Telecommuting, Business Travel Remain Key Employment Tax Issues

Payroll on Bloomberg Tax is built to get you to the right answer faster and more efficiently. Get all the payroll intelligence you need with Bloomberg Tax expert analysis, perspectives and...

By Jamie Rathjen

Telecommuting, traveling for business, and other employment activities that cross state lines remain an ongoing concern for out-of-state employers, according to a Bloomberg Tax survey.

The 18th annual Survey of State Tax Departments,” released April 27, 2018, by Bloomberg Tax, asked states to determine whether scenarios such as telecommuting, registering with state agencies, or work done by out-of-state employees would trigger nexus with the state. Nexus generally means that a business has a physical presence in a state or jurisdiction. Such physical contact must exist between an employer and a state before taxes may be levied.

The states’ answers regarding telecommuting were unchanged from the 2017 survey. Thirty-eight of the responding states said telecommuting employees would create nexus in all scenarios given by the survey: employees performing nonsolicitation activities, employees performing back-office functions such as payroll, and employees working on product-development functions such as computer coding.

Maryland and Tennessee said only some telecommuting activities would create nexus, while Indiana, Kentucky, Mississippi, and Oklahoma were the four states where telecommuters would not create nexus.

As in previous surveys, most states said their answers would not change if the out-of-state company did not make sales in the state or if the employees telecommuted for only part of their total work time.

Forty-two states, the District of Columbia, and New York City responded to the survey. New York state declined to respond because it said it still was working on regulations related to 2014 changes to its corporate tax code.

Arkansas and Florida did not participate this year after responding in 2017.

Employee Activities

For purposes of state taxation, nexus refers to the level of contact that must exist between an employer and a state before taxes may be levied on the company.

Employers that are deemed to have nexus with a state must register with the state in question and pay employment, sales, excise, and other corporate taxes.

The survey attempted to clarify state tax departments’ positions on employment-related activities and relationships.

Sixteen states said employees attending meetings in the state would create nexus, down from 17 in 2017. California, which said meetings may create nexus in 2017, did not respond to the question this year.

Eight states reported that attending seminars would create nexus, down from nine in 2017. California did not respond to the question, but said attending seminars would create nexus in 2017.

Forty-one states said conducting a training course, seminar, or lecture twice a year would create nexus, down from 43 in 2017.

Conducting job fairs, hiring events, or other recruitment activities could cause nexus in 21 states, down from 23 in 2017, the survey said. Thirty-six states, a decrease from 38 in 2017, said nexus would be created by having employees hire, supervise, or train other employees within the state.

Setting up product displays could create nexus in 35 states, down from 37 in 2017, the survey said. Handling customer complaints triggered nexus in 43 jurisdictions, a decrease from 45 in 2017, while providing shipping information could create nexus in 28 states, down from 30 in 2017.

Registering With State Agencies

A growing source of nexus is employer registration with state agencies to do business in the state or for purposes such as payroll or workers’ compensation.

Fourteen jurisdictions said out-of-state employers registering for either payroll or workers’ compensation would create nexus. In 13 states, both would create nexus, while the District of Columbia said only registering for workers’ compensation would create nexus.

Eleven states said registering with the secretary of state, or equivalent department, to conduct business in the state would create nexus.

However, several states said in response to the questions, which were added to the survey in 2016, that registering for business-related activities does not by itself create nexus.

Federal Legislation Introduced

The Mobile Workforce State Income Tax Simplification Act of 2017 ( H.R. 1393, also introduced in the Senate as S. 540), was introduced March 7, 2017, by Rep. Mike Bishop (R-Mich).

The measure would limit the taxation of wages earned by employees who work in more than one state to the employee’s state of residence and the state where they physically perform employment duties for more than 30 days in a year.

The House passed H.R. 1393 by voice vote June 20, 2017, and the bill was sent to the Senate, where it remains in the Senate Committee on Small Business and Entrepreneurship. The committee held hearings on the measure.

The bill attempts to standardize how states handle nonresident employees who work in their state.

Generally, employers must withhold from all wages earned by nonresidents working in the state. However, some states have thresholds of days worked in a year or wages earned before nonresident employees are subject to withholding.

For example, thresholds of days worked range from one day in Colorado to 60 days in Arizona or Hawaii.

States having thresholds based on wages include Idaho, where nonresidents are subject to taxation if they earn more than $1,000 in a year in the state.

To contact the reporter on this story: Jamie Rathjen in Washington at jrathjen@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Payroll