents since the start of the pandemic, as some employees (mostly professional workers) took advantage of remote-work arrangements to move out of city centers and into lower-cost neighborhoods.
In fact, some real estate industry experts attribute much of the recent surge in housing prices to the work-from-home trend, as apartment dwellers looked for larger suburban homes with work space, or as professional workers in expensive coastal cities began exploring more affordable Sun Belt cities.
If the CFO of your company decided to ride out the pandemic at their family’s lakeside cabin in an adjacent state, that may have established physical nexus in a new state for the business, and likely triggered new business registration and reporting requirements — and perhaps an obligation to start collecting sales taxes.
Likewise, if your Silicon Valley company went fully remote in 2020, and your workforce scattered to more affordable destinations like Phoenix, Arizona; Austin, Texas; or Coeur d’Alene, Idaho, you also likely saw your company establish physical nexus in new states.
Being physically present in a state almost automatically establishes nexus and an obligation to comply with state tax laws. During the early days of the pandemic, some states, like Pennsylvania, waived their nexus requirements on a temporary basis, assuming most remote work arrangements would be temporary. Most of those temporary waivers have expired.
Companies are calling workers back to the office
As pandemic restrictions are lifted, more companies are thinking about calling workers back to the office. Elon Musk has decreed that Tesla is ending its remote-work arrangements.
Morgan Stanley has reportedly set a limit on working from home for its brokers; no more than 90 days in a calendar year.
More recently, Boeing ordered its supply chain management teams to return to full-time in-person work, even though its CEO praised flexible work-from-home arrangements just two weeks prior.
Even President Biden has weighed in on work from home, noting that many cities have deserted downtowns now that so many office workers are logging in remotely. He called on federal agencies to return workers to their offices.
“It’s time for Americans to get back to work and fill our great downtowns again,” Biden said back in March.
When can you deregister your business in a state?
As with everything else in sales tax, the answer to this varies between states, and is subject to change.
A few states make it simple: In those states, when the condition establishing the physical nexus in a state ends, a company’s sales tax compliance obligations also end at that point. States with that rule include New York, Tennessee, Vermont, and Virginia.
However, at least 35 states have trailing nexus policies under which an obligation to stay registered and reporting in a state continues for a defined period after the event that established nexus ends. Some states (Michigan and Minnesota, for example), have reporting requirements that stay in place for 11 months after nexus ends.
So, in our hypothetical, if the CFO returns from their lake cabin in the state next door in September, the company will still have nexus in the state through the end of December.
In addition, some states assume companies that have substantial nexus in one calendar year continue to have nexus in the following year. (Meaning that if the CFO returns to the office in September 2022, the registration and reporting requirement would continue through December 31, 2023.)
And some states, like Ohio, don’t have specifically defined trailing nexus guidelines.
Third-party help can simplify trailing nexus confusion
You can’t simply stop collecting and remitting sales tax and filing returns if you think you no longer have nexus with a state. You need to verify that all nexus-establishing activity has ceased and that you no longer have a trailing sales tax obligation. You also need to alert the state in the manner prescribed, which varies by state and can include filing a final return or remitting additional forms.
One thing to keep in mind: If your sales can dip beneath an economic nexus threshold, they can also rise above one. The Avalara Sales Tax Risk Assessment can help you determine where you likely have economic nexus and an obligation to register and collect.
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