Are My Employees Telecommuting Right Into a New State Income Tax Liability?

A phenomenon of the ongoing COVID-19 healthcare pandemic is the exponential expansion of telecommuting. Whether stemming from an epiphany or simply the opportunity to escape to a more appealing place to live, many members of the workforce have opted to relocate. In many instances, relocation has meant crossing state borders, all the while continuing to work for the same employer. While the relocation may be temporary, it can have significant tax consequences — notably creating a nexus in a new taxing jurisdiction.

Physical presence of an employee in a state can create the requisite nexus to cause the employer to be subject to state corporate income taxes. An employer offering workforce flexibility can come back with a tax bite. In light of this quandary, several states have issued guidance — both formal and informal — addressing the nexus question.

The states which have issued guidance have typically taken the position that the state will not assert income tax nexus if the employee telecommuting is only due to COVID-19 healthcare pandemic. States indicating that corporate nexus will not be asserted due to COVID-19 include Arizona, California, Georgia, Indiana, Massachusetts, Maryland, Minnesota, New Jersey, Pennsylvania, and South Carolina.

Other states, such as Michigan, have affirmatively stated it will not waive nexus requirements due to COVID-19 related telecommuting. Yet other states have not issued any guidance. This latter category of states includes Florida, Illinois, New York, Tennessee, and Virginia.

For further information, please contact Peter Kulick in our Lansing, Michigan office at 517-487-4729 or any other attorney in our Tax Practice Group.