State income tax considerations for remote employees during COVID-19


Authored by RSM US LLP

This article was originally published on April 02, 2020

With state governments imposing mandatory closure of non-essential businesses to help slow the spread of the novel coronavirus (COVID-19), and many businesses forced to close physical operations, millions of employees are being working from home or other remote locations. While there have always been state income tax issues associated with employees telecommuting or working remotely, the potential impacts are magnified in the current environment given the large scale closure of physical business locations and the mandatory nature of the closures. The following are a few income tax considerations for both employers and employees in evaluating the potential impact of the new remote work environment.

Has the company’s nexus footprint changed?

A company is generally considered to be doing business and subject to a state’s income tax laws if the company has employees working in the state. Accordingly, a company that does not have any offices or other operations in a state could find itself subject to the state’s income tax laws based on the presence of employees in the state, even if the employee’s activities are home-based. The one big exception is for retailers claiming protection from income tax for pre-sales solicitation activities under Public Law 86-272 – the federal safe harbor prohibiting a state from imposing a net income tax on a seller's business activity if it is limited to the solicitation of orders for sales of tangible personal property. The Multistate Tax Commission (MTC), a consortium of state tax officials, provides a model provision indicating that the presence of a home office of a sales office does cause Public Law 86-272 to be forfeited if certain conditions are met, including a requirement that the home office is not represented to the public as being an office of the taxpayer. See Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272, Sec. IV.A.18. Under the MTC rule and state rules regarding Public Law 86-272, it may be difficult for companies to limit their employee’s activities that would qualify for protection under Public Law 86-272. It should be pointed out that Public Law 86-272 protection does not apply to service companies or to non-income based taxes, such as the Ohio Commercial Activity Tax or the Washington Business and Occupation Tax.  

Over the past couple of years, there have been a number of cases and rulings finding that the in-state presence of a telecommuter created an income tax nexus obligation. In New Jersey, a Maryland based software company was found to be subject to New Jersey’s Corporation Business Tax based solely on one of its employees moving to New Jersey for personal reasons and writing software code at home. Telebright Corporation, Inc. v. Director, Division of Taxation, NJ Super. Ct., App. Div. Dkt. No. A-5096-09T2 (Mar. 2, 2012). Although the employee was not client-facing, the employee’s work in New Jersey was continuous and was incorporated in the software sold by the company. In Virginia, the presence of a single employee working from a home office and performing back-office activities in the state created corporate income tax nexus for an out of state corporation. Va. Dept. Tax, Pub Doc. No. 16-5 (Mar. 3, 2016). Similarly, in California, the presence of a single employee working from home was sufficient to create corporate income tax nexus for a Massachusetts based service provider without any offices or clients in California. Appeal of Warwick McKinley, Inc., Cal. State Bd. Equal. No. 489090 (Jan. 11, 2012). 

A number of states have also adopted factor-presence nexus standards, where meeting a certain threshold of factors in the state, by itself, would trigger a filing requirement for income tax purposes. For example, having $50,000 of compensation to employees in a state would automatically trigger a filing requirement in Alabama, California (the threshold is indexed for inflation), Ohio (for Commercial Activity Tax purposes) or Tennessee. The mandatory shifting of employees into a state with factor-presence nexus could potentially cause a company to inadvertently meet the threshold.  

Several states have been proactive in issuing guidance providing for relief from usual nexus provisions in light of the COVID-19 pandemic. New Jersey has posted a statement on their website indicating that “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.” Similarly, Mississippi has issued a statement indicating that it would “not use any changes in the employees temporary work locations due to the pandemic” to impose nexus.

Has the company’s sourcing of receipts been impacted?

If the employee resides or works in a state that differs from the employer’s state, the shifting of the employee’s responsibilities to remote locations can impact the sourcing of revenues in both states that adopt cost-of-performance and market-based sourcing type regimes. For states that apply a cost-of-performance type of approach, service revenues are generally sourced to the state based on the level of activities conducted in the state. Although the majority of states have shifted away from cost-of-performance type approaches, a number of states continue to apply a cost-based approach to sourcing service revenues. In addition, several states that have adopted market-based sourcing have limited the application of such rules to C corporations (e.g., New York and New Jersey), leaving the traditional approaches in place for pass-through entities.     

For employers located in states that use a cost-based approach to sourcing revenues, the shift of employees outside the state could directly lower the sales factor apportionment in such states. Conversely, the receipts factor could be increased in states where an employer previously did not have significant physical activities. For states that have adopted a market/customer based approach, the shifting of employees may result in situation where it is difficult to determine where the market/customer is located. Should one look to where the customer has historically received the benefit of the service, or should the presence of the customer’s employees in different states be considered as part of the analysis?

How will the employee’s wages be allocated for income tax purposes?

For employees, wages for personal services are generally sourced based on the employee’s physical location or relative number of working days in the state. With respect to relative working days in a state, states generally will treat any day worked in a state as part of this analysis, even if the day was spent in the state for personal purposes or non-business related reasons. Accordingly, a day spent working from home in a state due to the COVID-19 pandemic is likely to be counted for purposes of allocating state wages. New Jersey has also issued a statement indicating that the normal wage allocation method would not be applicable “during the temporary period of COVID-19 pandemic.”

A number of states have adopted the Convenience of the Employer Test, which sources all of the employee’s income to the employer’s location unless the employee can demonstrate that the work was done remotely due to the employer’s necessity, rather than the employee’s convenience. The states that have enacted such a rule include Connecticut (effective Jan. 1, 2019 for resident credit purposes), Delaware, Nebraska, New York and Pennsylvania. New York has been on the forefront of applying this rule and has issued detailed guidance applying this rule to home offices. Under New York’s rule, a day spent at a home office will be treated as a day worked outside New York if the taxpayer’s home office meets the definition of bona-fide employer office as defined by New York. See TSB-M-06(5)I, May 11, 2006. One of the examples in the guidance indicates that an employee that is required to use specialized scientific equipment at the employee’s home is still not considered to have a bona-fide home office if the equipment could have been set up at the employer’s place of business in New York.

The application of the traditional Convenience of the Employer Test in the current COVID-19 pandemic presents a number of unique considerations. Given that employees are generally working from home or remotely due to restrictions imposed by government agencies and/or their employers, employees should not be considered to be working from home for their own “convenience.” Further, the work physically cannot be done at the employer’s place of business during the duration that the business is physically closed.  Nevertheless, we anticipate that state tax agencies will continue to limit the ability to allocate wages to work conducted at home in the absence of guidance to the contrary.   


The new remote workforce environment caused by the COVID-19 pandemic requires companies and their employees to evaluate the potential state income tax consequences of the remote work arrangements, including nexus and apportionment issues. Companies should carefully monitor any guidance issued by state and local tax agencies addressing state tax issues involving COVID-19 pandemic. Please visit RSM’s Coronavirus Resource Center for up-to-date developments.

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This article was written by Robert Zonenshein, Brian Kirkell, Harlan Kwiatek, Mo Bell-Jacobs and originally appeared on 2021-09-20.
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