After finally getting the hang of remote work, employers could face new headaches around tax policies for workers whose home offices had them working across state lines.
Many states adopted emergency COVID-19 policies giving employers a break on paying certain state business taxes for workers who were now working in a different state due to the pandemic. Rhode Island gave a pass to out-of-state companies on payroll, corporate income, and sales and use taxes during the pandemic for employees temporarily working remotely in the Ocean State. Rhode Island companies with temporarily out-of-state workers still have to withhold state income taxes; whether they are also exempted from other states’ taxes for their remote workforce depends on the other states’ policies around this “tax nexus.”
The tax exemptions are generally tied to the state of emergency; Rhode Island’s is set to expire in mid-August. The state tax policy assumes these confusing, cross-state work situations will end when workers return to their offices – an assumption proving to be incorrect as a growing number of companies plan to make remote work a permanent option.
The state hasn’t decided whether to extend or modify this emergency-related tax policy, according to Derek Gomes, spokesperson for the R.I. Department of Administration. The R.I. Department of Revenue was unable to provide data on how many companies or employees are affected.
Don’t count on states extending or making permanent their pandemic tax policies, said Alicia J. Samolis, partner and chair of the labor and employment practice at Partridge Snow & Hahn LLP in Providence. If anything, the increasing number of out-of-state remote workers will make states step up their enforcement of tax nexus policies, Samolis said.
The added revenue for state governments still grappling with the financial hit of the pandemic is not to be discounted, said Laura Yalanis, director of tax services for Providence-based Kahn, Litwin, Renza & Co. Ltd.
‘Is it worth the cost to comply, or can you find someone else locally?’
ALICIA J. SAMOLIS, Partridge Snow & Hahn LLP partner
Seeking to retain its state income tax revenue, Massachusetts said it would still apply payroll taxes to remote, out-of-state workers for in-state companies. New Hampshire, which has no income tax, sought relief to the Massachusetts policy in a legal appeal, but the U.S. Supreme Court in June declined to take up the case.
Yalanis described the interstate taxation rules as more of an administrative burden than a financial one for individual employers. Rather than paying all taxes in one state, companies now have to split payments across the multiple states where their employers work.
However, that administrative burden can come with some costs, particularly for small businesses that might now need to hire a payroll company or legal counsel to advise them on the more-complex process, Yalanis said.
Still, companies appear more willing than ever to take on those complexities amid nationwide labor shortages.
“Employees have a lot of bargaining power right now,” said Russell J. Stein, who serves as counsel on taxation law for Partridge Snow & Hahn.
While awaiting more clarification on how individual states would approach post-pandemic tax policies, Samolis advised employers to prepare by first taking stock of where their remote workers are located.
“I think a lot of companies might be surprised to learn that they have employees working elsewhere,” she said. “You need that information so you can make the decision: Is it worth the cost to comply, or can you find someone else locally?”
Nancy Lavin is a PBN staff writer. Contact her at Lavin@PBN.com.
