Even before COVID-19, trying to determine to which states a business might owe tax, or where it might be obligated to withhold tax on employee wages, was difficult at best.
With the paradigm shift to employees working from home, the situation grew even more complex leading some states to give businesses a break — at least for a while.
As a result of the COVID-19 pandemic, the New Jersey Division of Taxation temporarily waived an employer’s responsibility for withholding tax for teleworking employees. The state also relaxed its business presence rules.
As of October 1, 2021, New Jersey will no longer grant relief in withholding. Employers should resume sourcing income based on where the service or employment is performed and withhold New Jersey Gross Income Tax from such wages.
New Jersey will also no longer make an exception for Corporate Business Tax (CBT) Nexus and Sales Tax Nexus triggered by teleworking employees. Businesses should be aware that the presence of any employees telecommuting from New Jersey, beginning on October 1, 2021, may require the business to file a CBT return and obligate the business to collect and remit New Jersey sales tax.
Other states that have ended temporary tax relief based on remote working include Indiana, Maine and Pennsylvania. Businesses should continue to monitor temporary state tax relief provisions, especially those tied to a state’s declared state of emergency. For example, in June 2021, California ended its state of emergency due to COVID-19 and, along with that declaration, rescinded any temporary relief provisions related to teleworking employees. As such, California will treat the presence of an employee teleworking from a location within the state as establishing nexus on behalf of its employer, and both the employee and the employer may now be subject to California’s income and other tax jurisdiction.
Louisiana, on the other hand, has taken a different approach. The Bayou State recently began offering tax incentives for remote workers who relocate to Louisiana after December 31, 2021. Louisiana-based “digital nomads” will be granted an exemption from individual income tax of 50% of gross wages not to exceed $150,000 for a period of up to two taxable years during tax years 2022 through 2025. In the competition for relocating businesses, will other states follow suit?
If you have any questions regarding the impact of state and local COVID-era tax relief measures on your business, please contact Friedman’s state and local tax team.