Pub. 3 2021 Issue 2

15 nebraska society of cpas W W W . N E S C P A . O R G For more information, contact Jeff Schaffart or Nicholas Bjornson at Koley Jessen at jeff.schaffart@koleyjessen.com or nicholas. bjornson@koleyjessen.com, respectively. Schaffart solves complex tax and legal issues by providing timely, pragmatic advice to private equity sponsors, general counsel, management teams, and business owners. Bjornson’s practice focuses on federal, state, and international taxation of corporations, partnerships, and individuals. States require an employer to register, file, and withhold state payroll taxes and, if the employer fails to do so, may collect these tax obligations from the employer and impose penalties and interest. Depending on the state, penalties may be assessed for each day of delinquency and interest accrues on the estimated amount of taxes due for the period covered by the withholding report. Income/Sales and Use Tax In addition to state income tax withholding concerns, having an employee work remotely may create “nexus” for a state to impose other taxes, such as income and sales and use tax. Nexus permits a state to tax an out-of-state (foreign) entity when there is a sufficient connection (a “nexus”) between the foreign entity and the state. What constitutes nexus varies across states. For sales and use tax purposes, although most states have now adopted laws that impose an “economic” nexus based on the dollar amount of sales or the number of transactions in those states, nexus can still be created through the physical presence of employees. On the income tax side, federal Public Law 86- 272 prevents states from imposing corporate income tax without a minimum level of physical presence, and it excludes certain marketing activities. If an employer has established nexus because of employees working remotely, the rules for sourcing income and profit to the respective jurisdictions often depend on the physical presence of employees. This could materially change the apportionment of business profits. Businesses with offices in one state that have employees work from home in another state may be required to source sales to the various states where their remote workers perform services for their customers. However, businesses that solely provide either services or intangibles and have employees working in market- based sourcing states (market-based sourcing method assigns the receipts from sales of services to the location of a service provider’s customers or the destination where its customers receive the benefits of the service) should not face apportionment issues resulting from employees working from home. Employers should now be aware of these new concerns. There is limited guidance from the states thus far in terms of income and sales and use tax nexus triggered by employees working from home. Iowa has stated that simply having a remote employee during the declared state of emergency won’t create nexus or cause the company to lose protection under Public Law 86-272. Other states and jurisdictions have issued similar guidance, but many states have not issued any relief associated with employees working from home and some states have stated that they will enforce their withholding and tax nexus law. Unemployment Insurance When employees work in states other than where the office is located, the employer must decide whether to report and pay unemployment insurance in the state where the employee is located, or in the state where the employer is located. Unemployment insurance taxes are paid to only one state. All states require employers to use the same four-part test for each employee to make this determination, applied in descending order: Localizationof Services. An employee’s services are localized in a particular state if all or most of his/her services are performed in that state, with only incidental services performed elsewhere. Where the employee performs services outside of the state on a permanent or substantial basis, the services cannot be treated as localized to a particular state. Baseof Operations. If the employee’s services are not localized, the employer should conduct the “base of operations” test, which focuses on the place the employee customarily returns to in order to receive instructions or supplies. Place of DirectionandControl. If the employee’s services are neither localized, nor subject to a base of operations, the third test is the “place of direction and control,” which is often a corporate or regional headquarters where the employee gets instructions. Stateof Employee’sResidence. If none of the previous three tests provide an answer, then unemployment insurance taxes are due to the employee’s state of residence. If employers decide to continue to let employees work fromhome, the first three tests maymore easily fail for a nonresident employee, thus requiring the reporting and payment of unemployment insurance taxes to states where employees have their place of residence. In conclusion, employers should be aware of the differentwithholding requirements that their new employees working from home could trigger and follow guidance issued by state tax agencies. t When employees work in states other than where the office is located, the employer must decide whether to report and pay unemployment insurance in the state where the employee is located, or in the state where the employer is located. Unemployment insurance taxes are paid to only one state.