Remote work continues to be the new norm as the COVID-19 pandemic evolves, and the tax consequences of that remain unclear, according to state tax practitioners.
At the beginning of the COVID-19 pandemic, many companies anticipated remote work to be a temporary response to emergency orders and lockdowns. But "the COVID situation just seems to be really evolving,” and taxpayers and professionals need "the ability to think ahead and be nimble," according to Mitchell A. Newmark of Blank Rome LLP. Speaking during a December 15 panel discussion at the New York University School of Professional Studies’ Institute on State and Local Taxation, Newmark cautioned, “We can’t tell you what you’re going to have to deal with tomorrow.”
Brian J. Kirkell of RSM US LLP pointed out that although remote work is not a new concept, “COVID was the unusual circumstance that accelerated a trend that we were already dealing with.” He said he doesn't think "there's a complete end to COVID in sight. . . . There's going to be these kinds of waves that we’re going to have to deal with. What you’re going to end up with, depending on the business or the industry, is some kind of hybrid model or some kind of remote model, because in some ways, that is a way of attracting employees; it’s a way of retaining employees.”
“What’s going to fade away is the sense that it’s fundamentally unfair to tax a company differently because their employees have to stay home during a pandemic,” according to Kirkell.
Donald R. Roveto of Deloitte Tax noted that “in general, having an employee working in a state creates nexus and a filing obligation for corporate income tax purposes. Employee activity can also create apportionment considerations.” While some states have defined whether an out-of-state corporation will establish nexus based on the presence of employees working remotely because of COVID-19, that guidance is either expiring or has already expired, according to Roveto. He noted from some informal conversations he’s had with various revenue authorities that most think that by tax year 2021, tax returns will have to be filed if a company has any employees in a state.
Roveto said he’s “seeing an increased effort on the part of employers to develop more structured policies around remote work or hybrid work, which seems to be a requirement at this point.”
“Over the past almost two years now, the situation with employees working remotely has continued to evolve and remains fluid,” Roveto said. “We’ve even seen some employers who pushed early on for a more traditional, maybe more of an aggressive, return-to-work approach . . . put off their return to work.”
Newmark mused that part of the problem is the uncertainty of the disease itself. “If COVID winds up getting a little worse, do the majority of employees not want to come back at all? If we wind up with a magic bullet for COVID, do we wind up pretty close to the kind of situation we had before? Or do we have some kind of new normal, where we are now, just trying to stabilize like this?”
“Maybe we just wind up with everyone working everywhere,” suggested Newmark.
Kirkell weighed in, saying he thinks that time could be here already. “We’re seeing some clients who say they’re done with offices entirely. They make it as an operational decision, without thinking about the tax implications. That’s the problem here; there’s flexibility without deliberation.”
“The times they are a-changing,” concluded Kirkell.