Company Issues
If you’re starting to get concerned, it may get worse as we address the possible implications to businesses. Companies must consider the potential for myriad new state-tax consequences attributable to their remote workforces. First, they now may be subject to taxation by those other states where they have employees working from home. Some states could ultimately conclude that they can use their full taxing powers on a company with even the temporary presence of an employee or two within its borders—whether or not there’s a pandemic. Kentucky, for example, has not offered much comfort on the topic, vaguely indicating it will continue reviewing each company’s circumstances case by case.
Other states, however, have taken a somewhat more comforting approach—for now. California has said that one single employee of a company teleworking in the state during the governor’s stay-at-home order doesn’t mean the company has built a tax nexus there.
As for companies that, in fact, are subject to multi-state taxation, another issue is how income is “apportioned” among the states in which they are taxable. Many states use a “payroll factor” to determine how much of a multi-state company’s income should be subject to taxation in each place. This factor typically involves analyzing the percentage of a company’s total payroll attributable to employees working in each state. With employees potentially working in different places because of the pandemic, businesses must be wary of how the states might apply the payroll factor.
The apportionment issues become even more complex when states look at property or sales factors. The former measures the percentage of a company’s property in the various states in which it is taxable. Depending on how the states apply their rules, remote workers permitted to bring company computers and other property home may very well be triggering state tax consequences for their employers.
The sales factor requires calculating the percentage of a company’s total sales attributable to different states. Some states take the position that sales should be apportioned based on where any underlying services are performed, and that again calls into question the implications of employees performing services in different states.
The events of the past year have everyone watching the federal government very carefully, and rightly so. But the states’ responses must also be considered. Their reactions to the pandemic could have far-reaching and highly impactful tax consequences, especially to the unwary.
Michael Nathanson is Chairman and CEO of The Colony Group.