Over the past several weeks, state and local governments have issued a slew of “stay-in-place” or “shelter-in-place” orders mandating the closure of all “nonessential businesses” and requiring all persons to self-isolate. For most companies, this means that most, if not all, of their employees are required to work remotely. While telework has become a great way for businesses to protect their employees from the Coronavirus (COVID-19), it may also be exposing the businesses to taxation in states where they may not otherwise have sufficient nexus. This is because employees may be working remotely from states where a business does not otherwise have a presence. Under the traditional nexus rules, the employees’ work in these states would likely be sufficient to create nexus such that the states can tax the business. This seems unfair given that the federal, state and local governments are strongly encouraging individuals not to travel and to work remotely.
Although state taxing authorities have implemented certain tax relief measures in response to COVID-19, very few states have addressed this nexus issue and indicated that its tax relief guidance includes measures aimed at limiting the expansion of nexus. The New Jersey Division of Taxation (“Division”) has been one of the few state taxing authorities to limit the expansion of nexus for corporate income tax purposes and will, hopefully, set a precedent that other states will follow. On March 30, the Division issued the following statement regarding telecommuting and corporate nexus:
“As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, the Division will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.”
The Mississippi Department of Revenue (“Department”) has similarly indicated that it will not use changes in an employees’ temporary work location due to COVID-19 to impose nexus or to alter any income apportionment while temporary telework requirements are in place. The Department further provided that it will not change withholding requirements for a business based on an employee’s temporary telework location due to COVID-19.
The COVID-19 pandemic is a novel experience requiring novel responses from all US taxing authorities, including states. One effective way for states to provide taxpayer relief during periods of mandated shelter would be to disregard employees’ temporary telework location changes. We applaud the responses of the New Jersey and Mississippi taxing authorities and we hope that others follow suit, both with respect to nexus and with respect to other relevant issues, such as wage withholding issues.