In today’s service based economy, the traditional office-based workforce has been replaced with a more mobile version. As employees become more flexible in their ability to work from multiple customer locations, it is more critical for their employers to understand the state and local tax implications of a mobile workforce.
Employees who travel to customer locations to perform work can create potential tax issues for your business as well as themselves. Most businesses typically apply the “physical presence” test to determine if there is any filing responsibility in a particular state. If your business is engaged in the sale of tangible personal property, this is generally a good rule to follow if the only connection with another state is for solicitation purposes only.
However, if you are a service-related business, you do not have a physical presence test to rely on to help you avoid additional state compliance burdens. The simple act of sending employees to another state to provide assistance to a customer can inadvertently create filing responsibilities you may never have anticipated. Depending on what your employees are doing at a customer location in another state, you might be required to register to do business in that state and file tax returns. Some states, like Pennsylvania, have a combined registration form that requires a business to register for all applicable taxes at one time; such registrations might lead businesses to register for taxes for which they are not required.
For your employees, working remotely can trigger the need to file:
- Entity level income tax returns, including income tax returns for the owners if the business is a pass through entity
- Net worth tax returns
- Withholding on employee wages earned while spending time at the remote location
- Withholding on pass through income of non-resident owners
- Sales tax returns and gross receipts tax returns
The administrative burden of complying with these additional filings can be overwhelming. Often, businesses are not prepared to comply with the additional reporting requirements imposed, such as sourcing revenues or wages to the states where employees may be working.
Plus, your employees may not realize they will have additional filing responsibilities and are often caught off guard when they are notified that taxes have been withheld and remitted to other states where they are not a resident.
Because of the cost to comply, businesses often “take their chances” that a state will not uncover this activity. Unfortunately, states are becoming more aggressive in their discovery techniques and pursuit of non-compliant businesses. As a result, the likelihood of discovery has significantly increased. You would be well advised to continually monitor changes in the way the business operates, including the introduction of new products and services, and determine how those changes might impact your state tax filing responsibilities.
Businesses usually apply a practical approach to state filing responsibilities, weighing the exposure against the cost of compliance. However, you should always be in a position to understand the risks and make an informed choice.
Allowing employees to work and serve customers remotely has many benefits in our fast-paced, mobile business environment. However, employers with mobile workforces need a consistent and uniform approach to state taxation. Federal legislation that has been introduced over the years has attempted to create such consistency for businesses. Although none of this legislation has formally passed so far, it is never too early to ensure you have a solid process in place to address the effect on your business of geographic changes to your workforce’s location.