The era of remote work has transformed nearly all parts of the business world, creating tax challenges for both companies and the people who work for them, according to speakers at the Foundation for Accounting Education’s New York and Tri-State Taxation Conference Webcast Thursday. 

Businesses Must Be Mindful of Nexus

One of the conference speakers, attorney Mark S. Klein, chairman of Hodgson Russ LLP, noted that, on the employer side, the main concern to be mindful of is nexus, which he said was “a fancy word for connection.” Essentially, it is the right for a state to levy taxes on someone not necessarily in that state. It is usually established by some form of economic connection with a state.

“If I’m sitting in Iowa baking pies and go out my front door and sell pies, can Minnesota say, 'Hey, we want to collect sales tax on that?' Of course not," he said. "There’s no connection; there’s nothing. The law says there needs to be some minimum connection between the state and the business it wants to tax."

While nexus has always been an important issue for companies that do business across state lines, Klein said that it has become particularly relevant in light of the pandemic’s mass migration to remote work. Although there are ways to dispute whether someone has nexus for this reason or that, Klein said that “once you have physical presence in a state, basically all bets are off. States now have the ability to impose tax on the business.”

This means that there is a host of considerations that a business must keep in mind with regard to a telecommuting employee. The company might be obligated to withhold taxes, the employee may be subject to that other states' income or franchise tax, or the company might even be required to start collecting sales tax, all from having just one person in another state.

Klein noted that some states have recognized that the pandemic was a special circumstances and so passed measures to shield people from income and franchise tax while telecommuting. They include Alabama, California, the District of Columbia, Georgia, Iowa, Louisiana, Maryland, Massachusetts, Maine, Minnesota, Mississippi, New Jersey, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina and Wisconsin. Pennsylvania and Indiana used to have such a shield, but the shields expired at the end of this past June.

But there are a number of other states that have definitively confirmed that a single telecommuting employee will create tax nexus, COVID-19 or no. Alaska, Arizona, Colorado, Florida, Idaho, Michigan, Montana, Nebraska, New Hampshire, North Carolina, Ohio, Tennessee, Texas, Utah, Vermont, Virginia and West Virginia have all taken this stance.

Klein noted that this list has a particularly relevant absence: New York. The Empire State, he said, has not taken a position on this question. This doesn’t mean that companies should breathe a sigh of relief, though.

“If they don’t offer any guidance, I would not take comfort in that. In fact, I feel just the opposite,” he said, noting that New York tends to be very aggressive on tax in general.

Similarly, while New York has not taken an official position as to whether a single telecommuting employee triggers sales tax nexus, Klein said that Albany has historically been very interested in collecting taxes from out-of-state companies.

“I’ve been involved in more than a few audits where I had New York auditors call an out-of-state business,” he said. “I had one where the business, they buy your old iPhone and have nothing to do with New York, but someone from New York state called the business and said, ‘I’ve got 1,000 iPhones--can you come to New York to pick these up? They’re too expensive to ship,’ and they said, 'Of course, we do it all the time.’ Turns out they don’t do it all the time--they were just trying to grab a sale, but that phone call was recorded, and the auditor, when the taxpayer said they have no nexus, said. 'Were you lying about doing it all the time or are you lying now?'”

He also urged people to take withholding taxes seriously.

“You might say, 'I don’t care; my client uses ADP or Paychex,' but I got news for you: The states aren’t necessarily looking at ADP or Paychex.' They agree [hat the employers are] probably doing everything right, but what [they] look at is employees traveling to other states, and you’re not withholding tax for those employees in other states,” he said.

So while the client may be deducting its payroll as it does for everyone who lives in the state, tax authorities will be able to tell when an employee was not in the state. In New York City, for example, the government can tell through using toll road data. Klein added that having even just a single employee who didn’t have their withholding in order can spark a company-wide inquiry as well.

“New York looks at this person and determines they were working in New York and owes New York income tax. That’s one person. But if the employer failed to withhold that one person, what are the odds they withheld for anyone? Why look at every single employee when you can go to the employer as a one stop shop and find out what’s going on?” he said.

Convenience Rule Not So Convenient

Remote employees also have a number of hazards that they must be aware of in order to avoid a big tax bill. One of the prime considerations is the convenience rule. New York, being one of the states that has this rule, will count the day someone telecommutes into a New York company as being spent in New York, meaning that income generated that day is subject to state taxes. The exception, which is where the name of the rule is derived, is when the remote work is done out of necessity rather than convenience.

Another conference speaker, Roger Blane, state and local tax partner for law firm Hutton Solomon & Blane LLP, said that the analysis used to be more straightforward before the pandemic. If someone was in Florida but still telecommuting to a New York company for no other reason than, say, nice weather, it was counted as a New York workday. If, on the other hand, that person was in Florida because of an important business meeting that required their presence, it was a necessity and would not count.

But then the pandemic happened. He noted that offices everywhere closed down, leading many to telecommute not out of choice but necessity. But because the law did not account for mass lockdowns, it still considered these people as doing so out of their own convenience. Not helping matters was that the safe harbor for these rules were written in 2006, when there was a completely different business climate. The safe harbor generally considered the question of whether someone was telecommuting from a bona fide office, in which case the time spent working there could be allocated to another state. While there are a number of different criteria for establishing this designation, he said they’re very dated.

“It talks about, if you look at some of these factors, you have a phone number separate from your home phone," he said. "No one has phones at home anymore! You have to have a sign outside your office! There’s a lot here that is so dated. I have not come across any taxpayer who satisfies these rules. … One of these talks about whether business records of the employer are stored at the employee home office. Everything is virtual, and I don’t think any accounting firm has paper anymore! It’s very challenging to satisfy."

The other speaker, Barry H. Horowitz, a multistate tax partner at Withum, said that his own firm has many offices, and to avoid getting tripped up by this rule, the firm has resorted to “hoteling,” where no one has assigned places within an office. People just come in, set up their computer, and work. He said the firm is advising clients to do the same.

“For the convenience of employer rule, you don’t have a home base anymore; your home base is your home. [We tell clients,] 'You have hoteling, you need permission to come into the office, and that is how you get the convenience of employer rule on the side of the employee,” he said.

Blane warned that it is unknown whether auditors will take kindly to this kind of maneuver, but Horowitz said that his firm recently won a case where someone’s personal office was taken away, and he had to work in a conference room with no privacy or amenities if he wanted to work in the company's office in New York. It took a year and a half to win, but he said the firm eventually proved that the man’s legitimate office was, in fact, in New Jersey.

Blane said that a surefire way that someone can avoid the convenience rule is if the person never comes into the office. And that really means “never.” He noted that he had a client who came into New York five times from Florida and didn’t have an office there, but he did go to meet with one of the company’s vendors. Just a single time going, Blane said, meant he was now subject to the rule.

In general, the speakers expressed that these are not rules to trifle with. New York, said Blane, is becoming especially aggressive on this issue, to the point where the burden is on the taxpayer to prove his or her filing status in 2020. Horowitz said that already clients have received a flood of audit letters asking them to prove when someone did or did not work for a New York-based company. He strongly advised CPAs to take these letters seriously. They are audits, and they follow audit rules, meaning that the professional will need powers of attorney and engagement letters.

“Just be aware, these letters have to be answered timely with powers of attorney," he said. "You can ask for extensions, and it’s a regular audit, and you should be paid for your time. Don’t pooh-pooh it just because it’s a letter. It’s an audit.