As the person in charge of the financial dealings of your firm, COVID has presented a lot of challenges. Keeping the lights on has been a challenge for some controllers, but what about the fallout? Following our last blog documenting the different approach you need to take in order to deal with employees affected by COVID, a recent article in Accounting Today brought up another issue—SALT.
State and Local Taxes are nothing new, affecting everything from property taxes to sales taxes (especially under Wayfair) to the tracking of payroll taxes across different locations. But one thing you’re going to need to prepare for as we approach March 15, 2021 is the impact that COVID-19 had on your now-remote workforce.
Remote Workers and Nexus Concerns
According to US Census data, 4 percent of workers live and work in different states. Not a problem under normal circumstances—it’s likely your HR department, payroll staff, and accounting team has worked this out. But again, nothing has been normal about 2020, and now is the time to start understanding how remote work laws might affect your business tax burden. As noted,
“Often, tax planning strategies are created to reduce [a] client’s or business’s tax burden to the absolute minimum. But when employees suddenly empty their offices and set up offices at home, as they have due to COVID-19 concerns, a wrench can be thrown into that tax planning.”
In this, employee movement may have resulted in a change to the taxable nexus, and newly remote employees who live in a different state than their employer’s business operations may, in some cases, create a new state income tax nexus and new tax worries for the business.
A nexus, which could be something as simple as an ‘economic presence’ might mean that you will need to reevaluate your taxable presence to try to keep your business compliant and ready for the upcoming burden. Defined as a minimum amount of business activity, your business’ nexus may leave you exposed to new tax considerations—especially as we edge closer to 180 days under lockdown.
Three Challenges in the COVID-Driven Remote Work Landscape
Planning, of course, begins with understanding. Business leaders, controllers, and accountants should understand these three significant SALT issues brought up by Accounting Today, if they’re expecting an increase of remote employees working in new state or local tax jurisdictions this year. Though you can read the entire article by clicking the link above, AT author John Hayashi notes the following as potential problems:
- Remote employees may create taxable nexus in a new state or local jurisdiction: To have taxable nexus in a jurisdiction means your business has sufficient business activity there to be subject to that state’s state and local tax laws. Depending on how much longer a worker stays at home, the remote work conundrum may require you to file taxes in a new state.
- Corporate income tax apportionment for multistate taxpayers may be affected: State apportionment formulas are typically using a sales factor, which makes a business’s state income tax simply a function of the share of the company’s overall sales into that state. However, approximately one-third of states still include a payroll factor and a property factor in their formulas. In turn, a remote workforce may have triggered a new way of looking at income taxes.
- A physical presence nexus for sales and use taxes may or may not be established: Especially prevalent for small businesses, the change in nexus might signal a complete change from the Wayfair law. Unfortunately, for those on bordering states, a single employee can be sufficient to create a nexus in a state, creating new administrative burdens that you hadn’t prepared for.
Plan Now or Expect Fallout
The COVID-19 outbreak has changed a lot about the business operating environment. Though Accounting Today goes into greater detail in their article, it goes without saying that preparation is key to success—especially as we have no idea how much longer the lockdowns will last.
Stay tuned for more analysis and insights by following the Controllers Council for all the latest.
Additional COVID-19 Resources for Controllers
Three Ways Leading Controllers Have Kept Things Running Smoothly During the Pandemic
What Should You Know about COVID-19 Delays to the Qualified Opportunity Zone Implementation?
IRS and Treasury Offer Guidance on Reporting Sick and Family Leave in Coronavirus Relief