[For more tax and accounting guidance to help you advise clients and businesses through the impact of Covid-19, visit our resource page.]
Most states have provided interest- and penalty-free income tax filing and payment extensions to match the extended federal deadline. However, practitioners should keep in mind that not all states have provided such extensions and that more states have extended the individual income tax filing due date than the corporate income tax filing due date.
Several states have also extended filing and payment deadlines for sales and use taxes and withholding to provide extra liquidity to businesses.
[For a comprehensive inventory of all the states’ coronavirus activity, including a state-by-state listing of income tax deadlines, download the State Tax – Coronavirus Roadmap.]
What activity has been coming from the states so far?
Initially, states were focused on providing immediate relief for the 2020 tax filing season. Many states extended their direct tax filing and payment deadlines as well as various indirect tax deadlines, deadlines for vehicle registration, property tax payments, and excise tax payments.
Some states also have waived penalties (e.g., Iowa) and interest (e.g., Hawaii).
The focus has since steadily shifted. Some states are decoupling from specific provisions of the CARES Act (Pub. L. No. 116-136), while others are simply choosing not to adopt any amendments at this time. New York for example, specifically decoupled from I.R.C. §163(j)(10)(A)(i), adopting a March 1, 2020, I.R.C. conformity date for both state and city personal income taxes. This effectively couples the state to most, but not all, of the CARES Act’s modifications to the Internal Revenue Code.
Several states have passed legislation specifically excluding amounts received under the CARES Act from individual income taxation. Arkansas, Montana and West Virginia, for example, have specifically excluded recovery rebate payments from state taxation, California has excluded recovery rebate payments and retirement relief funds, and the District of Columbia has exempted small business loans awarded and subsequently forgiven.
What income tax issues should companies consider regarding remote workers?
Companies should consider the products or services they sell, the location of their remote workers, and the sourcing methods of the states in which their remote workers reside and/or work.
Companies shifting to remote work environments in response to the COVID-19 health pandemic crisis, should be aware of the potential physical presence / nexus repercussions, in other states. A growing number of states are releasing guidance to create an exception to their nexus-creating activities for businesses with teleworking employees due to the pandemic.
Minnesota, Indiana, the District of Columbia, Pennsylvania, New Jersey and Mississippi, for example, have all released temporary guidance clarifying that telecommuting resulting from the COVID-19 pandemic will not create nexus for corporate income tax purposes. Taxpayers should keep an eye out for further guidance on their state’s specific requirements.
Because almost every state uses destination-based sourcing for the sale of tangible property, an increase in remote workers should not result in major apportionment issues for most businesses. Additionally, market-based sourcing is the major trend among states for sourcing income from services and intangibles; businesses with remote workers in these states should not face apportionment issues resulting from accommodating an increase in remote workers resulting from the pandemic.
States with cost of performance sourcing rules for sales of services could prove problematic for taxpayers. Businesses with offices in one state, and a newly remote work force at home in other states may be required to source sales to the various states where their remote workers perform services for their customers.
Therefore the existence of remote workers in market-based sourcing states will likely not have a great impact on apportionment calculations, but businesses in cost-of-performance states may see a measurable impact on 2019/2020 tax returns.
Other than filing extensions, what sales and use tax issues should businesses consider?
Businesses entering a state to provide disaster response products or services may be eligible for use tax exemptions on equipment and other items they bring into the state during a declared emergency, and many states will also not consider their disaster response activities to give rise to tax nexus. Businesses entering states to perform activities in response to Covid-19 will need to examine whether these exceptions apply.
Additionally, businesses donating goods withdrawn from inventory will need to consider the use tax implications of these withdrawals from inventory. Typically, when a business withdraws otherwise taxable items from its tax-free resale inventory for use, this creates a use tax liability. However, items withdrawn from inventory to be donated to governmental or charitable organizations may qualify for use tax exemptions.
Businesses withdrawing items from inventory to be donated directly to nonexempt individuals, such as general consumers, teachers, students, or health care workers, or to nonexempt entities should anticipate a use tax liability. State use tax sourcing rules will be crucial here, as some states consider the withdrawal of an item from inventory within the state to give rise to a use tax liability within the state, even if it will ultimately be used in another. Other states consider the taxable event to occur in the state of use.
Withdrawals from inventory also pose unique tax base issues when the items withdrawn are produced by the taxpayer. Some states calculate the use tax based on the cost of the raw materials used to fabricate the items, while others apply use tax to the retail selling price at which the items would otherwise be sold or attempt to approximate this retail selling price in some manner.
Bloomberg Tax & Accounting’s resource page offers additional guidance to help you advise clients and businesses through the impact of Covid-19.