States Announce Temporary Nexus Positions on Employee Workplace Changes by COVID-19 Pandemic

In order to comply with guidelines established by many states as well as guidelines established directly by employers, many employees are working from home or in an alternate remote location rather than reporting to the office of their employer. In many cases, they are now performing their duties for their employer in a different state or jurisdiction than they were previously. As the guidelines begin to relax, it is expected that many of these employees will return to work at their regular office.

From a state and local tax perspective, the presence of employees performing their duties in an alternate jurisdiction can impact the tax obligations of both the employer and the employee. First and foremost, the presence of an employee in a new jurisdiction could create nexus for the employer for income / franchise tax, sales / use tax, or other various business activity taxes. This could result in filing obligations that did not exist previously. Furthermore, depending on the apportionment methodology required by the jurisdiction for income / franchise tax purposes, the increase in payroll within the new jurisdiction could increase the amount of income or capital apportioned to the state, resulting in greater tax liabilities. Lastly, the employer’s obligation to withhold payroll taxes on certain employees might now shift to other jurisdictions.

Given the hopeful temporary nature of this remote environment, certain states have recently published guidance to alleviate concerns for businesses on changes in their nexus footprint, sourcing for state apportionment, employer wage withholding and more.

  • The Office of Tax and Revenue for the District of Columbia announced that it will not seek to impose Corporate Franchise Tax or Unincorporated Business Franchise Tax solely on the basis of the temporary use of property, or the temporary work of employees from home, in the District during the COVID-19 Emergency. OTR Tax Notice 2020-05.
  • The Georgia Department of Revenue will not use someone’s relocation that is a direct result of temporary remote work required during COVID-19 pandemic as the basis for (1) establishing Georgia nexus or (2) for exceeding the protection provided by L. 86-272 for the employer of the temporarily relocated employee. Also, if the employee is temporarily working in Georgia, the wages earned would not be considered Georgia income and, therefore, the employer is not required to withhold Georgia income tax. Coronavirus Tax Relief FAQs.
  • The Indiana Department of Revenue will not use someone’s relocation that is a direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis as the basis for establishing Indiana nexus or for exceeding the protection provided by P.L. 86-272 for the employer of the temporary relocated employees. Indiana DOR COVID-19 FAQs.
  • In Maryland, the Office of Comptroller will recognize the temporary nature of a business’s interim workplace model and employee deployment during COVID-19 emergency and will not use these temporary measures to impose business nexus to alter sourcing of business income, or to impose additional withholding requirements on an Md. Tax Alert No. 05-04-2020.
  • The Massachusetts Department of Revenue issued emergency regulations indicating that Massachusetts non-residents typically working in Massachusetts but now working out of state because of the COVID-19 crisis will continue to be subject to the Commonwealth’s personal income tax and Also, a tax credit is available for Massachusetts residents who worked in another state but are required to work from home during the crisis if they incur an income tax liability in that state. In addition, out-of- state employers are not required to withhold Massachusetts income tax to the extent the employers continue to withhold income tax for the other state. 830 CMR 62.5A.3.
  • The Minnesota Department of Revenue has stated that it will not seek to establish nexus for business income tax or sales and use tax solely because an employee is temporarily working from home due to the COVID-19 Generally, an employer that transacts business or derives income from sources in Minnesota must withhold for employees. MN COVID-19 FAQs 5/5/2020.
  • The Mississippi Department of Revenue announced that during the period of COVID-19 national emergency it will not impose nexus or alter apportionment of income for any business while its employees are temporarily on telework assignments within the state. MS Release 3-26-2020.
  • In New Jersey, during the period of COVID-19 national emergency, the Division of Taxation will temporarily waive the impact of its tax standard that treats employee work from New Jersey as sufficient nexus for out-of-state corporations. Therefore, no threshold will be considered to have been met for employees working from home solely as a result of COVID-19 closures and social distancing Also, for employer withholding, New Jersey sourcing rules dictate that income is sourced based on where the service or employment is performed based on a day’s method of allocation. However, during the temporary period of the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction. N.J. Telecommuter COVID-19 Employer and Employee FAQs.
  • The North Dakota Tax Department has announced that if the telecommuting is attributable to a COVID-19 related response and is intended to be temporary, then North Dakota will not assert income tax nexus on that basis alone, and North Dakota will not require inclusion  of that payroll in the numerator of the payroll ND COVID-19 Tax Guidance.
  • The Pennsylvania Department of Revenue stated that it will not seek to impose corporate net income tax or sales and use tax nexus solely on the basis of temporary work activity of employees including telecommuting from their Pennsylvania home. PA DOR Q&A 4/3/2020.

It is important to note that the guidance provided by many of the states above is administrative in nature rather than a statutory or regulatory change. Therefore, these states should be monitored closely to determine whether any actions taken legislatively negate the positions described above.

It will also be important to monitor the point in time in which states no longer consider this alternate work environment to be a temporary impact of COVID-19. If employees continue to work remotely after certain guidelines are relaxed, will the states continue to grant the prescribed relief?

While it is expected that many other state and local jurisdictions will grant similar relief, it is important to take careful note of those that do not. Businesses might find themselves with additional state and local tax obligations as a result of the location of their employees and need to act accordingly to remain in compliance.

DHG will continue to monitor the guidance provided by the various states and publish periodically.

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