Survey Finds Rise in States Where Telecommuters Create Nexus

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By Allison M. Gatrone

The number of states where certain types of telecommuting triggers nexus has increased slightly since 2014, according to a Bloomberg BNA survey.

The 15th annual Survey of State Tax Departments, released April 24, 2015, by Bloomberg BNA's Tax Management and Accounting Division, addressed whether any of three types of telecommuting would trigger nexus in the surveyed states.

Massachusetts replied that nexus would arise from a telecommuting employee who performed back-office administrative business functions, such as payroll, as opposed to direct customer service or other activities directly related to the employer's commercial business activities, increasing to 38 in 2015 from 37 in 2014 the number of jurisdictions that said such telecommuting triggers nexus.

Massachusetts also increased to 37 in 2015 from 36 in 2014 the number of jurisdictions that replied that a telecommuting employee who performs product-development functions such as computer coding would trigger nexus.

A telecommuting employee who performs nonsolicitation activities would create nexus in 38 states in 2015, unchanged from 2014, the survey said. Massachusetts replied in 2015 that such telecommuting triggers nexus in all instances, which is a change from its 2014 response that telecommuting triggers nexus in some instances.

Forty-five states responded to the income-tax portion of the survey. New York declined to respond because doing so would be premature given that it has not completed the corporate tax reform it enacted in 2014, it said.

Employee Activities

At the heart of multistate tax and out-of-state authority issues is nexus, which generally means the physical contact that must exist between an employer and a state before taxes may be levied.

A company deemed to have nexus must register with the state and pay any corporate, sales, excise and employment taxes within the state.

Because state opinions vary on what triggers nexus, the survey was conducted to clarify state tax-department positions on certain employment-related activities or relationships. 

Employees attending meetings for no more than 14 days may cause nexus in 17 jurisdictions, down from 19 jurisdictions in 2014, the 2015 survey said. The District of Columbia no longer considers meeting attendance to create nexus, it said.

Seven states said that out-of-state employees attending a seminar within the state is a nexus-creating activity, and 40 of the responding jurisdictions said that out-of-state employees conducting a training course, seminar or lecture twice a year is a nexus-creating activity, with Illinois and Massachusetts joining the 38 states that in 2014 said such activity created nexus.

Conducting job fairs, hiring events or other recruitment activities may cause income tax nexus in 21 states in 2015, unchanged from 2014, the survey said. Thirty-seven states said nexus may occur from having employees hire, supervise or train other employees within their borders, also unchanged from 2014.

Preparing product displays is a nexus-creating activity in 34 states, including Utah as of 2015. Handling customer complaints creates nexus in 43 jurisdictions and providing shipping information creates nexus in 28 states.

Federal Legislation Reintroduced

The Mobile Workforce State Income Tax Simplification Act of 2015 (S.B. 386) was introduced Feb. 5, 2015, by Sen. John Thune (R-S.D.) and referred to the Finance Committee.

The measure would limit the number of states that could tax the wages of a nonresident employee to two: the state where the employee resides and the state where the employee physically performs employment duties for more than 30 days in a year.

The bill would not override state provisions that allow individuals “to conduct greater activities without the imposition of tax.” The bill would establish that a state may assess income tax and employment taxes on wages of those who were physically present in-state for business purposes for at least 15 days or for a state-specified time period of more than 15 days.

How states treat nonresident employees who temporarily work within their jurisdiction varies.

Generally, employers are to withhold tax on wages earned by nonresident employees regardless of how many days they spend in the state; however, many states have thresholds on the amount of time that must be spent or money earned by the nonresident employee within their jurisdiction, and in many states, a nonresident employee may technically be subject to tax on the first day of in-state travel.

For example, employers in New York are not penalized by the state for failing to withhold state taxes on wages paid to nonresident employees performing services in New York if the employees work no more than 14 days in the state, are assigned to a primary work location outside the state and their compensation is not a form of excepted compensation.