2020 Year-End Tax Guide

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State and Local Tax (“SALT”) Year-End Tax Updates

Due to both revamped economic nexus laws in the wake of the 2018 Wayfair decision and state responses to the upheaval caused by the COVID-19 pandemic, 2020 was a busy year for State and Local Tax professionals. Now, two years removed from Wayfair, states are increasingly enacting and updating their economic nexus statutes, and many state legislatures have been forced to update tax policy as part of their efforts to provide emergency relief to taxpayers affected by the pandemic. In the following sections, we will discuss some notable effects of the COVID-19 pandemic on state and local taxes and highlight some updates to state law.

A few states have answered this by providing guidance stating they would not seek to impose nexus due to employees working in-state temporarily, as a matter of safety and public health for the duration of this emergency. The states’ leniency in this regard is limited, however, as some states are starting to issue guidance including expiration dates for this treatment. The most common dates are the end of 2020 or 90 days after the state’s state of emergency is lifted. Another consideration concerns a change in an employee’s status, from temporary remote to full-time remote. This would cause businesses to have additional state income tax filing requirements, potentially affecting the employer’s payroll apportionment factor, as well as sales, withholding and unemployment tax requirements. EFFECT OF COVID-19 ON STATE AND LOCAL INDIVIDUAL INCOME TAX Notable tax concerns faced by individual taxpayers relocating to a different state due to the COVID-19 pandemic include individual withholding requirements, as well as the potential residency implications of living for a prolonged period in a new state. Income Sourcing/Withholding: Generally, individuals are subject to tax withholding based on the states in which they work. As a result of the pandemic, many states have chosen to accommodate individual taxpayers, allowing income to be sourced to the individual’s normal work location rather than the state from which they are telecommuting (their resident state). However, not all states have taken this position, potentially raising double income tax implications for individual taxpayers. For example, Georgia released guidance stating that if an employee is temporarily working in the state, wages earned during that time period will not be considered Georgia income, and employers will not be required to withhold Georgia income tax. Unfortunately, states rarely conform, and some states have taken the opposite position. Iowa, for example, has released guidance stating that an individual temporarily working in Iowa will be subject to Iowa individual income taxes, and that employers of such employees will have to withhold taxes on wages and payments made to those employees.

EFFECT OF COVID-19 ON BUSINESSES’ STATE AND LOCAL TAXES

Many employees have been forced to telecommute as a direct result of the COVID-19 pandemic. Work-from-home orders and the realities of life under lockdown have resulted in a sudden relocation of many U.S. employees, often, across state lines. Generally, the presence of a remote employee in a state where a company’s employees do not usually work would be sufficient to create nexus in that state for an employer – thereby potentially exposing the employer to additional taxation by the new state.