State and local governments are on the front lines of the COVID-19 crisis, and decisions regarding the health and welfare of their citizens have been the priority and come first. State and local governments have not, however, ignored the potential impact of this crisis on the ability of individuals and businesses to meet their tax obligations. Over the past few weeks, many state and local taxing authorities have begun to address the filing and payment deadlines for income, sales & use, payroll, excise, and/or property taxes that are due now or in the coming months.1 This Legal Update highlights some of the states' initial responses to COVID-19 and offers some state tax considerations for businesses implementing new employee work arrangements.
To date, many states have provided some combination of (1) extended filing and/or payment deadlines, and (2) waivers for late filing and/or payment penalties. While some states have mirrored the federal income tax relief outlined in IRS Notice 2020-18, others have issued their own guidance. 2 For example, some states have initially only extended their filing and payment deadlines for personal income tax, 3 some states are not waiving interest on late payments, while others are not extending the deadlines for Q1 and/or Q2 2020 estimated tax payments. The chart below highlights some of the extensions and waivers that are available for income, commercial activity, excise, and sales & use taxes in certain jurisdictions. 4 Many states have only extended the income tax filing and/or payment deadlines for returns and payments due on April 15th, and have not addressed or extended informational returns, like partnership returns, or fiscal year filer returns. Additional guidance is expected over the next few weeks.
In addition, several states have been closing their offices and/or limiting in-person customer service at their taxpayer service centers. Others are requesting that taxpayers take advantage of phone and online resources as a way of preventing the spread of COVID-19. Audit functions are also slowing down, with many auditors requesting to extend the statute of limitations periods for assessment sooner than they normally would and for longer periods of time than usual. Some state audit departments have moved their auditors to work-from-home status, while others are now "on-call" meaning that their working hours will likely be significantly reduced. 5
Some states, either through executive order or judicial pronouncement, have extended court filing deadlines. Taxpayers relying on those extensions for filing protests should carefully consider whether the particular extension applies to an informal appeal (such as to a department of revenue's appeals division) or to an administrative law judge forum. 6 Whenever there is doubt, it would be prudent to adhere to the original protest filing deadline. Moreover, courts and administrative tribunals have postponed hearing dates and will likely be conducting certain proceedings telephonically during this time.
Some states, either through executive order or judicial pronouncement, have extended court filing deadlines. Taxpayers relying on those extensions for filing protests should carefully consider whether the particular extension applies to an informal appeal (such as to a department of revenue's appeals division) or to an administrative law judge forum.6 Whenever there is doubt, it would be prudent to adhere to the original protest filing deadline. Moreover, courts and administrative tribunals have postponed hearing dates and will likely be conducting certain proceedings telephonically during this time.
When an employee telecommutes and performs work from a state in which the employer previously did not have nexus—that is, did not have a sufficient connection for the state to assert tax jurisdiction under the U.S. Constitution—the new arrangement may surprise the employer with new state tax obligations. The employee is potentially conducting the employer's business in-state and creating a connection that did not previously exist. Although it is unclear how states will react to employees working from home as a result of COVID-19, states have become increasingly aggressive in asserting nexus over employers based on telecommuting employees, and this temporary shift in working arrangements may develop more permanent features that states decide to address. 7
Even as states have shifted much of their attention to economic criteria for nexus, especially after the Supreme Court decision in Wayfair, 8 they nonetheless have not given up on physical presence as a trigger for taxability. Therefore, it is possible that a state would contend that an employer is doing business, and taxable, because of a single employee working remotely in the state. 9 Connecticut and New Jersey, for example, have a large number of residents working from home after New York-based employers closed their offices in anticipation of, or pursuant to, the government mandate to do so. New Jersey generally treats employees working from home as sufficient to create nexus, but it has announced that it will waive the application of its remote employee threshold to determine nexus of foreign corporations, so long as the employee is working from home as a result of a closure or employer's social distancing policy. 10 This announcement removes significant uncertainty for employers. It remains to be seen how other states will address this situation, but it would not be surprising for them to assert nexus as a result of these employees' activities at home.
So what types of tax responsibilities and issues should businesses be thinking about if employees working remotely because of COVID-19 triggers nexus? They should be considering not just business income taxes, but also withholding taxes, personal income taxes, unemployment taxes, payroll taxes, and sales and use taxes, among others.
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Footnotes
1 This relief will vary by jurisdiction and tax type.
2 For additional federal income tax guidance related to IRS Notice 2020-18, please see our Legal Update: Initial U.S. Federal and State Tax Relief Developments Relating to COVID-19.
3 Such as Pennsylvania, Arkansas, Massachusetts, Montana, and Minnesota. Additional guidance is expected.
4 Updated through March 30, 2020.
5 Some Illinois auditors are on call now.
6 For example, certain filing deadlines for New Jersey state tax court appeals have been extended to the later of May 1, 2020 or 30 days following a determination by Governor Murphy that the State of Emergency declared under Executive Order 103 has ended. California recently issued FTB Notice 2020-02 which extends the filing deadlines for claims for refund and protests of proposed tax assessments with the Franchise Tax Board ("FTB"), and to file an appeal or petition for rehearing with the Office of Tax Appeals ("OTA"). For example, in cases where an applicable statute of limitations to file a timely refund claim expires during the period of March 12, 2020, through July 15, 2020 (the "Postponement Period"), the FTB will consider the claim timely if filed on or before July 15, 2020. Likewise, if the period to file a timely written protest of a notice of proposed assessment expires during the Postponement Period, the FTB will consider the protest timely if filed on or before July 15, 2020. For an OTA appeal or petition for rehearing with a filing deadline that expires during the Postponement Period, the appeal or petition for rehearing will be considered timely if filed on or before July 15, 2020.
7 Compare to situations where out-of-state businesses send employees to provide emergency-related services in states that are impacted by hurricanes or other natural disasters. Last year, Louisiana Revenue Information Bulletin No. 19-011 (July 12, 2019) noted that "performance of disaster or emergency-related work within the declared emergency period for Tropical Storm Barry does not create a physical presence or nexus in the State of Louisiana that would otherwise obligate the nonresident business or nonresident employee to register, file, or remit any income tax otherwise due on the disaster or emergency-related income."
8 South Dakota v. Wayfair, 138 S.Ct. 2080 (2018).
9 See Telebright Corp., Inc. v. Dir., Div. of Taxation, 38 A.3d 604 (N.J. Super. Ct. App. Div. 2012) (holding one full-time, non-customer facing employee working from home in New Jersey was sufficient to establish CBT nexus for her employer). Remote workers can also jeopardize a company's eligibility for federal protections under 15 U.S.C. 381 (Public Law 86-272), which otherwise prevents a state from imposing income tax on a business that only has certain types of in-state presence related to selling merchandise, equipment, and other tangible personal property.
10 Per the New Jersey Division of Taxation's website (last visited March 31, 2020): "Tele-Commuting and Corporate Nexus – As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, the Division will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer's social distancing policy, no threshold will be considered to have been met."
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