As we move through the summer of 2021, overall remote employment remains high with an estimated 15% of the workforce working outside of traditional offices. At the same time, state after state has been rescinding pandemic-related orders, and providing guidance for businesses and individuals as we all continue to emerge from more than a year of COVID limitations. The intersection of these two phenomena presents difficult challenges from a state and local tax perspective, particularly for businesses that have transitioned from traditional office space to a virtual or hybrid workforce model, have employees located in a variety of new states and have not historically had state tax nexus outside of the states in which their offices were located.
For example, in June of 2021 California Governor Gavin Newsom rescinded Executive Order N-33-20, which required all California residents to stay at home in order to prevent the spread of the coronavirus. Under the executive order, the California Franchise Tax Board (FTB) provided guidance that a business would not have tax nexus with the state merely because of remote employees teleworking from a location in California, and that those employees would be treated as a de minimis activity for the purposes of the application of P.L. 86-272. With the rescission of Executive Order N-33-20, the FTB updated its guidance in July of 2021 to provide that, depending on the specific facts and circumstance involved, the state will treat the presence of an employee teleworking from a location within California as a nexus-creating activity that exceeds the protections of P.L. 86-272.
Unfortunately, there is some uncertainty regarding the effective date for applying the FTB’s new guidance. Executive Order N-07-21, which rescinded Executive Order N-33-20, was effective immediately on June 11, 2021. However, the FTB’s guidance was not updated until July 1, 2021. To complicate matters further, the FTB had previously provided that its guidance was effective from March 12, 2020, through July 15, 2021. Did the presence of remote employees create nexus and exceed the protections of P.L. 86-272 as of June 11th? Or, July 1st? Or, do businesses have until July 15th? There is room for the FTB to provide some leeway here, especially since businesses are in the process of reopening offices and making decisions regarding ongoing remote workforce, and not every state is at the same point as California. To be clear, the broad provision of any further relief is not likely, and businesses may need to approach the FTB proactively with a plan for identifying and removing teleworking employees in the near term in order to obtain specific relief.
From a general perspective, businesses are well-advised to acquire a real and dynamic understanding of where their remote employees really are, model the state tax impact and make deliberate decisions regarding current and future remote employment. As the situation in California shows, there is time pressure. Continuing as-is with remote employees in place may have significant tax impacts. Lastly, for historically California based businesses, the flip side of the state’s guidance for out-of-state businesses may provide an opportunity to mitigate California tax through apportionment or throwback relief.
Finally, California is not the only state to rescind pandemic-related executive orders or temporary pandemic safe harbors. Pennsylvania recently ended its nexus and withholding safe harbors on June 30, 2021. Philadelphia followed the state’s end date for the city’s nexus guidance and ended prior COVID-19 apportionment guidance on June 11, 2021. As the states re-evaluate nexus, apportionment or withholding safe harbors issued as pandemic relief measures, multistate businesses or businesses with remote employees will need to understand and examine how remote workforces continue to complicate state tax nexus.