The state and local tax implications for your business will require careful attention in the COVID-19 pandemic environment. Remote work during shutdown orders led to many workers finding themselves working for an organization from a different state. Some may even opt to change locations now that working virtually has become a more permanent option.
Early talks around a fourth phase of stimulus legislation may address some of the complicating factors that arise from a geographically diverse workforce. The Senate Republican plan for COVID-19 relief contained a bill that would increase the threshold for states to tax residents and workers who are physically present and performing work duties to 30 days. Frontline workers who are providing additional pandemic support, such as medical personnel, would be subject to a 90-day threshold. With talks over what the next round of relief should look like stalling out, however, it is unclear at this moment whether such a package would be implemented.
In the interim, we have identified seven ways your business may be impacted when filing state and local taxes under the laws in place today.
Managing Tax Deadlines
It is critical to monitor deadlines as well as relief available for taxes at the local level as they will not directly mirror federal extensions in all cases. States varied in their approach to providing additional time for filing during the COVID-19 pandemic disruption, particularly among different types of state taxes.
Payroll for Employees in Other States
Businesses will need to understand the associated payroll or withholding tax requirement related to the physical location of their employees. Verify with the Department of Labor for a particular state to understand obligations and determine if any reciprocal agreements exist. Payroll taxes carry high penalty and interest rates, so it is very important to assess not only where your employees are working, but also what activities they are performing.
Tax Requirements for Remote Workers
Some states have created COVID-19 safe harbors or exceptions for income and sales tax filing requirements. Most tax laws are triggered by physical presence in a state. It is anticipated that workers will be working virtually for a longer amount of time as uncertainty around the pandemic continues, so your organization will want to be mindful that many of its employees may be meeting physical presence standards in states other than where your organization is physically situated.
Large Populations of Virtual Employees Out of State
The volume of work in another state may affect income tax calculations and thresholds. Nexus requirements and thresholds will vary by state. Employees working from home may change your state income tax computation especially in states that still apportion income to the state using a payroll factor.
Federal Tax Changes
States vary in their federal conformity to tax law, particularly with provisions that affect income taxes. Changes to the business interest limitation, net operating loss deduction, and qualified improvement property depreciation may differ from state to state in relation to the relief provided under the CARES Act. Taxpayers my need to amend previously filed returns since federal changes are retroactive to 2018. If a company needs to amend a federal return, state returns may require amendment as well.
Increase in Virtual Transactions
Following the Supreme Court decision in Wayfair vs South Dakota, states are now allowed to levy taxes based on where a good or service is consumed. Your organization may face new state and local tax (SALT) obligations as shutdown orders may have increased the volume of digital transactions.
Changes in Workforce Policies
New excise, net worth, and property taxes may result from modifications in filing obligations. Non-income state and local taxes still have varying relief thresholds and deadlines. Understanding the complete tax situation will help you and your organization address current tax obligations and plan for the future in relation to changes that have affected your workforce.
Stay Current with New Developments
Keep in mind that tax departments are also often working remotely and may find it difficult to stay as up-to-date as may be necessary during these uncertain times. Additional compliance issues and workforce changes will make clear and consistent communication extremely important. Seeking additional support from a dedicated state and local tax team may help your organization ensure it is prepared for its obligations and filings. For more information, contact us or visit our COVID-19 resource center for other types of COVID-19 updates.
Ann Brown is a Senior Manager and member of the New England State and Local Tax Practice. She can be reached at email@example.com or 617.761.0658.
Tarra Curran is a Managing Director and Leader of the New England State and Local Tax Practice. She can be reached at firstname.lastname@example.org or 401.626.3240.
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