As if we weren’t already living in uncertain times, a workforce almost totally on lockdown or sheltering in place comes with potential tax implications for employers. There could be exposure to additional payroll withholding taxes, corporate income tax, and sales tax.
Last week, the Oregon Department of Revenue issued an alert to Washington employers to review their payroll tax withholding requirements for Oregon residents working from home. Typically, employers are required to withhold state income taxes from employees working in a state. For an employer in the state of Washington, there would be no withholding requirement on resident employees, as the state does not have an individual income tax. If, however, employees reside over the state line in Oregon, and normally commute to work daily, the employer is not required to withhold Oregon income taxes, as the Oregon residents are working outside the state. As a convenience for employees, some employers will withhold income taxes for the state of residence upon request.
Now, with many employees working at home, their state of residence may differ from their state of employment, which creates potential exposure for employers. Oregon has put Washington employers on alert that they could be required to withhold state income taxes on their employees now working at home in Oregon. If a Washington employer fails to withhold income taxes from their Oregon employees, the Department of Revenue can collect taxes from the employee, or the state can go after the employer for payment.
The Mobile Workforce State Income Tax Simplification Act has been reintroduced in Congress many times since 2007 to eliminate the withholding requirement differences among the states. This Act would establish uniform rules among the states to exempt workers from individual income taxes in a state where they work for 30 days or less in a year. This Act could standardize the complicated payroll tax procedures employers currently encounter.
To make matters worse, depending on the type of business activities the employees are performing in Oregon working from home, the Washington employer could be creating nexus there and now be subject to Oregon corporate income tax and corporate activity tax. This situation could also be reversed if Oregon employers have Washington employees working at home. The employer could be at risk for creating nexus for the Washington business and occupation tax. Depending on the nature of the business, sales tax nexus could also be created by employees working at home in different states.
This issue is not unique to the West Coast states. New York and New Jersey, for example, have been dealing with the issue of remote workers for a long time. At least in this case, with both states imposing individual income taxes, the tax impact might be offsetting. For many other tax situations, this could be a costly problem.
New Jersey has in fact asserted nexus based on a telecommuter’s presence in the state. In 2012, the Appellate Division of New Jersey held that a foreign company, with no official operations in New Jersey, was “doing business in New Jersey” because it employed a single telecommuting employee who lived full-time in the state.1
Telebright Corporation, Inc. (“Telebright”), which was incorporated in Delaware and maintained its offices in Maryland, employed a woman who lived in and telecommuted from New Jersey. Her job was developing and writing software code from a computer in her home, which she uploaded to a repository on Telebright’s remote computer server. Other than attending company-wide meetings in Maryland once or twice a year, she worked entirely from her home.
Telebright withheld New Jersey income tax from her salary and remitted it to the New Jersey Division of Taxation. The Division determined that Telebright was subject to the New Jersey Corporation Business Tax (CBT) Act and was required to file New Jersey Corporation Business Tax returns. The New Jersey Tax Court upheld that determination, and Telebright appealed to the Appellate Division. On appeal, Telebright did not dispute that the employee’s activities satisfied the statutory test for “doing business” under the CBT Act. Instead, Telebright argued that applying the CBT Act to those limited activities violated the Due Process and Commerce Clauses of the United States Constitution.
In rejecting Telebright’s arguments, the court noted the that the employee produced a portion of Telebright’s web-based product in New Jersey, and the company clearly benefited from all of the protections afforded to the employee under New Jersey law. Thus, because the tax related to an activity with a substantial nexus with New Jersey, the application of the CBT Act did not violate the Commerce Clause. Accordingly, the Appellate Division affirmed the Tax Court’s decision.
Concurrent with the Oregon announcement, on March 26, 2020, the Mississippi Department of Revenue specifically announced that it will not extend its withholding requirements, impose nexus, or alter apportionment factors based on an employee’s temporary work location.
Needless to say, the dust has not settled on these issues. Rest assured as this crisis ends and states find themselves in need of revenue, this issue may become an important component of a state’s recovery.
1Telebright Corporation Inc. v. Director, New Jersey Division of Taxation, 424 N.J. Super. 384 (App. Div. 2012).