As 2021 is over we begin to consider the year ahead and what is in store from a state and local tax (SALT) perspective. Nexus is a significant area of focus in SALT and the evolution of nexus will continue in 2022. The last few years brought us economic nexus via the Wayfair decision and the subsequent economic nexus legislation enacted by the states. The pandemic has also played a large role with employees rapidly shifting to work from home. This transition resulted in temporary nexus guidance from many states to address the related nexus issues resulting from employees moving from office work to working from home.

On the sales tax economic nexus front, 2021 saw the last three states (Florida, Kansas and Missouri) finally pass nexus legislation. The Florida and Kansas laws went into effect in July 2021 and Missouri’s comes online January 1, 2023. Additionally, two states, Maine and Wisconsin dropped the transaction count component of their economic nexus thresholds. The transaction count trend began almost as soon as states began passing legislation as the transaction count threshold (typically 200 transactions) can require small sellers that sell many low-price items to register and collect in many states. The intent of the Wayfair court and to a lesser extent, the states, has been to provide some protection for small businesses. Many of these small businesses simply do not have the resources to administer sales tax in multiple jurisdictions. The elimination of the transaction count threshold in more states will significantly benefit small sellers.

Wayfair or economic nexus became a reality with the court’s decision on June 21, 2018, however; it took months for the states to react. The states had to pass economic nexus laws, provide notice to remote sellers, and address issues of administration. In the subsequent months and years, most states were lax with taxpayers that registered after the effective date of their remote seller law. For example, if a taxpayer registered on April 1, 2019, in a state that imposed economic nexus on October 1, 2018, often the state did not question the timing of the taxpayer’s registration (or the fact that six months passed from the effective date of the legislation). In essence, there was an unspoken grace period offered by many states. The grace period began to fade away in 2021 as we have seen several states starting to question new registrants. Often, the states either send a nexus questionnaire asking for specifics on the date of first sales in the state or they may be more direct and ask the taxpayer to document their sales threshold in the state. Taxpayers should evaluate any historic risk before registering in a new state for sales tax. In some cases, it may be best for the business to pursue a voluntary disclosure if a material liability exists. The tax is required to be paid under a voluntary disclosure, but penalties are abated. In addition, a voluntary disclosure agreement normally has a limited lookback and generally, an agreement prevents a state from reviewing older periods.

One of the primary nexus questions since 2020 has revolved around the impact of the pandemic and the resulting move of employees to remote work. In 2020, many states provided guidance that they would temporarily suspend income tax and/or sales nexus rules if a company’s only activity in the state was an employee temporarily working from home due to COVID-19. In the latter half of 2021 and into 2022, states are lifting their temporary nexus guidance. This will affect businesses in states where employees work from home, but the business is not currently registered for income tax and/or sales tax. Pennsylvania and New Jersey each revised their nexus guidance related to telecommuting employees effective July 1, 2021, and October 1, 2021, respectively. Currently, employees working remotely in either state may create income tax or sales tax nexus.

While we always hope the new year is better than the last, we also expect these nexus considerations to grow in 2022. The impact for some companies will be significant as states move to impose nexus on out-of-state businesses. If your company has employees working remotely or you have increased interstate sales in recent years now is the time to review your nexus footprint. A nexus review can identify tax issues before the state does and offer you the opportunity to control and direct the solution. HBK SALT Solutions is here to assist at any stage from the nexus review process to the tax filings required to obtain compliance. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

Watch the HBK Manufacturing Solutions Webinar including special guest Cassandra Baubie, a member of HBK’s Tax Advisory Group and specialist in State and Local Tax (SALT) matters, to discover important regulations that manufacturers should understand regarding state and local tax. During the presentation, we will discuss state and local tax as well as nexus considerations that manufacturers should understand.

• What is the significant of South Dakota vs. Wayfair, Inc. to manufacturers?
• When does your company need to file state and local sales tax returns?
• Understanding where your process starts and stops to get the most out of your exemption certificates.
• How did COVID-19 impact state and local tax regulations?
• What actions should your manufacturing company take today to ensure it remains in compliance?

Download the materials.

As the end of 2020 nears, manufacturers should begin thinking about their taxes. Join Jim Dascenzo, CPA and Peter Roupas, CPA, JD to discuss tax planning strategies specific to manufacturing companies. Key opportunities discussed will include:

• Research and Development (R&D) tax credit
• Bonus Depreciation
• IC-DISC
• LIFO Inventory Valuation
• Accrual vs. Cash Basis

  Download the materials.

As the world begins to adjust to a “new normal” in a post COVID-19 world, companies are shifting to allowing more employees to work from home on a permanent basis. Employees who have worked successfully from the comfort of home do not see the need to go to an office, and this provides opportunities for employers to downsize their current buildings, reducing rent and overhead costs. However, this leads to new state tax issues that must be addressed.

During the midst of the crisis, many states took a very taxpayer-friendly approach and announced that having an employee who normally worked in one state but was now working from home in another state would not create nexus. They also took the position that the income would be considered earned by the employee in the jurisdiction where it was normally earned. Basically, their approach was “let’s pretend this pandemic never happened,” allowing employers to get their employees out to a safe working environment without having to concern themselves with any lasting state tax implications.

As more states begin to open during this pandemic, states and cities are going to be facing the harsh reality of unprecedented deficits. Unlike the federal government, most states must pass a balanced budget which includes making up for prior year shortfalls. They will be looking to refill the coffers. Raising taxes could be a solution, but for many states this is an election year and raising taxes is not a pragmatic decision with their citizens still recovering financially. A politically noncontroversial way to raise taxes would be to tax nonvoters.

Nexus
If you are not a State and Local Tax professional, you may not be familiar with the term “nexus.” The simple definition is connection or “touches” with a state. For tax purposes, a business must have some sort of connection to a state before it is required to file an income tax return or have an obligation to collect sales tax. The connection required differs based on the type of tax. There is a federal law that protects businesses from a state’s income tax if the only presence in the state is for the mere solicitation of tangible personal property. This law is not applicable to other types of taxes, such as franchise or sales tax. The solicitation of services or real property is also not protected. Therefore, a sales employee could be based in a state and not subject a business to state income tax if their only function is solicitation of tangible personal property. As soon as their services go beyond mere solicitation, the business could be subject to income tax. Additionally, the activities of that salesperson may protect the employer from an income tax obligation, but having an employee performing work in a state regardless of their job description will certainly trigger sales tax implications in that state.

Income Tax Nexus
An employee working from home, performing administrative functions for the business, is not protected under federal law. As we move beyond the crisis, businesses may be looking to reduce costs by downsizing their occupancy costs. They may continue to allow employees to work from home, which is different from the location of the business. If this situation occurs, businesses will need to consult with their tax advisors to determine their obligations.

If a business is considering allowing its employees to work from home, there are some matters they need to examine:

• Are the duties of the employee protected from income tax exposure?
• Will the employee give them nexus in a state in which they did not previously have nexus?
• How are they taxed? Are they taxed as a C Corporation, a Pass-Through Entity?
• If they are a pass-through entity, will the owners be able to utilize the credit available for taxes paid in another state?
• How does the other state source revenue – cost of performance or market-based?
• Will the entity be subject to a franchise tax in the state?
• What other registration and filing requirements will the business have?
• What employment rules must be followed in a state?

Employee Considerations
An employee working from home for an out of state company also needs to consider their own income tax exposure. If the employer allows them to split their time between the office and home, and they live in a different state than the office, they will be subject to tax in both states and will need to track their days worked in each state. The employee may have tax withheld in multiple states, thus requiring them to file income tax returns in multiple states. Employees may have opportunities to get a credit against taxes paid in any additional states or be refunded taxes withheld in an additional state depending on the circumstances.

Whether or not an employer has an obligation to withhold on an employee is dependent upon the states at issue. Some states, such as New York, have the convenience of the employer test. Under this test, for example, a telecommuting employee’s income is apportioned entirely to the state in which the taxpayer’s employer is located. New York has upheld the test several times in appeal. There are currently five other states that impose the convenience of the employer test: Connecticut, Delaware, Nebraska, New Jersey, and Pennsylvania. The application of the convenience of the employer test can lead to double taxation where the employer’s state applies the test and the state from which the employee resides does not.

Conclusion
It is important to examine these issues before deciding whether employees should be able to continue to work remotely. Tax is the land of unintended consequences. The employer may intend to offer more flexibility in order to attract and maintain qualified employees or reduce expenses, only to be subject to additional taxes. These matters should not be ignored, getting ahead of state tax issues allows for a smoother transition as the business grows and expands into multiple taxing jurisdictions. If you would like to discuss the state tax consequences of remote employees, please reach out to your HBK Advisor.