State Tax Changes to Monitor During COVID-19

Crises are by nature unstable times, but the current COVID-19 pandemic is creating instability at all levels of global governments, ranging from the health and economic well-being of their citizens to the financial impact to their budgets and the economy.

The Economic Impact of Each Spending & Stimulus Package

The U.S. Federal government has clearly struggled with how to respond to the crisis and moved to pass legislation resulting in three spending and stimulus packages, with discussions already underway for a fourth one.

• March 6 — the Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074);
• March 18 — the Families First Coronavirus Response Act ( H.R. 6201); and
• March 27 — the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748, “the CARES Act”), the largest stimulus bill in U.S. history.

Now, they are watching the impact these have on the economy along with the trajectory of the coronavirus to determine what phase four of the collective stimulus might include. Members of Congress were already discussing the next round of fiscal stimulus, one that might need to include a retroactive rollback of the state and local tax (SALT) deduction cap enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA).

For sure, there are major uncertainties given the current situation and it is still unclear what state legislatures will do once they are back in session. It is important to watch how they will deal with the dilemma of easing the impact and burden on corporate and individual citizens versus dealing with budget deficits that already began or are developing, while also thinking ahead about creating a “rainy day fund.” (A reference to funds that some states have tried to build in the past to deal with disasters, especially natural.)

What could we see from states and what should businesses prepare for?

Since the pandemic was declared, state-level tax changes (e.g., tax filing and payment extensions) have been the focus thus far in order to provide administrative and economic relief to taxpayers. We have seen these extensions with respect to both personal and corporate income taxes, as well as sales and use tax returns to date. It will be important to monitor when states shift from a taxpayer administrative relief (e.g., tax filing and payment extensions) to a mindset of economic stimulus and/or revenue recovery mode.

Regarding indirect taxes, we are watching to see if states will reduce sales and use tax rates to stimulate spending and economic activity in the short-term or if they will raise rates to replenish budgets hard hit by COVID-19-related impacts. Those decisions could vary state by state, as we’ll see once state legislative sessions kick in gear. Law firm Baker McKenzie’s state and local tax experts have been tracking states’ reactions to COVID-19’s bruising economic effects, and they point to several levers state legislators have pulled after past economic downturns. These actions include sales tax rate increases, postponing or limiting tax deductions, eliminating tax exemptions and credits, and broadening their tax bases. Those moves were all designed to recover lost revenue.

Remote Employee Nexus & Payroll Taxes

As noted in a recent Tax Law360 article, another top concern state tax professionals are watching is whether states can and will assert nexus on businesses whose employees are working remotely at home due to the COVID-19 pandemic, resulting in businesses needing to make payroll tax withholding changes. Businesses want relief from the administrative burden of having to comply with pre-COVID-19 nexus rules to determine in which state payroll taxes should be withheld from an employee paycheck.

States, on the other hand, could see new payroll taxes from in-state teleworkers as a source of found revenue in these unstable times. So far, adjustments have only been made in response to telework nexus requirements and/or withholding requirements in Mississippi and New Jersey.

I’ll keep you posted as state legislators and departments of revenue process the dilemma in front of them including how to ease the impact and burden on individual and corporate citizens while dealing with budget shortfalls and potentially even building a fund for a rainy day.

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