Telecommuting and Tax Nexus

Many states are taking advantage of the rise in telecommuting due to the pandemic to trigger the establishment of a tax nexus. Unfortunately, this may create additional administrative and tax burdens for small business owners who have employees telecommuting from different states.

What is Tax Nexus?

Tax nexus is a connection between a taxing entity (in this case the state in question) and a business. It establishes that the company has a presence within the state and therefore necessitates that it pays taxes to that government in addition to federal taxes. In the past, many businesses have only had to file with the states where the business was physically located and did the majority of its operations. However, the rise of e-commerce and telecommuting has made things slightly more tricky.

The Wayfair case, a 2018 ruling wherein the Supreme Court voted that states may charge sales tax for online purchases even if the seller has no physical presence there, marked the beginning of a new era in tax nexus law. Even more recently, small business owners have been affected by states seeking to retroactively collect taxes for online sales.

Changes in Tax Nexus Laws due to COVID-19

Now, with most employees working from home due to the pandemic, the rules around establishing a tax nexus are changing even further. According to Accounting Today, a recent study found that 36 states now indicate that they will consider such a nexus established if the business has even one employee working from their state. This is more than double the number of states that did so in 2018 prior to the Wayfair case.

The same study reported that 16 states now require third-party vendors that organize errand or delivery services, such as UberEats and Postmates, to collect state sales tax. Fortunately, only 5 of those states put the responsibility of this collection on the actual delivery person.

In addition, 27 states claim that online marketplaces such as Ebay and Etsy must collect taxes for each jurisdiction where goods are purchased and shipped. 23 of these states stipulate that individual sellers are not responsible for this collection and that the responsibility lies with the marketplace facilitator.

These changing guidelines have serious implications for small businesses with employees in multiple states and may place additional pressures on companies whose accounting departments are already stretched thin due to the stresses of new paid leave requirements and changes in business income due to economic closures. For tips on how to cope with changing sales tax laws, read our article here.