Businesses in Washington state could face potential liability if they don’t withhold Oregon income taxes for employees that are now working from home in that state, one example of how telecommuting in response to the coronavirus could complicate employers' state tax obligations.
Eric Kodesch of Lane Powell PC’s Portland office told Tax Notes March 20 that because of COVID-19, many businesses in Washington are requiring their employees to work from home, including those employees that live across the border in Oregon. Because Washington lacks an income tax, employers aren't required to withhold income taxes for employees working in the state. However, Oregon requires employers to withhold its state income taxes for employees who work in Oregon.
“We’re likely going to have this [situation extend] over one or more payroll periods . . . where for the entire period of the paycheck the employee was working in Oregon with the [Washington] employer knowing about it,” Kodesch said. It’s possible that “next April, when it comes time to pay your 2020 taxes,” some employees who worked from home in Oregon could be financially unable to pay all the taxes they owe Oregon, for example, because of the economic fallout from the pandemic.
In those cases “the Oregon [Department of Revenue] will do what it’s supposed to do, which is collect, and at that point Oregon has a choice — it can collect from the employee who owes it, but they can also go after the employer" if the Washington employer failed to withhold Oregon taxes for the employee while they worked from home in Oregon, Kodesch said.
“There’s a lot of reasons why . . . the Oregon DOR would choose to go after the employer rather than the employee,” including that the business failed to comply with state’s withholding requirement, and that it could be easier for the tax agency to go after the employers than the employees, Kodesch added.
Kodesch said other businesses in other states could also face issues over withholding linked to telecommuting, such as for employees who work in New York but live in Connecticut or New Jersey. But he said the situation is more problematic for Washington businesses because the state lacks an income tax and therefore a withholding requirement.
For employees that normally cross borders to work in states that have income taxes, if their employers don't update their state tax withholding when they work from their home state, they can get refunded for taxes that were incorrectly withheld for the period during which they were working from home. Those refunded taxes can then be used by the employees to pay the taxes owed to their home states for the time spent working from home.
“What compounds the problem” in the case of Washington employers “is [that] Washington has no withholding requirement,” Kodesch said. “The person who normally works in Manhattan, but is now working in their home in Connecticut, they’ve probably been overwithholding in New York, so they’d get a refund for that.” Overall, “I think this is more dangerous for Washington employers,” he added.
Kodesch, who coauthored a March 19 Lane Powell alert on the issue, said his advice is for employers to adjust their withholding as soon as possible.
“That’s the main thing we’re trying to get out to the businesses. . . . Take a look at your payroll,” Kodesch said. Washington employers “already have the whole payroll process for federal income tax withholding and FICA . . . [so] it’s probably a good idea to now talk to that payroll company and expand” payroll to include withholding for Oregon.
Kodesch said that some Washington employers already withhold Oregon income taxes for their employees who work in Washington, for the convenience of the employee.
Notably, Kodesch said that some Washington residents working in Oregon, if their employers don't update their withholding, "will probably be able to get a refund of their Oregon taxes” that were withheld while they were working from Washington.
Other issues raised in the alert include the possibility that employees of a Washington business that are working from home in Oregon could create an increased risk of nexus that would make that business liable for Oregon’s corporate income tax and corporate activity tax, while Oregon employers with employees working from home in Washington could now have a greater likelihood of nexus for Washington's business and occupation tax.
Other tax attorneys are alerting clients of such concerns. In a March 20 alert, Eversheds Sutherland (US) LLP also warned that "employees working from home may generate nexus exposure for employers," and that even "one employee working from home within a state has the potential to trigger nexus for income tax and/or sales tax purposes."
"Working from home arrangements may also impact sales, property, and/or payroll apportionment factor calculations," according to the alert.
Temporary out-of-state workers and the issue of differing state income tax and withholding rules have been on Congress’s agenda for years. The Mobile Workforce State Income Tax Simplification Act was reintroduced last year. The measure would standardize income tax reporting requirements and exempt workers from filing tax returns in a state if they work in that state for 30 or fewer days a year.