Advancements in technology have made it possible for employers and employees to remain connected when working from remote locations. These types of remote working relationships have commonly been called ‘telecommuting’ or ‘workforce mobility.’ No matter what you call it, when businesses have employees that work remotely it can create state and local tax consequences.
Although utilizing employees that work from a remote location can save a business money and increase productivity, you should weigh those benefits against the potential for increased state tax compliance burdens. Employees that work from a remote location can cause your business to be subject to a variety of taxes such as income, sales and use, and payroll withholding taxes. Despite the rising popularity of telecommuting, state and local tax laws remain unclear and inconsistent, making it difficult for employers to comply with possible added state filing requirements.
In today’s environment, where more and more states are adopting economic nexus standards, the presence of an employee working remotely can easily exceed the threshold of de minimis activity that typically protects a business from state taxation. Nexus refers to the degree of contact with the state to allow the state to assert tax jurisdiction over a business. Businesses that allow employees to work from home or a location where it does not already have a physical connection could result in sufficient contact with a taxing state to establish nexus.
A seminal case in the taxation of businesses resulting from telecommuting employees was decided by the New Jersey Tax Court. In that case, the Court ruled that a company that regularly and consistently allows employees to work from home in New Jersey is doing business in the state and is subject to New Jersey’s corporation business tax. The criteria the Court used to determine if the company was doing business in the state was as follows:
- Where is the employee expected to report for work?
- Where is the employee regularly receiving and carrying out his/her assignments?
- Where is the employee supervised?
- Where does the employee begin and end his/her work day?
- Where does the employee deliver his or her finished work product?
The presence of a telecommuting employee in a state other than the employer’s home state is a slippery slope towards establishing sufficient contact with the state to constitute doing business in that state. Once a business is deemed to be doing business in a state, it becomes subject to a myriad of taxes imposed by that state, such as income, sales, and payroll withholding taxes. Federal legislation has been introduced to try to alleviate the inconsistency between states and to provide businesses with a bright line standard of what constitutes “doing business.” However, Congress has failed to enact any laws that would alleviate the issues facing businesses with telecommuting employees.
States are currently pursuing aggressive tax policies intended to trap unsuspecting out-of-state businesses, because it allows the state to export its taxes and potentially avoid unpopular tax increases or new taxes that affect in-state businesses.
Businesses are often not prepared to deal with the increased administrative burdens that come with doing business in other states, and must consider the state implications of telecommuting employees.
You may also like: