COVID-19 Telecommuting: State Guidance on Business Tax Nexus Is Inconsistent and Incomplete.

• Author: Britton, Nadya

Millions of Americans are working remotely during the COVID-19 pandemic--and many are expected to carry on this lifestyle after the virus is under control. (1) Some will even relocate to other states to be closer to family, access more affordable housing, or improve their quality of life in other ways. (2)

A great deal has been written about the effects of this societal shift on productivity, corporate culture, and how work gets done'--but what about the tax implications?

Well, it's complicated. And largely unclear. In some cases, for example, a lone employee working in a state can trigger sales and use tax collection obligations for their employer--even if the company has no other physical presence in the state and its sales are below thresholds that would require collection. A few states have temporarily waived the sales and use tax consequences created when workers are temporarily forced to telecommute from the state due to COVID-19, but most have not.

Economic Nexus & Physical Presence Nexus

In the 2018 case South Dakota v. Way fair, the US Supreme Court ruled that companies can be subject to tax obligations if they have economic nexus in a state--that is, if they meet the state's legislated sales threshold. Previously, nexus depended on a company's having a physical presence in the state, which could be an office building or storefront, a third-party repair person, or an employee engaged in solicitation.

In the wake of Wayfair, most states provided a sales tax nexus "safe harbor" to small sellers whose remote sales don't reach a threshold established by the state, often $100,000 or 200 transactions. However, increased telecommuting during the COVID-19 pandemic means that businesses may have unexpected sales and use tax collection obligations--under physical presence nexus rules--in states from which their employees are newly telecommuting.

This means that if a state considers the presence of an employee sufficient to establish nexus, economic nexus thresholds would be irrelevant. Physical presence is enough. In these cases, businesses must register and collect applicable sales and use taxes on all taxable transactions once physical presence nexus is established--so a single telecommuter in a state can have significant consequences.

In the COVID-19 era, sales and use tax nexus issues arising from telecommuters have raised important questions. For example, some states have indicated that workers who telecommute because of the pandemic...