Menu
Tax Notes logo

Successfully Navigating COVID-19

Posted on June 22, 2020

In this installment of Board Briefs, Tax Notes State advisory board members discuss how to successfully navigate state tax measures during the COVID-19 crisis.

This article is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

Where Does a Telecommuter Work?

Walter Hellerstein

Walter Hellerstein is the Distinguished Research Professor Emeritus and the Francis Shackelford Professor of Taxation Emeritus at the University of Georgia Law School and a visiting professor at the Vienna University of Economics and Business.

As readers of this publication are well aware, “with states moving to reopen from COVID-19 lockdowns, businesses continue to face uncertainty regarding the tax consequences of employee telecommuting during the pandemic.”1 As readers of this publication are also aware, however, the uncertainty regarding the tax consequences of telecommuting is not a novel issue, as Ed Zelinsky has recently reminded us in his powerful critiques of the application of New York’s “convenience of the employer” doctrine to telecommuters.2 I have little to add to Zelinsky’s analysis, in part because we have literally been on the same page regarding this issue for many years, as our frequent references to each other’s work in our respective writings on the convenience of the employer doctrine plainly reveal. What I can do, however, is to emphasize that this is not merely a convenience of the employer issue, as a recent legal opinion from the Arkansas tax administration demonstrates.3

The taxpayer worked in Arkansas as a systems analyst (computer programmer) until 2017, when she moved to Washington. She continued working for her Arkansas employer, doing the exact same work but “work[ing] remotely from her home in Washington state.”4 The taxpayer’s lawyer sought an opinion “as to whether or not a new client of mine has to pay Arkansas income tax.”5 After adverting to the established constitutional principles underlying a state’s power to tax a nonresident’s income on the basis of source,6 the opinion, in a statement with which I can hardly take issue, observed:

The more difficult question arises in determining the source of the nonresident’s income. In State Taxation, Vol. II, Professors Walter Hellerstein and Jerome Hellerstein explain:

It is important to recognize that the states’ power to tax nonresidents’ income is not limited by a narrow or technical view of “source” that requires identification of specific in-state activities that produce particular streams of income that may be said to have their “source” in the state.

Instead, a state’s taxation authority is described as follows:

A State is free to pursue its own fiscal policies, unembarrassed by the Constitution, if by the practical operation of a tax the State has exerted its power in relation to opportunities which it has given, to protections which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.7

In addressing the question of the source of the nonresident employee’s income, the opinion continued, “Your question requires a determination whether your client’s income results from a business, trade, or occupation carried on in this state”8 and whether Arkansas had provided sufficient opportunities, protections, and benefits to satisfy constitutional strictures. In answering these questions in the affirmative, the opinion declared:

Your client’s job activities are such that they can be performed from any location. The opportunities, protections, and benefits offered by the State of Arkansas, however, allow your client to earn income from her employment with the State of Arkansas. Arkansas provides an education system for its citizens that gives rise to the need for the . . . Systems Analysts to provide programming services. . . . Arkansas provides various protections and benefits for employees of Arkansas employers including job protections, employee rights, unemployment compensation, and other similar benefits. Your client benefits from the protections and opportunities afforded her as a public employee under the laws of the state of Arkansas.9

Accordingly, the opinion concluded that “although your client is performing her job duties from a physical location in Washington, she is carrying on an occupation in Arkansas” and “the income she earns from the conduct of that occupation is subject to Arkansas income tax.”10 While the opinion also states that “your client is required to file Arkansas income tax returns and pay tax on that portion of their [sic] income from her Arkansas employment,”11 there is nothing in the opinion to suggest that any portion of the income from the employee’s work for her Arkansas employer was attributed to Washington — perhaps because the issue was not raised.

For reasons set forth at length in a portion of my treatise that the Arkansas legal counsel apparently did not read,12 I remain doubtful that a state may constitutionally tax all of a nonresident’s income derived from personal services performed outside the state. As noted in the treatise:

while we would not go so far as to say that the state where an employee’s base of operations is located has no claim whatsoever, as a matter of due process, to a portion of the income that a nonresident employee derives from services performed outside the state, we do believe that the Constitution forbids a state from taxing all of a nonresident’s income derived from personal services performed outside the state, whether performed out of “convenience” or “necessity.” . . . [A state’s] claim that it is the source of all of a nonresident employee’s income derived from personal services performed outside the state is difficult to reconcile with the fundamental due process principle that a state’s power to tax a nonresident’s income extends only to income derived from services “carried on therein.”13

Indeed, if further authority were needed to cast doubt on the proposition that all of the income earned by a telecommuting computer programmer is derived from “carrying on an occupation” at her employer’s location, one can find it in Telebright.14 In that case, the court held that an out-of-state corporation had nexus with New Jersey based on the presence of single employee, who “telecommute[s] full-time from her New Jersey residence” where she “develops and writes software code from a laptop computer.”15 In the course of its opinion, the court remarked that “the fact that Telebright’s full-time employee works from a home office rather than one owned by Telebright is immaterial for purposes of the first prong of the Complete Auto test,”16 because “she is producing a portion of the company’s web-based product here” and Telebright “already withholds and pays New Jersey state income tax from her salary.”17 To be sure, the court’s comments were addressed to the corporation’s nexus, not to the source of the employee’s income, but the court’s observations unmistakably reflect the understanding that a telecommuting employee earns income where she physically works, and not only at her employer’s base of operations.18

What Comes After COVID-19 Is the Bigger Concern

Eric J. Coffill

Eric J. Coffill is senior counsel with Eversheds Sutherland (US) LLP in Sacramento, California.

The more appropriate question should be how to successfully navigate state tax measures in the aftermath of the COVID-19 crisis because this is not a problem that will be solved in the short term. On the administrative side, there have been plenty of immediate procedural changes prompted by current and pressing COVID-19 issues; for example, extensions of deadlines such as we have seen by the California tax agencies for filing protests/petitions, holding hearings, filing returns, and so forth. But eventually when offices — professional, corporate, and tax agencies — are open and up and running by the end of the year, the procedural potholes should be filled and behind us. Perhaps we will work differently, and more from home or elsewhere away from the traditional and pre-COVID office setting, but a degree of normalcy will return.

What will not be behind us by the end of the year is the damage to the economy and how states and localities react to what, for all practical purposes, will be a (short, we hope) recession. We will likely be living for years with new revenue-raising measures driven by falling tax revenues and increased governmental expenses related to COVID-19. Let’s look at California. State law requires there be a balanced state budget signed by July 1, which is the start of the new fiscal year. There was an earlier deadline of June 15 for the Legislature to send a budget bill to the governor. The budget process begins each year in January when the governor releases his budget and, at that time, Gov. Gavin Newsom (D) projected California would end fiscal 2020-2021 with $20.5 billion in reserves. That was pre-COVID-19. Without getting bogged down in the details, all interested parties agree there will now be a large projected deficit as a result of falling tax revenue (and increased COVID-related expenses). But there is little agreement on anything else, especially the size of the deficit that needs to be plugged (that is, “balanced” on paper) by July 1 and how to accomplish that through a combination of spending cuts and tax increases.

Other than the projected size of the deficit, the other big unknown factor is how much money California might receive from the federal government, which would then lessen the need for new revenue-generating tax increases. As of right now, watch for legislation proposed by the governor to (1) suspend net operating losses for 2020-2022 for medium and large businesses and (2) limit the use of most tax credits/incentives from offsetting more than $5 million in tax for 2020-2022. Both measures seem to have the support of the Legislature. Also watch A.B. 398, which would impose for five years (beginning January 1, 2021) a new $275-per-employee tax on companies employing more than 500 Californians. Also watch A.B. 2570, which would extend the California False Claims Act to claims, records, and statements made under the Revenue and Taxation Code. That bill is substantially similar to A.B. 1270, which died in committee during the 2019-2020 legislative session and may be pitched this session as a tax revenue-raiser.

Localities face the same revenue problems. There is a series of cases (five in particular) working their way through the California court system on the issue of whether a tax increase proposed by local initiative requires a simple majority or a supermajority vote. Of those cases, the lead one to watch is Matter of Proposition C, which is pending in the Second District Court of Appeal and will be argued on June 23.19 Expect a decision within 90 days. This is a huge issue because local jurisdictions are looking hard for their own revenue streams independent from state sales/use taxes and property taxes, and it is far easier to win passage of a local tax increase if the hurdle is only 50 percent plus one vote. If a simple majority is the standard, then look for a plethora of local taxes in the next few years.

Another local revenue item to watch in California is an initiative measure that has qualified for the November ballot to move to a split-roll property tax that will use market value for commercial property valuation purposes. Our famous Proposition 13 was enacted by initiative in California in 1978, and limited the property tax base value to acquisition value, subject to an annual inflation increase of up to 2 percent or a reassessment based on change of ownership or new construction. Now, Initiative 19-0008 would change Proposition 13 to require select commercial and industrial property (but not residential) to be regularly reassessed (every three years) at full market value (with specific exceptions), absent a change of ownership. Ballot proponents expect it to increase property tax on businesses by approximately $11 billion, but that is now certainly an exaggerated figure in view of declining fair market values of commercial property in light of the COVID crisis. The usual arguments over 19-0008 have become exaggerated by COVID. The Schools and Communities First campaign behind the initiative argues that its passage is now more critical than ever for funding schools because school funding by the state is likely to decline. Opponents forcefully argue that additional property taxes will hurt businesses and their customers because of looming unemployment, increasing business failures, and recession-like conditions. Current polls show it will be a close vote.

As the World Turns

Craig B. Fields

Craig B. Fields is a partner in the New York City office of Blank Rome LLP. He can be reached at CFields@BlankRome.com.

As the earth turns on an axis that seems slightly more tilted than normal, the world (at least the state tax world) begins adjusting for the impact of COVID-19. I see three areas that will keep people busy for the foreseeable future:

  • taxpayers and practitioners staying aware of the changing filing and payment deadlines;

  • employers being forced to stalk their employees; and

  • companies looking into whether taxes are owed for premises that the government is prohibiting them from using.

First, the state and local governments deserve credit for extending the deadlines upon which the filing of returns and the payment of taxes are due. This helped many taxpayers at a time when we were in the early stages of working from home and with many businesses temporarily closing. However, and not surprisingly, the terms of the extensions are not consistent. Many but not all jurisdictions have used July 15 as an extended due date for corporate income taxes that will prevent the imposition of penalties (and, in some cases, interest). But in the fine print of some extensions it is stated that the extension will expire sooner if the state of emergency in that jurisdiction is lifted. This will cause many tax professionals to continuously track the extended deadlines to ensure that there are no surprises and to take advantage of any benefits.

Second, with many employees working away from their offices (at their homes, their second homes, relatives’ homes, or rented locations), issues of nexus, apportionment, and withholding tax arise. For example, if an employer was previously protected from a state’s income tax by Public Law 86272, having employees working from second homes in that state for extended periods of time could eliminate the protection because the activities of many employees would exceed solicitation. In a state that uses a payroll factor in its apportionment scheme, would having an employee working from her second home for nine months (which is certainly not out of the realm of possibility) affect the calculation of the factor? Similarly, in a state that uses the costs of performance standard for its sales factor calculation, that same employee could affect the sales factor for the employer. Further, assume the second home is in a state other than the employee’s state of domicile; because that employee is working at her second home, withholding tax issues could arise for the employer. As a result of the foregoing, employers will be forced to stalk their employees to determine their work locations to properly compute the tax obligations.

Finally, some jurisdictions tax the right to use or occupy premises in their jurisdictions. Taxpayers should consider whether such tax is due when they are prohibited from using the property. For example, Philadelphia generally imposes a use and occupancy tax on commercial tenants for the use or occupancy of premises for business purposes. The Department of Revenue took the correct and fair approach and issued a pronouncement that businesses ordered to close by the mayor will not be subject to the tax. This is because those businesses are being denied access to their places of business.

New York City generally imposes an annual tax on rent paid by commercial tenants for the right to use or occupy taxable premises in some parts of Manhattan. New York’s governor ordered the mandatory closure of all nonessential businesses throughout the state, including in New York City. As a result, commercial tenants in New York City are left with the uncertainty of not knowing whether, in addition to having to pay rent for premises that they are prohibited from occupying, they may also be required to pay tax on those rental payments. The commercial rent tax law would seem to support an interpretation that allows the exclusion from the tax of rental payments made for any period where the government denies the tenant the right to use or occupy those premises.

While we hope we are headed in the right direction regarding the pandemic and there is reason to be positive, as the foregoing demonstrates, this experience will continue to preoccupy state and local tax professionals for the foreseeable future.

The Lack of Certainty Is the Only Certainty We Have

Lynn A. Gandhi

Lynn A. Gandhi is a partner and business lawyer with Foley & Lardner LLP in Detroit.

The COVID-19 pandemic has spawned myriad state and local tax guidance documents, notices, legislation, rules, and executive orders. Many have been disbursed in a trickle, as the taxing jurisdictions consider the implications of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and proposed Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. Others have come in a tsunami as the taxing jurisdictions try to respond and stay ahead of the issues facing them. Guidance is often incomplete, issued as attempts to understand these acts while they are being written and amended. Guidance often follows a nonlinear path, as new events make previously issued guidance obsolete. And because of the still-unknown path to certainty, deadlines may be extended again and again. The lack of certainty is the only certainty we have. I must admit a bit of satisfaction in the chaos caused by 50 different states’ inconsistent paths to reopening and remind my non-SALT colleagues that this is the world I work in most of the time.

So how to best navigate? While there is no single solution for all businesses or tax professionals, what is predictable is that working within a consistent framework to learn, analyze, apply, and adjust provides a strong foundation. The bombardment of information, law changes, adjustment to business operations, and forecasts, amid not only a health pandemic but also a financial crisis and social unrest, requires steady concentration and collaborative efforts to best navigate.

Read and Save

There is plenty to read regarding SALT changes, and I commend the providers on their quality of content and increasing ease of navigation on their platforms. I have found some sites more helpful than others, depending on the topical area and specific needs. Given the volume of information across a wide range of topics, it is helpful to read at least two items on the same topic to compare insights and information. To aid your reading, now is the time to become as technologically proficient as possible. Most sites allow you to set up folders and subfolders for flagged items. You can do so by topic, by state, or by any other method you choose. You can also flag items as favorites, as well as highlight text in your saved items to quickly take you to the pertinent information. Set up automatic searches on key terms to avoid the need to refresh your searches. Divide and conquer code provisions among the members of your team and set up weekly chats to update your department. This not only provides internal training and professional development, but also collaboration among your department while working remotely.

Take Time to Analyze

Due to the constant inflow of information, a best practice is not to rely merely on an alert or summary. Take the time to review the specific legislation or executive order, as many are not clear, given the desire of the states to initiate action quickly. Read and reread to ensure you have a thorough understanding of whether an extension to file also provides an extension for payment, or is it only for the filing of a return or report? Will the extension save you effort now, or will it primarily create another deadline to track and fulfill in the future that could be easily satisfied now? Think through your entire process to determine what you need to react to and which other processes in the business may be affected. Consider if the change to an established company process properly contemplates the number of affected departments and whether they can accommodate the change.

Prepare

Prepare to communicate your findings to management and leadership, with a best practice to prepare a written document even if your advice will be verbal on a videoconference, as there will be at least one dog barking, one child crying, and someone preparing a snack while failing to mute their microphone. Having a written internal memo, even if only one paragraph, will provide a reference should guidance be adjusted, revised, revoked, or reissued. Prepare a reliance file of all guidance incorporated into your analysis. This avoids trying to remember where you may have read something or searching multiple “favorites” in your online subscriptions. Most states will abate penalties for reasonable cause and reliance on guidance issued by a taxing authority. Ensure you have copies of documents relied upon, as audits may not occur for several years.

And Then, Reset

Lastly, be prepared to reset, and reset again. The Paycheck Protection Program loans and questions of forgiveness as well as deductibility of expenses paid by the loan proceeds showcase the myriad of questions that can quickly arise, and for which practitioners will have differences of opinion. Meanwhile, businesses are under pressure to act quickly. Recognize that 180-degree pivots may be necessary and a lack of finality is to be expected. Ensure that recipients of your information recognize the instability of the environment in which we are all working, and flexibility and resiliency are key elements to success in navigating state taxes during these times.

A Thousand Little Interactions

Billy Hamilton

Billy Hamilton is the executive vice chancellor and CFO of the Texas A&M University System.

If history is a guide — and it probably isn’t, since nothing about this benighted year resembles any past year I remember — there will be plenty of tax measures to navigate when state legislatures next meet.

That’s because state finances are a mess — or soon will be — and something will have to be done to balance state budgets. The choices: Cut spending, raise taxes, spend reserves, borrow money, or all four.

The last time lawmakers faced a similar mess — in 2009 — actions taken by the states produced a net tax increase nationally of $28.6 billion the following year, or about 3.7 percent of prior-year total tax collections, according to the National Conference of State Legislatures.

Time flies, and 2009 wasn’t that long ago. But in political terms, it was a lifetime ago. Legislatures today are more conservative than in 2009, at least in part because of 2009. Whether 2020-2021 resembles 2009 is a matter of conjecture, but despite present-day politics, tax measures almost certainly lay ahead for some states. The holes in state budgets may simply be too big to avoid them, however many accounting tricks they try. Even if states don’t pass major tax bills, they’ll be looking to enhance revenues in one way or another.

Tax legislation in any form offers opportunities for the strategically minded to fix their own tax problems or achieve other goals. Barring a miracle drug, navigating that process in the months ahead may be far removed from how things worked in days of yore, by which I mean last year.

I asked some of my “government affairs” friends — that is, lobbyists — what they expect in the upcoming legislative sessions, a very nonscientific poll. They expect — or more accurately, fear — that the legislative environment will be much changed. For one thing, legislative access may be strictly limited, with committee testimony provided via Skype or Zoom, and the legislative halls and offices restricted to lawmakers, their staffs, and a few state agency staffers. There will be no tours; no school choral groups; no doctors, teachers, dentists, or veterans moving in herds from legislative office to legislative office. Most importantly from the lobbyists’ perspective, there will be no trolling the capitol halls in Des Moines, Olympia, Trenton, or Jackson.

Many will watch live feeds of the action, as many already do. The good old days of lobbyists spending their time sitting in legislative galleries or waiting to buttonhole lawmakers outside the legislative chambers were waning before COVID-19, and many lobbyists of my acquaintance already avoid the capitols except when they need to meet legislators individually — or when their clients are in town.

Congress has provided a preview of how legislatures could function in the year ahead. There, the House leadership allows remote voting, but Republican members won’t go along, showing up in person to vote and potentially spraying one another with coronavirus because some decline to wear masks. The Senate continues to act like nothing much has happened but at least the Senators wear masks. You may see that sort of weird political mishmash in many legislatures, while others will be more cautious.

One of my lobbying friends said: “I can’t imagine a hundred House members crammed together on the House floor or crowding the podium on key votes, much less sitting side-by-side in committee rooms. After the last couple of months, people are going to be awfully uncomfortable doing that.”

The lobbyists’ thoughts and prayers go out to legislative staffers who work insanely long hours during legislative sessions, often crammed together in small offices or trailing behind legislators from meeting to meeting. Even during sessions in better times, staff members often pass sickness around like a bunch of first graders in their first month of school.

The lobbyists say what they may miss most is the “magic” of legislative sessions — that is, the magic found in the continuous, intense face-to-face interactions that have always been part of the legislative process. “How do you write a budget or tax bill without sitting around the table talking about the details and making deals late into the night?” one asked. “The system functions because people work long hours, go to dinner together, and hash things out.”

“It’s the happenstance little interactions” that lubricate the process, another said. “I can’t imagine a tax bill being written without a thousand little interactions. How do you do that on Zoom? Zoom isn’t the answer. I’m not sure what is.”

Bearing the Pandemic Pain

George S. Isaacson

George S. Isaacson is a senior partner at Brann & Isaacson and represents multichannel marketers and electronic merchants throughout the United States in connection with state sales and use and income tax matters.

One thing is certain: This pandemic will have a devastating impact on state budgets — and not just for the short term. 

Sales taxes, accounting for roughly a third of all state taxes, are usually a relatively steady source of revenue for states, with less volatility than personal and corporate income taxes, which are more vulnerable to the ups and downs of economic cycles. Sales taxes have been comparatively stable because household spending does not drop as quickly or dramatically as household income during economic downturns. Consumers are inclined to dip into savings and increase credit card debt as they weather difficult times. The pandemic, however, has produced a very different set of circumstances. The Commerce Department reported that retail sales fell 16.4 percent from March to April, the largest monthly decline on record, which nearly doubled the previous record drop of 8.3 percent — set just one month earlier. With stores and restaurants ordered closed and social distancing mandated upon their reopening, the shortfall in sales tax revenue can be expected to last well past the end of this year.

The decline in sales tax revenue is paralleled by a similar reduction in personal and corporate income tax revenue, due to rising unemployment and the unprecedented challenges confronting much of the business community. While tax proceeds are decreasing, the demands on state coffers have never been greater, with unemployment insurance claims at record highs and Medicaid, as well as other healthcare costs, skyrocketing. 

This crushing combination of declining tax revenues, record unemployment, and rising health costs will likely force most states to make major cutbacks in much-needed investments in education and infrastructure. The consequences could be dire.

State funding for public two- and four-year colleges in the school year ending in 2018 was already more than $7 billion below the 2008 level, after adjusting for inflation. Public universities have responded to these funding cuts by increasing tuition, reducing faculty, limiting course offerings, and in some cases closing campuses. Further funding cutbacks are now likely, and the result is a disinvestment in America’s future. 

Much-needed infrastructure spending is similarly threatened. The American Society of Civil Engineers estimated that there was already a 10-year U.S. infrastructure gap of $2 trillion and, if not addressed, will cost $3.9 trillion in GDP by 2025. This shortfall affects not only the nation’s competitive position, but everyday life as well. For example, each year two trillion gallons of drinking water are lost to water main leaks. Cutbacks in state spending on roads, bridges, sanitary facilities, and public transportation are almost inevitable.

The economic recession that lasted from December 2007 through June 2009, which was followed by a slow recovery, may be predictive of what many state and local governments will be confronting. Faced with depressed tax revenues and increased spending on social welfare programs, the budgetary impact of the last recession was severe.

According to the Center on Budget and Policy Priorities, states cut spending by $290 billion and increased taxes by $100 billion to try to close the budget gap caused by the Great Recession. California, with the largest state budget in the country, cut its transportation spending by 31 percent from 2007 to 2009. Moreover, the damage extended beyond the recessionary period. State support for public higher education dropped by 13 percent, on average, in constant dollars between fiscal years 2006 and 2011.

What does all this mean for taxpayers? Once state departments of revenue reopen, it is likely that there will be more aggressive auditing of companies and increased efforts to source income to states hungry for taxes. It is always politically attractive to impose taxes on companies that have no, or little, in-state presence, and, therefore, little political influence. They are likely to be prime targets of audits and assessments. Sympathy for the state’s financial problems may also subtly influence administrative appeals officers (who are, after all, state employees) even if they vehemently deny any suggestion that they lack objectivity and evenhandedness. It could be rough sledding for taxpayers.

If state tax professionals are searching for a bright spot, one might be found in the opportunity for settling cases. States are hard up for cash, and a settlement now may be significantly more attractive than the prospect of protracted litigation. With tax administrators working from home and facing massive amounts of paperwork when their offices reopen, not to mention delayed and clogged appeal dockets, a negotiated settlement conducted over the phone may appear to be a reasonable resolution of a pending dispute, as well as an appropriate accommodation by both sides to the extraordinary exigencies of the current health crisis.

State COVID-19 Relief Can Be a Trap for the Unwary

Brian J. Kirkell

Brian J. Kirkell is a principal with the Washington national tax office of RSM US LLP.

Over the last few months, businesses have been scrambling to deal with massive economic disruption in the wake of the COVID-19 pandemic. Although immediate liquidity needs, business continuity, and overall survival in the face of shutdowns and stay-at-home orders have dominated the public conversation, state tax issues have had their fair share of the limelight. Are state tax payment and filing deadlines going to be extended? Will employees, interns, owners, and board members working from home or elsewhere have an impact on nexus, withholding, and historical planning? Will the states provide grants and short-term financing? Will economic development boards renegotiate incentive commitments? These questions and many more center on one thing: relief. And most states have responded in some way. However, the relief provided may contain traps for the unwary

First, let’s take a closer look at deadlines. Most states pushed back the deadlines for filing and paying 2019 income tax, both corporate and individual, but the approaches taken left several gaps. For example, very few states addressed 2019 deadline extensions for fiscal year filers, leaving taxpayers in an odd limbo where second period estimated payments are due before the first. In states that listed specific forms for extensions, some left out many forms, including some that are penalty-bearing. Trickier, however, are sales tax deadline extensions. The sales tax is a trust tax collected on behalf of the state. When a business takes advantage of a sales tax filing and remittance deadline extension, it is holding, and likely spending, money that it has no right to at the same time that it compounds additional collections. Unlike business income tax, if that business goes under with that money unremitted, managers, board members, and owners may be held personally liable for the sales tax due without any requirement to pierce through entity-level limited liability protection. The same holds true with personal income tax withholding for employees. Accordingly, “letting it ride” month after month on sales tax and withholding tax remittance requires a real understanding of the personal liability risks involved, and many business managers, board members, and owners are in the dark.

Next, let’s look at nexus. Due to stay-at-home restrictions, many businesses are dealing with a virtual workforce for the first time, and many of those remote employees are working from states other than the state where their normal office is. We’ve seen businesses go from having employees in one state to having employees in almost all 50 states overnight, and most states would say that having a single employee working in the state is sufficient to establish nexus. While this approach may arguably be infirm from a fundamental fairness perspective under the present circumstances, some states have decided to avoid the fight, and have affirmatively come forward and provided nexus relief. However, only a small handful of those states have said that relief applies to the P.L. 86-272 protections. Accordingly, while one virtual employee working in a relief-providing state as a result of COVID-19 will not give the business nexus, if you have nexus for another reason (for example, because you have sales people operating in the state) that one virtual employee could exceed the protections provided by P.L. 86-272 and cost a business significantly.

These are just two examples where the relief provided at the state level is fraught with uncertainty and potential risk. There are plenty more. For example, while some states have set a date for the end of their relief provisions related to remote employees, most have indicated that the relief will last for the duration of the COVID-19 crisis. However, they have provided very little guidance on what that means. So even if a business avoids the obvious problems, it could find that the relief provisions on which it was relying could sunset unexpectedly and at a time that the business cannot get those employees back in the office. To deal with these issues, businesses have to spend precious time and energy to track, analyze, and manage their responses to a mishmash of relief provisions when their focus should be on staying afloat.

Mama Lohman’s Recipe for Making Lemonade

Janette M. Lohman

Janette M. Lohman is a partner in the St. Louis office of Thompson Coburn LLP.

Mama Lohman20 was my soul and inspiration when I was just startin’ out on my own, and so poor that I couldn’t pay attention. All I hadda do was call her up to whine about whatever my crisis du jour was. She would artfully and resourcefully remind me that I hadda quit complainin’, and jus’ focus on the tasks before me. Facin’ and defeatin’ my own problems, rather than whinin’ about them, were simply duties that must be performed. Mama Lohman was also quick to remind me that there was no lemon that could not be turned into a pitcher of lemonade.

So even now, although it seems like the entire world around us has gone catawampus and we are all facing 10 miles of bad road, Mama Lohman would tell us this is no time to pitch a hissy fit. We must all face the issues and look for opportunities to help our employers and clients wade through and survive this mess of federal and SALT filin’ extensions and delays, federal law changes (that may or may not be followed by the states), nexus chaos, and every other financial problem that this dad-blasted, low-down, good for nuthin’ virus has thrust upon our economy.

So here for all y’all’s consideration are three of the numerous opportunities (or “lemons” in Mama Lohman’s lingo) afforded by our situation. How to make lemonade out of them and all the other lemons out there will depend upon the facts of each specific state and taxpayer. Mama Lohman would caution us to please be optimistic; after all, even a blind hog finds an acorn every now and again, and Mama Lohman knows that all y’all can do this, if we take it jus’ one step at a time. She might even tell us to be creative, too, cause cookin’s like religion is, some’s ’lected and some ain’t — but rules don’t no more make a cook than sermons make a saint.

Lemon No. 1. Be prepared for our states’ situations to become much worse before our economy starts to recover. State governments are going to be hit the hardest of all because they are experiencing dramatic decreases in revenues, coupled with dramatic increases in demands for state services. Just looking at my own state, Missouri, Gov. Mike Parson (R) just announced another $209 million in expenditure restrictions, in addition to the earlier two rounds totaling $227 million in April.21 Missouri lost a frightening 10 percent of its workforce in just one month, which will have extremely detrimental effects on future collections of personal income tax and sales taxes. The lemonade, at least for Missouri taxpayers, is that the Department of Revenue was not among the agencies that suffered budget cuts. The DOR’s officials have been workin’ diligently and remotely throughout the crisis and are tryin’ real hard to mitigate the resultin’ disruptions (bless their hearts). So don’t get your knickers in a knot if your audits, appeals, or cases are delayed; because now is not the time to fish or cut bait. This jus’ might be an ideal time for both sides to mend some fences and settle some of those older matters.

Lemon No. 2. Expect a heap more state conformity analysis work (déjà vu from 2018?). Are states fixin’ to impose income taxes on the $2 trillion in federal tax relief? Obviously, this has come to us in the form of personal rebates, small business loans, increased unemployment benefits, and assorted tax breaks that the federal government has provided, but will states be equally generous, when faced with having to clean up their own backyards? For example, the CARES Act made significant changes affecting federal taxable income. Although this was a great and wonderful gesture from a federal tax standpoint, states that base their own taxable income on federal taxable income will hafta address (or not) whether to decouple from these federal changes, at least to the extent that such states are actually holding legislative sessions for the rest of the year. Many states will probably be tempted not to adopt (or not to acquiesce to) the federal reform provisions, or at least any that would increase their own burgeoning revenue deficits.

Nonetheless, Mama Lohman would remind us about how much fun all of us SALT practitioners had right after the Tax Cuts and Jobs Act was enacted at the end of 2017! We were all tryin’ to determine how the various states would treat the numerous and dramatic changes to the federal income tax laws, all the time fixin’ to make some lemonade. Well, guess what — the CARES Act reverses some of TCJA’s negative changes and adds even more goodies that are deliciously complex with a slight taste of lemon.

For example, prior to TCJA, both individuals and companies could carry back NOLs for two years and carry them forward for 20 years to offset up to 100 percent of the taxpayer’s net income. The TCJA removed NOL carrybacks for pre-TCJA periods, allowed an indefinite carryforward period, but limited carryforwards to 80 percent of a taxpayer’s taxable income. Now, under the CARES Act, NOLs from 2018 through 2020 can be carried back for five years, and losses carried forward to 2019 and 2020 can offset all of a taxpayer’s taxable income. Goodness gracious, what an accountant’s dream!! But how are the states gonna treat that? To conform or not to conform, that is the question, and the cookin’ lesson here is that we’ll all have numerous opportunities to help our clients and employers take advantage of every incentive that the federal and state governments will allow. Preferential treatment of NOLs is but one of the many positive federal changes addressed, and how each state decides to handle each change will hafta be determined on a state-by-state, taxpayer-by-taxpayer basis. We can do this — Mama Lohman told us we could!

Lemon No. 3. Nexus again? All of the shelter-in-place edicts issued by the president, governors, and mayors across the country are fixin’ to cause nexus havoc at both state and local levels. Now, Mama Lohman would say, hush your mouth and stop that fussin’. But fuss I mus’.

From a state standpoint, will employees who live in one state and work across the border in another, but who are thus compelled to work from home, give their employer nexus with their state of residence, or otherwise compromise their employer’s reliance on P.L. 86-272? Also, won’t that cause payroll tax withholding issues in states where, pre-COVID-19, employers might not have had those obligations? And what about apportionment? Although many states have adopted single-sales-factor apportionment methods, SALT practitioners are still gonna hafta help their clients and employers address how shelter-in-place, work-from-home employees, who normally work and live in different states, will affect those states that still consider payroll in their apportionment factors.

These government-mandated orders are also gonna affect some municipalities that impose taxes on net income. For instance, in St. Louis, employers hafta withhold city earnings tax (CET) on 100 percent of their employees’ wages if they live in the city (regardless of where they work), on 100 percent of their wages if they work in but live outside the city, and on an apportioned percentage of their wages if they live outside the city and work partly in and partially outside the city. City-based companies are entitled to apportion their own CET using a traditional three-factor method of property, sales, and payroll. The city collector intends to continue to require employers to withhold CET in the same manner as if COVID-19 never happened,22 but if the city orders employees to work from home, and home is either in St. Louis County or somewhere on the East Side over yonder in Illinois, shouldn’t those employees be entitled to a refund for the time they spent livin’ and workin’ outside the city? Where is the nexus during that period? More lemonade, anyone?

Well, I guess Mama Lohman would tell me that I’ve more’n worn out my welcome, but I hope all y’all get some benefit out of what she would have told you to do, had all y’all gone a-whinin’ to her. In summary, she’d tell you that all y’all, as SALT practitioners, need to jump into this situation like a knife through hot butter, and stop that cryin’ before life gives you somethin’ to really cry about. Jus’ do the best that y’all can in y’all’s own stomping grounds, and with any luck, all y’all and y’all’s clients and employers will all end up as fat as ticks and as rich as Croesus, while laughin’ all the way to the bank! Amen.

SALT and COVID-19: An Interesting Mix

Amy F. Nogid

Amy F. Nogid is counsel in Mayer Brown LLP’s New York office.

The views expressed here are mine and mine alone and should not be attributed to Mayer Brown LLP or any of its clients.

It has been said that taxes are the lifeblood of civilization. During fiscally challenging times, however, governments’ need for revenue often directly conflicts with their citizens’ lack of revenue, bringing to mind another saying: You can’t get blood from a stone. Stated differently, states are between a rock and a hard place. The reality is that states will be sorely challenged in their quests to raise revenue and will need to be financially savvy and nimble to adjust with each turn of the pandemic. SALT practitioners will face corresponding challenges and will likewise need to be nimble and savvy to keep abreast of the tax-related measures SALT authorities and other government officials are issuing. This will be no small feat.

Unlike the federal government, which can essentially print money, state governments are more restricted in their revenue-raising abilities, hampered by balanced budget requirements, limitations on debt issuance, or state constitutional caps or restrictions. Further, the realities of raising taxes when so much of the populace is out of work or has suffered significant income reductions is unlikely to be practically or politically viable. Budgets will need to be reconsidered and adjusted, and tax measures reevaluated and reimagined. Perhaps many times over.

Further complicating state tax responses to COVID-19 are Congressional actions. Whether it’s revising the Internal Revenue Code to allow for NOL carrybacks or the amount of income that can be offset by NOLs, modifying the interest deductibility rules of IRC section 163(j), or extending the time for filing federal tax returns or paying taxes, Congress is changing federal income tax rules, and depending on states’ conformity policies they not only must act, they must react. As tax practitioners know, some states have rolling conformity with the IRC, while other states have static conformity and adopt the IRC as of a particular date. So for example, a state that decides not to conform to the taxpayer-favorable NOL rules may either need to decouple if it is a rolling conformity state, or do nothing if it is a static conformity state with an IRC conformity date that precedes the new NOL rules. To add to the complexity, a state may opt to decouple for one tax type, for example, corporate income taxes, but not for personal income taxes.

State rules also vary for determining nexus and withholding requirements, and COVID-19 has forced some of these issues to the forefront. Will a worker who is teleworking from a state establish nexus for a company in that state? In the few states that retain a payroll factor, will the wages paid to the teleworker impact the employer’s apportionment factor? Will the employer be required to withhold taxes for the employee working in that other state? Will a teleworker be deemed to be working in her employer’s base state or in the state in which she is quarantining if the employer’s base state has a convenience of the employer rule, which deems the teleworker to be working from her base of operation unless she is working at home as required by her employer rather than for her own convenience? Will the teleworker be deemed a statutory resident in the state where she has opted to stay during the pandemic? While some states have offered guidance, other states have remained silent, presenting a real challenge for tax professionals and their clients who are trying to do the right thing during an already stressful time.

Some of the more mundane questions that have arisen include whether the state or locality will accept digital signatures or will require “wet” signatures on documents such as waivers, powers of attorney, petitions, and returns (and states may allow digital signatures for some, but not all documents), and whether any statute of limitations have been extended, including those related to the time for filing petitions or protests challenging assessments or refund denials. These issues are just the very tip of the SALT iceberg with which professionals must grapple in light of COVID-19.

So how can SALT professionals successfully navigate the tax twists and turns wrought by the pandemic? Research and networking are critical. Most state tax department websites have pages dedicated to highlighting their COVID-19-related responses, and those sites should be checked early and often, as they are continually being revised and updated. Many state tax publishers and professional organizations have also compiled state tax responses and are excellent resources. And, inasmuch as many of us are hunkered down, this is the perfect time to use the pandemic as an excuse to reach out to our SALT brethren and tax officials to share insights and answers and, perhaps most importantly, to stay connected until we reach the other side.

Telecommuting During COVID-19: One Headache After Another

Timothy P. Noonan

Timothy P. Noonan is a partner in the Buffalo and New York offices of Hodgson Russ LLP.

As if living in the era of a pandemic wasn’t stressful enough, now many people have to consider the tax implications of their telecommuting for work over the last few months. This is becoming a hot topic as more and more states release guidance on this issue. And just like the states’ stay-at-home orders, the guidance on the treatment of compensation earned while telecommuting is by no means consistent.

While some states have released guidance on how compensation earned while telecommuting should be treated, most have stayed silent. As of this writing, only Alabama,23 Georgia,24 Illinois,25 Iowa,26 Maryland,27 Massachusetts,28 Minnesota,29 Mississippi,30 Nebraska,31 New Jersey,32 Pennsylvania,33 Rhode Island,34 and South Carolina35 have issued guidance. Massachusetts36 and Rhode Island37 have gone so far as to issue emergency regulations. And to make things even more complicated, there is no consensus among the states that have issued guidance. For example, Iowa and Maryland said that the withholding requirements are not affected by stay-at-home orders, so compensation earned within the employee’s home state is subject to income tax there, even if her employer and regular office are in another state. But most of the other states say the employee’s regular place/state of work is due the tax; that is, the work-at-home days will be sourced back to the employer’s location.

Double taxation, here we come! Say you live in Maryland and work in Pennsylvania. Pennsylvania’s guidance says that if an employee is working from home in Maryland, that employee’s compensation is still Pennsylvania-source income and subject to withholding and personal income tax.38 But Maryland’s guidance says withholding is based on physical presence in the state, so compensation earned while telecommuting in Maryland will also be subject to Maryland taxes.39 What a terrible and unfortunate result.

Of course, coming from New York, I have seen this telecommuting issue for years. Under the oddly named “convenience of the employer” rule, when a New York-based employee works from her home outside the state, those days still generally count as New York workdays for income allocation purposes if the employee is working at home for her convenience, and not the employer’s necessity. This rule has survived constitutional attacks,40 but has been neutered slightly by a special safe-harbor test that does permit home-office workdays to count as non-New York workdays under specific circumstances.41 But we’re expecting a whole new wave of convenience-rule issues to bombard New York now that so many New York City-based employees are telecommuting from their homes outside New York state. The tax department, up to this point, has been silent on the issue. But given that the governor was insistent on even taxing out-of-state nurses who came to New York to assist with COVID-19 patients,42 do you think that the Empire State would give office workers a pass? Me neither.

But that doesn’t mean New York’s convenience rule will carry the day here. Indeed, apart from the fact that this pandemic has been entirely inconvenient for everyone, to say the least, there’s a question legally as to whether the state could even argue that state-ordered telecommuting falls under the convenience-rule provisions. And case law likely supports the argument that these days could qualify as necessity days, and not convenience days. For example, in Matter of Devers, an administrative law judge determined that the taxpayer worked outside New York by necessity when his employer eliminated his office, rescinded his access to the building, and “relocated” him to the Virginia office, while he simply worked from his home in Connecticut.43 So we think that an employee who is prohibited from going into the office by the governor’s orders could reasonably argue that the days worked at home are by necessity, not convenience. And the employee may have a similar claim even after the stay-at-home orders expire, because we expect many employers to continue to require their employees to work at home to comply with social-distancing edicts and to attempt to keep their employees safe.

You’d hope that states could do the right thing here and come up with some consistent rules to ensure that no one gets taxed twice. We’re supposed to be all in this together, right?

Responding to COVID: How to Deal With Nearly $100 Billion in Wasted Incentives

Richard D. Pomp

Richard D. Pomp is the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law.

There is never a good time to raise taxes. When the economy is going gangbusters, opponents of tax increases argue “let the good times roll.” Why interfere? When the economy is in a tailspin, why kick taxpayers when they are down?

But this column deals only superficially with increasing taxes; the focus is on eliminating waste in spending, always a popular rallying cry among conservatives. That cry, however, suddenly and mysteriously disappears when that spending takes the form of tax expenditures.

Tax Expenditures

A tax expenditure is a special provision, like a tax incentive for economic development, which represents a spending program implemented through the tax system. A tax expenditure can be viewed as if the taxpayer had actually paid the full amount of tax owed and simultaneously had received a grant equal to the savings provided by the special provision. Congress and many states compile tax expenditure budgets. In some states, the amount spent through tax expenditures exceeds the amount in any other budgetary category.

A tax expenditure is a neutral term. Tax expenditures are not necessarily good or bad. They need to be evaluated like any other spending program and subjected to the normal budgetary criteria: How much money is being spent? How is this money being distributed? Is the expenditure achieving its intended goal? Is the expenditure the best means of achieving that goal? Tax expenditures compete for dollars like any other spending program and thus should be subjected to, and survive, a cost-benefit analysis.

Many commentators, however, do believe, and with ample empirical support, that most tax expenditures would not survive such an analysis, and label them as loopholes.44 As states debate laying off employees to help cope with the pandemic depression, these commentators view lopping off loopholes as an alternative to lopping off heads.

How to Think About Tax Incentives for Economic Development

The goal of most tax incentives for economic development is simple: jobs, jobs, jobs. A siren call in the midst of a pandemic. The goal is to reach nirvana: (1) the sought-after activity would not take place without the incentive, and (2) the benefits of the activity outweigh the costs. Win-win? Not necessarily.

If the benefits are jobs, what are the costs? Forgone tax revenue, congestion, pollution, strain on the infrastructure (schools, sewers, roads), pressure on the real estate market, and the like. On the benefit side, what kinds of jobs? Full time or part time? Minimum wage or higher? Health insurance? Sick leave? Maternity leave? Retirement benefits?

But too often, the incentive is not calibrated finely enough to achieve nirvana. Often the incentive benefits another group: “close but no cigar.” Although this group would also not engage in the activity without the incentive, nonetheless the benefits they receive do not outweigh the costs.

Too many incentives use a shotgun rather than a rifle, sweeping way too broadly with their largesse, spraying their benefits like buckshot, wide of the mark. Bystander corporations scoop those benefits up, even though many would engage in the sought-after activities even without the incentives. In this case, the costs are unnecessary and collateral damage. This situation can be described as a “waste of time and money.” Then there are those companies that save us from ourselves: They will have nothing to do with the state regardless of any incentive.

What the literature demonstrates is the difficulty of designing an incentive to reach nirvana without wasting money on the other outcomes. For example, suppose a state targets an activity by granting it a rate reduction. And suppose viewed in isolation the blessed activity occurs, generating a net benefit: seemingly the blessed state of nirvana.

The problem is that the net benefit for the nirvana group is overwhelmed by the cost imposed when other corporations needlessly receive the deduction. Supporters of the tax reduction all too often focus on nirvana, declare success, and congratulate themselves on their economic acumen. Meanwhile, the total loss in revenue may be hundreds of thousands of dollars per job created.

Even when a rifle is used, such as a special benefit for targeted new investment only, the literature suggests that it too often spills over beyond nirvana, reaching the “close but no cigar” and “waste of time and money” groups. To reach a few corporations at the margin that will be influenced by the benefit, it must be given to the freeloaders as well. The result is that the tax system is skewed, inefficiently squandering taxes with no offsetting net benefits.

The Seductive but Fruitless Allure of Tax Incentives

Politicians have few policy tools at their disposal to encourage economic development in the short term. So many of the critical elements that affect businesses’ locational decisions — weather; cost of labor, energy, or transportation; proximity to customers or supply chains; access to major airports with direct flights to key places; access to public transportation; cost of living; quality of education; attractiveness to PhDs — are simply not easily controlled by politicians.

Out of frustration, rates can be lowered, apportionment formulas changed, exemptions, deductions, and credits adopted, state personal income taxes diverted for the use of employers, and corrupt federal incentives like the Opportunity Zones can be piggybacked onto. Businesses will applaud these tax changes, whether they are effective or not. Businesses typically do not turn down free money (or not so free if it is the result of campaign contributions). And politicians will claim that any or all positive effects in the economy whatsoever would not have taken place without their intervention, and the beneficiaries will hardly disagree. Like those who follow the elephants in Aida with dust brooms, economists are left dealing with the detritus.

The politics become even more irresistible when state politicians adopt incentives and impose them on municipalities. The state politicians claim the credit, and the municipalities pay the price.

The Movie Industry: There’s No Business Like Show Business

Yes, making movies is glamorous, which may account for the nearly $2 billion in annual incentives spent on the industry. Film subsidies are probably the most studied of all state tax incentives. The studies consistently show that the jobs created are temporary and often go to nonresidents brought in specially for the movie. The jobs last only as long as the movie is being made. Residents do get jobs, but these tend to be low-paying and disappear when the movie is finished.

True, there are increased sales taxes from restaurants and hotels that the cast and crew use, but these pale in comparison to the dollar amount of incentives. And because film production is mobile, and risky, it chases the incentives in a race to the bottom. Like all incentives, that race is often won through complicit politicians who put their short-term self-interest ahead of rational economic planning. And they get away with this because by the time any rigorous — and embarrassing — cost-benefit study can be completed, showing the politicians were patsies, they have declared victory and have long moved on.45

An Immediate Moratorium on Existing Tax Incentives46

The extant economic literature demonstrates that the burden of proof should be placed on those advocating the effectiveness of tax incentives. I propose an immediate moratorium on existing incentives pending the formation of a commission to evaluate, corporation-by-corporation, whether the existing incentives represent nirvana or fall into the other categories. On that commission should sit a few of the open-minded politicians who do not have skin in the game, provided they are powerful enough to implement any recommendations. Joining the politicians should be those who have a proven record of dispassionate and impartial evaluation of incentives, who are free from any conflict of interest.

The next step is for the commission to evaluate any proposed tax incentives on a beneficiary-by-beneficiary basis. Once the existing landscape is cleared of dead rotting branches, the commission should make sure no weeds or poison ivy take over. Anyone wanting the benefit of an incentive will have to survive the gantlet of a cost-benefit analysis to make sure the benefits they bring to the table exceed all the costs they impose. How can any conservative (or libertarian), true to their principles, not rally in support of eliminating waste in spending and keeping the government from inefficiently interfering with the market?

The Devil Is in the Details

Carley A. Roberts

Carley A. Roberts is a partner in Pillsbury Winthrop Shaw Pittman LLP’s Sacramento office.

Much has transpired by way of state tax measures in the wake of COVID-19. With the grant of emergency power to governors and tax commissioners, the first set of measures suspended state tax return filing and payment requirements as Tax Day drew near. What followed has been a litany of largely well-meaning state government acts intended to offer relief to taxpayers. How to successfully navigate these pandemic-induced state tax measures? The devil is in the details.

Not long after California’s Franchise Tax Board released an updated version of its already expansive listing of COVID-19-related rules on extensions to file and pay, I received a straightforward client inquiry: “Our fourth quarter payment is due May 15 (fiscal-year filer). How do California’s new rules apply to us? Can we defer the payment to July 15?” The short answer was yes — any 2019 estimated tax payment due during the postponement period, fiscal filer or not, had been extended — but where did the rules say that? The FTB’s “estimated tax payments due dates” laid out the applicable rules for C corporations but only listed July 15 as the extended deadline for first and second quarter payments by calendar-year filers. There was no specific rule or reference to fiscal-year taxpayers. The authority did not take me long to find — a new FAQ elsewhere confirmed my initial conclusion — but this was a reminder of what often leads to success in all things state and local tax: There is no substitute for attention to detail.

One of the biggest struggles I hear about from clients handling the recent rash of state tax measures is the inconsistent rules and approaches being taken by states and localities, and what is often a lack of attention to detail by jurisdictions issuing guidance. Take administrative guidance released by some states addressing remote worker issues: Despite the fact that shelter-in-place restrictions have raised potentially contentious issues for employers surrounding nexus, apportionment, and withholding, the issued guidance to date leaves much to be desired. For example, New Jersey has stated employees working in-state because of the pandemic will not trigger sales tax nexus and that withholding will not be required due to employees working in state because of COVID-19. Nothing is stated, however, regarding corporate income tax nexus, how partnerships with service income are to treat the in-state activities of sheltering-in-place employees when applying the costs of performance method, or what will cause the same employees to create nexus down the road (for example, many remote work policies have expanded to allow employees to maintain a regular remote work schedule once the self-quarantine rules have subsided). At a bare minimum, in a state where the nexus standard is typically met with a single in-state employee (not unlike most states), the state could and should have addressed the nexus standard for both sales and corporate income tax purposes.

While there is not much I can do to encourage New Jersey or any other state to issue more detailed guidance on issues affected by or related to COVID-19, I take the time to connect with tax agency administrators on these topics with some frequency. And what is better, most are more than happy to engage about whether they are working on issuing guidance for a particular issue, whether they intend to issue guidance at all on something, what they are hearing from other taxpayers or other tax administrators as concerns or ideas related to particular issues, and the like. More than anything, I suspect they just enjoy the human connection, much like me these days!

Controlling the Way in Which We Respond

Marilyn A. Wethekam

Marilyn A. Wethekam is a partner with Horwood Marcus & Berk Chtd., co-chairing the firm’s multistate SALT practice.

In the words of that great philosopher Snoopy, “When you can’t control what’s happening around you, challenge yourself to control the way in which you respond.” We are currently living in a crazy and challenging time due to events we cannot control. Unfortunately, COVID-19 did not allow the SALT world to press the pause button. Therefore, as Snoopy said, the key is how we respond.

It goes without saying that compassion, patience, and yes, some humor are all required to navigate the SALT world in the COVID-19 era. Managing the SALT function can be a challenge in normal times but now taxpayers, tax advisers, and tax administrators alike are adjusting to working remotely in the new virtual world. The changes in the workplace environment coupled with COVID-19-driven changes in tax administration policies require an additional emphasis on both communication and organization.

Organization is a key element in navigating the challenges we all face. From the taxpayer’s and tax adviser’s perspective, there is a clear need to develop procedures that track and implement the new extended filing and payment changes, the tolling/suspension of statutes of limitations, the use of electronic signatures, and the determination of whether employees working remotely change the nexus footprint or impact withholding requirements. Decisions are required on the need to use the extended filing and payment due dates. The analysis that contributed to those decisions should be documented and retained. While there is a short-term impact to using the extended due dates there may also be long-term implications at the time those filings are audited.

While it is always vital that one monitor the statutes of limitations, the tolling or suspension of the statutes in several states takes on new importance for determining the timely filing of refund claims, amended returns, and more importantly, whether assessment notices have been timely issued. The tolling or suspension of the statutes themselves raises issues related to whether broad executive orders provide authority to suspend the statutes. Similarly, some state courts have issued blanket orders extending filing dates for pleadings. In some instances, those orders extend to independent tax tribunals. The fact that a blanket order has been issued extending the due date for pleadings may not extend the due date for the initial filing that provides the tribunal or court with jurisdiction over the matter, thus creating traps for the unwary. Understanding and tracking the changing landscape of statutes of limitation and filing requirements is an important element in the management of the SALT function.

Most taxpayers have procedures in place addressing who has the authority to sign specific documents. Working remotely raises numerous challenges, including how to obtain signatures on those documents. It is important to maintain a list of which states will accept electronic signatures and what, if any, types of documents cannot be signed electronically. Existing corporate procedures may need to be adjusted to allow authorized individuals to sign documents electronically. While several states have addressed whether employees working remotely as a result of COVID-19 will change a company’s nexus footprint or require withholding changes, other states have not issued any guidance or have indicated the decision will be made on a case-by-case basis. The lack of guidance and inconsistent state positions result in taxpayers having to assess potential risks and possibly temporarily change procedures.

While the immediate focus may be to develop procedures to deal with the changes in the administration of taxes, there is also a need to reevaluate audit procedures. Most audits will be handled remotely for the foreseeable future. Information will be transmitted electronically. As a result, there may be a need to adjust audit procedures to address such items as audit responses, how supporting documentation will be provided, and when waivers will be granted. Agreements with auditors that all notices should be sent electronically are essential. However, just as states have reviewed their authority to revise signature requirements, there may be a need to determine if there is authority to allow assessment notices to be sent electronically.

Organization is essential, but the most important factor in navigating this crazy time is communication. Communication of policies, practices, and agreements is important because the tax team members are not likely to all be in the same location. There also should be continued communication with management regarding potential risks and decisions being made to mitigate those risks. Communication between the taxpayer and the various tax auditors is also required to ensure the audit process continues efficiently. While we cannot control the COVID-19 events, we can challenge ourselves to adopt measures to proactively respond to the events.

How to Substantiate Decisions Made Today For Tomorrow’s Audits

Kathleen K. Wright

Kathleen K. Wright is the director of the SALT program in the School of Taxation at Golden Gate University, San Francisco. In 2015 she was appointed to the California Board of Accountancy, which regulates the licensing and practice of CPAs.

The most important consideration in navigating the COVID-19 crisis is, of course, our health. To date, one of the most effective strategies for containing the virus is shelter-in-place programs, in effect all across the country. One outcome of sheltering in place is that businesses have realized that their employees can successfully work from home, and they like it. Further, budgets are very tight and many businesses can only make ends meet it if they significantly cut expenses. Reducing headquarters office space (if they can get out of lease agreements) can be a significant savings — so why not let employees work from home indefinitely? It may be a good idea, but be sure your clients go into this workplace change aware of the many issues they are going to face and of how to substantiate the decisions made now, when audited tomorrow.

Many of the issues that follow will ultimately depend on proof of one critical fact — the physical location of the employee. Detailed documentation is going to be key to winning audit issues in the future.

Sourcing Wages for Employer (Wage Withholding) and Employee (State Tax Return Filing Requirement)

Most of the state and local issues arise when an employee works from home in a different city or state from the employer. For most purposes wages are sourced based on physical presence, which requires using a working days formula to determine where the wage is earned. The formula is working days in the state over total working days during the year (or contract period). Employer income tax withholding and the employee tax return filing requirement both use the working days formula to determine how much wage is sourced to the state.

Employer Wage Withholding: The first complexity is that each state has slightly different thresholds before withholding is required, and these rules do not follow the same rules that govern taxability of a nonresident’s wage earned in the state. In California (as an example), wage withholding for a nonresident earning wages in the state is $1,500 of income earned in the state (as determined by the working days formula).47

Employee State Income Tax Return Filing Requirement: California sources wages based on physical presence. Nonresidents are taxable on compensation for services performed only within the state.48 Therefore, if a nonresident worker decides to stay in his/her parent’s home in California during the shelter-in-place period, then the employee will have to file and pay tax in California based on wages earned in California during that period. This is generally going to be determined using the working days formula.

Sourcing Wages for Employer (City Taxes)

City Taxes: Several larger cities in California assess various taxes on businesses in the city. Businesses operating in San Francisco, as an example, pay business taxes primarily based on gross receipts. San Francisco also imposes a payroll expense tax. This tax was scheduled to phase out completely in 2018, but due to shortfalls in revenue collections from the gross receipts tax, the payroll tax continues to apply. It is imposed on all compensation paid to individuals working in the city. If an individual works partly in and partly outside the city, then payroll expense is generally apportioned to the city based on a ratio of the total number of hours employed within the city over the total number of working hours.

It is difficult to gauge the impact of sheltering in place on the payroll tax, but it is fair to say that many workers commute to the city because of limited affordable housing in San Francisco. By the same token, recent trends do indicate that highly paid workers in the technology sector prefer to live in the lively environment of San Francisco than in the more suburban Silicon Valley. Whichever way the numbers go, documentation of where the employee is working from is going to be key.

Recordkeeping: The employee should keep a daily diary of where he was on any given day and who he contacted or met with. If the employee travels, then she needs to keep copies of airline receipts, hotel receipts, expense reports, meal receipts, cellphone records, and credit card statements. Consider requiring employees to use location-based apps (like Monaeo) that keep track of where a worker is on any given day. And note further that the San Francisco payroll expense tax requires that workers keep track of not just days worked in the city, but hours worked in the city.

Employers should perform detailed person-by-person audits of where their employees are living to comply with stay-at-home orders. And note that an employee who goes to live with parents, relatives, or friends might not be at the home address listed with the employer.

Sourcing Wages for Purposes of Doing Business (Employer)

Sourcing wages for determining if the employer is doing business in the state where the employee is working is subject to different rules, which may require somewhat different documentation.

Doing Business: A business is generally considered to be doing business and subject to the state’s income tax if the business has employees working in the state. Even in states that have enacted statutory thresholds that define doing business, not much leeway is granted for payroll sourced to the state, which has a low threshold. Under the Multistate Tax Commission model rule, a taxpayer establishes nexus with a state for business activity tax purposes if the taxpayer exceeds any of the following apportionment factor numerator thresholds in that state during a tax period:

  • $50,000 of property;

  • $50,000 of payroll;

  • $500,000 of sales; or

  • 25 percent of total property, total payroll, or total sales.49

California has adopted the MTC statutory standard, but does adjust the thresholds for inflation. Revenue & Taxation Code section 23101(b)(4) states that compensation in the state for purposes of the statutory threshold is determined by assigning payroll using the rules in Rev. & Tax. Code section 25133. That section states that compensation is sourced to this state if:

  • the individual’s service is performed entirely within the state;

  • the individual’s service is performed both within and outside the state, but the service performed outside the state is incidental to the individual’s service within the state; or

  • some of the service is performed in the state and (1) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state, or (2) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual’s residence is in this state.

These are the same rules for sourcing wages to determine where an employer pays state payroll taxes — the largest being unemployment insurance. The purpose of these rules is to try to source compensation to only a single location. Therefore, assume that an employee is working from his home in California, and travels frequently to Miami, New Orleans, Houston, and Dallas during the year. Assume that the company’s headquarters is in Dallas, which is where he receives all of his instructions and where he replenishes his supplies and equipment. In this case, his wages would be sourced to Texas.50

Although this may mean that the worker’s salary is not sourced to California under the statutory threshold, this does not mean that the employer will not be doing business in the state. California views the statutory thresholds as guidelines — not safe harbors. The general rule of doing business (as set forth in Rev. & Tax. Code section 23101(a)) states that doing business means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. A worker’s presence in the state will almost certainly mean that the employer is doing business in California under the general rule of section 23101(a). California has not provided any relief for the temporary situation of working from home caused by COVID-19.

Recordkeeping: An employer will need to not only keep track of where the employee is while sheltering in place, but also to determine where it is paying unemployment insurance for that employee. That location is what the employer will use to apply the statutory standards.

And if all of this weren’t confusing enough, the recordkeeping timeline is indefinite. Remember that the term wages includes the deferred compensation recognized upon the exercise of a nonqualified stock option, which can carry with it a lookback period of several years.

FOOTNOTES

1 See Paul Jones, “Telework Taxation Uncertainties Remain as States Begin to Reopen,” Tax Notes State, June 1, 2020, p. 1163.

2 Edward Zelinsky, “New York’s Ill-Advised Taxation of Nonresidents During COVID-19,” Tax Notes State, May 25, 2020, p. 1001; and Zelinsky, “Coronavirus, Telecommuting, and the ‘Employer Convenience’ Rule,” Tax Notes State, Mar. 30, 2020, p. 1101.

3 Legal Op. No. 20200203, Ark. Department of Fin. & Admin. (Feb. 20, 2020).

4 Id.

5 Id.

6 See Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, State Taxation, para. 20.05[1] (3d ed. 2020 Rev.).

7 Legal Op. No. 20200203, supra note 3 (quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940)).

8 Id.

9 Id.

10 Id.

11 Id. (emphasis supplied).

12 See Hellerstein, State Taxation, supra note 6, at para. 20.05[4][e][ii].

13 Id. (footnotes omitted, quoting Shaffer v. Carter, 252 U.S. 37, 57 (1920)) (emphasis supplied).

14 Telebright Corp. v. Director, New Jersey Division of Taxation, 38 A.3d 604 (N.J. Super. Ct. App. Div. 2012).

15 Id. at 606.

16 The reference is to the “substantial nexus” requirement of Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977); see Hellerstein, State Taxation, supra note 6, at para. 4.12[1].

17 Telebright, 38 A.3d at 611.

18 The Telebright case is considered in detail in Hellerstein, State Taxation, supra note 6, at para. 6.06[2], regarding states’ jurisdiction to tax out-of-state corporations.

19 City and County of San Francisco v. All Persons Interested in the Matter of Proposition C, No. A158645 (Cal. Ct. App. 2020).

20 Mama Lohman was Helen Sudie Williams Lohman (1924-2007), and the author’s dearly beloved mother. Bless her heart and may she rest peaceable-like.

21 Office of Missouri Gov. Mike Parson, “Governor Parson Announces $209 Million in Additional Expenditure Restrictions” (June 1, 2020).

22 Kayla Drake, “St. Louis to Deny Earnings Tax Refunds to Remote Workers,” St. Louis Public Radio, May 20, 2020.

24 Georgia DOR, Coronavirus Tax Relief FAQs (last visited June 1, 2020).

25 Illinois DOR, Info. Bulletin No. FY 2020-29 (May 1, 2020).

26 Iowa DOR, “COVID-19” (last visited June 1, 2020).

27 Comptroller of Maryland, Tax Alert 5-04-20.

28 Massachusetts DOR, TIR 20-5 (Apr. 21, 2020).

29 Minnesota DOR, COVID-19 FAQs for Individuals (last visited June 1, 2020).

30 Mississippi DOR, Release, (Mar. 26, 2020).

32 New Jersey Division of Taxation, Telecommuter COVID-19 Employer and Employee FAQ (last visited June 1, 2020).

33 Pennsylvania DOR, “Find Answers: Answer ID 3739” (Apr. 3, 2020).

34 Rhode Island DOR, ADV 2020-22 (May 26, 2020).

35 South Carolina DOR, Information Letter #20-11 (May 15, 2020).

36 830 CMR 62.5A.3.

37 280-RICR-20-55-14.

38 Pennsylvania DOR, supra note 33.

39 Comptroller of Maryland, supra note 27.

40 Huckaby v. New York State Division of Tax Appeals, 4 N.Y.3d 427, 796 N.Y.S.2d 312, 829 N.E.2d 276 (2005), cert. denied, 546 U.S. 976 (2005); Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85, 769 N.Y.S.2d 464, 801 N.E.2d 840 (2003), cert. denied, 541 U.S. 1009 (2004).

41 TSB-M-06(5)I (May 15, 2006).

42 Edward A. Zelinsky, “New York’s Ill-Advised Taxation of Nonresidents During COVID-19,” Tax Notes State, May 25, 2020, p. 1001.

43 Matter of Devers, DTA No. 819751 (N.Y. State Div. Tax App. 2005).

44 See Richard D. Pomp, Taxing Smarter and Fairer: Proposals for Increased Accountability and Transparency in the Connecticut Tax Structure (2005), at 34-43.

45 Many of the older studies resulted in states either eliminating their film industry tax incentives or cutting them back substantially. For a recent critical study, see John Charles Bradbury, “What Do Film Incentives Mean for the North Carolina Economy,” Western Carolina University, CSFE Issue Briefs (Fall 2019).

46 Greg LeRoy, “INSIGHT: 10 Steps States Should Take to End Corporate Giveaways,” Bloomberg Tax, May 6, 2020.

47 Cal. Rev. & Tax. Code section 18662, FTB Pub 1017.

48 Cal. Rev. & Tax. Code section 17041(b)(1); Cal. Code Regs. tit. 18, section 17951-1.

49 On Oct. 17, 2002, the Multistate Tax Commission adopted a model rule, Factor Presence Nexus Standard for Business Activity Taxes.

50 DE231D (Rev. 12-17).

END FOOTNOTES

Copy RID