Revenue Hungry States May Reconsider Tax Treatment of Remote Workers

Two COVID-19 impacts—the massive shift to virtual work and the massive hit to state sales tax revenues resulting from stay-at-home orders—appear poised to collide in the tax policy arena.

Prior to the pandemic, large numbers of U.S. workers commuted to physical offices from other cities and states. Many states have adhered to a status-quo approach by keeping employee-related taxation requirements the same during COVID as they were pre-COVID. Doing so has helped ease the administrative burdens of a payroll tax nexus change due to the location where the employee may now be working. However, if temporary work locations due to COVID become permanent once the pandemic subsides, employee nexus rules must change.

These debates may get heated. New Hampshire and Massachusetts have already clashed over the Bay State following current general nexus rules and taxing employees who live in New Hampshire and who commuted to offices in Massachusetts prior to COVID-19. In August, New Hampshire Gov. Chris Sununu told CNBC that states who tax—or in his words “pick the pockets of”—New Hampshire residents who work remotely have no right to do so.

In May, New York introduced a bill that would authorize “businesses to designate work performed remotely due to the outbreak of COVID-19 to have been performed at its normal work location for state and local tax purposes.” The bill, which remains in committee review, would only apply for the duration of the state’s official COVID disaster emergency declaration.

That timing stipulation and the fluid nature of state emergency declarations amid a global pandemic illustrate the types of tax policy complexity companies will be contending with for some time. Although states were originally in agreement for the sake of administrative ease, we know this likely won’t continue long-term. That’s because state and local lawmakers are only beginning to address how to alleviate the extraordinary economic strain COVID caused, and tax policy adjustments will figure prominently in their solutions. New York state, for example, lost an estimated $10 billion in tax revenue due to COVID-related shutdown orders, according to PwC.

There’s been a flurry of standard sales tax rate changes at the city and district level, according to the Vertex 2020 Midyear Sales Tax Rates and Rules Report. States could follow suit as they all zero in on sales tax rates, employee nexus and additional ways to increase tax revenue in a post-COVID world.