Many of our business clients have had drastic workforce changes during the COVID-19 pandemic, including having existing employees relocate or taking on new employees in new jurisdictions. As a result, these businesses may be subject to new or increased tax requirements, such as: withholding state personal income taxes, collecting and remitting sales or use taxes, or allocating and paying state corporate income taxes.
Many for-profit businesses are very sensitive to these issues, particularly if they sell tangible property and are required to collect sales and use taxes. However, nonprofit organizations should also be aware of these issues, as unexpected exposure to a new jurisdiction could require a state tax-exemption application, charitable and/or fundraising registration, and ongoing periodic filings.
When confronting these issues, nonprofit organizations should first consider any obligation to collect and remit state personal income taxes in the new state, as well as corresponding obligations to register with state employment agencies, such as for unemployment insurance or workers’ compensation. Generally, states impose these requirements when a business employs a single individual working in that state, though a few states provide limited exceptions where individuals are working from home or where workers have relocated solely as a result of the COVID-19 pandemic. However, most states do not have applicable exemptions. In fact, the state of New Hampshire and commonwealth of Massachusetts are litigating in the Supreme Court over Massachusetts’ ability to tax New Hampshire residents on wages allocable to services previously performed in Massachusetts, but now being performed from homes in New Hampshire.
Some businesses and nonprofits might begin withholding and remitting state personal income taxes with respect to their out-of-state workers, but continue to try and avoid entity-level tax nexus with that state. However, once a business or nonprofit begins withholding personal income taxes, the likelihood of incurring nexus for sales/use taxes and entity-level tax income taxes increases substantially. For a nonprofit, the best course of action may be to seek a state corporate income tax exemption and register as an active charity and/or fundraiser in that state.
Of course, some nonprofits may be unaware of employees that have moved and started working remotely out-of-state. In the first few months of the pandemic, we saw no instances of state tax departments seeking to assert tax nexus over these organizations. However, as the pandemic continues, workers become permanently settled in out-of-state jurisdictions, and states seek new sources of revenue to fill budget gaps, nonprofits will need a strategy for compliance. In some circumstances, nonprofits may want to establish a policy that employees provide notice before moving to a new state with an intent to settle permanently, and in certain cases, consider (properly) converting employees to independent contractor status if they resettle in a state where the organization is not currently registered.