Employers that allow their employees to telecommute across state lines may be at risk for exposing their company to additional tax filings. Each state has a different set of rules for establishing nexus or “doing business” in their state, but there are a few general principles to follow.
Telecommuting and state tax nexus
Generally speaking, a business can establish state tax nexus if they have a business location, perform services or generate sales within a particular state. In certain states, this includes employees that regularly and consistently telecommute across state lines. This may be the case even if the out-of-state employer made no sales in the state and the employee telecommuted only part time. Furthermore, there are some states in which nexus is triggered even if the telecommuters are performing back office administrative functions.
Do we have nexus?
The first step is to determine the specific activities that the employee is conducting within their state of residence. You will also need to determine if any company sales are generated from that state. Then you’ll need to review these activities in accordance to state specific rules. For instance, each state has a different definition of, “doing business” in their state and whether or not nexus is created. It’s also important to note that the guidance in the State Department of Revenue websites and specific State citations may not always explicitly cover every specific situation. For example, the term “generally” will be used often in the state citations to cover the exceptions. You also may need to reference past State Supreme Court cases. If you have an employee telecommuting from Florida, an example would be the Florida Technical Assistance Advisement No. 09A-058,17. In this advisory, it was determined that a mail order seller’s use of a Florida-based independent contractor consultant to provide process improvement services to personnel of the company at its corporate headquarters located outside Florida did not cause the company to have sales/use tax nexus in Florida. Working out of her Florida home, the consultant helped the company to research and select new products that it would offer for resale in its mail-order business. The consultant did not have any contact with customers of the company, nor did she provide any services that were detectable by the company’s customers. The Department of Revenue agreed with the company that the term “transaction of business” in the Florida use tax nexus statute “generally … includes activities that further the taxpayer’s ability to establish and maintain a market in this state.” Finding that the consultant’s process improvement activities were provided directly to the company’s corporate headquarters personnel rather than to customers in Florida, the Department ruled that the company was not required to collect and remit Florida use tax on its mail-order sales of merchandise. While this specific case covers use/sales tax, it may be referenced if there are no other similar cases covering telecommuting.
What are the implications for establishing tax nexus?
The result is that the out-of-state employer may be subject to additional corporate tax liabilities and required to file additional returns. The implications can also be long-lasting as several states also have trailing nexus rules.
Should your company offer telecommuting as an option?
While telecommuting provides employees with significant work/life balance, the business must evaluate the financial benefits for providing that option versus the potential additional corporate income tax liabilities and the administrative costs of filing additional state income tax returns. It’s certainly possible that it may be worthwhile to offer telecommuting, but the state tax requirements must first be reviewed.
More questions? Browse answers or ask nexus tax questions online.
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