State Tax Impacts of COVID-19

Quick Hits:

1. Due dates/extensions
2. Telecommuting
3. How states will recover lost revenue through sales tax

Due Dates

Much of the focus in the tax world has been on the federal aspects of the CARES act and the Families First Act for the past few months.  

Most states have followed suit with extended deadlines for filing and payment of most tax returns/payment obligations. This article gives high-level insight into the northeastern states for possible discussions with clients to identify the state implications of the pandemic. 

Below you will find the updated due dates of common returns for CT, MA, ME, NY, NJ, NH, RI, and VT.

NOTE: Pass-through tax will be noted if the state treats S-corporations, LLCs (treated as partnerships), or Partnerships differently.  

The below does not include any automatic extensions.

*New Hampshire did not extend the due date for the dividend/interest tax. If individuals cannot pay by 4/15 and owed less than $10k for 2018, they have until 6/15 to file and pay. If individuals have paid in as much as they owed in 2018 by 4/15, they can file and pay their 2019 return by 11/15.

**New Hampshire has not extended the due date for the business profits and enterprise tax. But, if an entity owed less than $50k for 2018, they have until 6/15 to pay. 

If the full amount due for 2018 is paid in, the taxpayer can file by 11/15 without penalty. For estimates, 2018 can be utilized, and 25% is due by each quarterly due date (4, 6, 9, and 12/15) unless the entity owed less than $50k. 

In that case, they can pay the Q1 payment by 6/15.

Telecommuting

Another emerging issue is the state tax impacts of telecommuting. The two main areas of focus are (1) nexus; and (2) individual impacts on personal income taxes and withholding.

Nexus:

Currently, most states have lessened both sales tax and income tax nexus thresholds. A short time ago, physical presence was needed to trigger nexus for an entity in a state. The pandemic has required a significant number of employees to work from home in a state that may not be a state their employer has a presence. In traditional times, this activity would create sales tax and income tax nexus as their activities would create enough of a connection to a state to require filing and possibly payment based upon that activity.

For both sales tax and income tax nexus, Massachusetts and New Jersey have stated they will not count telecommuting activities due to the pandemic as part of any nexus generating activity. Our presumption is that other states will follow their lead, but nexus should remain at the forefront of any exposure analysis.

Withholding and personal income taxes

Similarly, to the nexus discussion, Massachusetts and New Jersey have been at the forefront of the various withholding and personal income tax issues that have arisen during the pandemic.

Massachusetts provided guidance in the case of a non-resident of the state that provides services in the state prior to the state of emergency and continues those services outside of Massachusetts solely because of the pandemic. The wages will be treated as Massachusetts wages and source income subject to withholding.

Additionally, if a Massachusetts resident is working in Massachusetts due to the pandemic which continues to incur income tax liability elsewhere due to the ‘working state’s’ rules, the employee will be eligible for a credit for taxes paid to the other state. In that case, the employer is not required to withhold income tax to the extent the employer must withhold income tax with respect to the state where the employee performs the services. (MA TIR20-5)

New Jersey has issued guidance that the state will continue to source wage income as determined by the employer. New Jersey has also determined that they will not require employers to change their payroll system based upon temporary telecommuting.

NEXUS

With the expected significant drop in tax revenue to states due to the pandemic, there are several areas that clients should be aware of and preparing for.

Sales Tax: As states struggle with rate increases of income taxes from a legislative perspective, one area of enforcement that is the next step in revenue recovery is sales tax.  

With Wayfair paving the way for more expansive nexus triggering activities, clients should acknowledge and mitigate exposure as soon as possible. The main areas of focus will be:

1. nexus generating activities,
2. sourcing of receipts,
3. taxability determinations and
4. exemption certificate tracking

With the expansion of sales tax nexus, states are not far behind in lining up income tax (entity level) nexus. Sales tax may be the first domino that leads to exposure, but income tax could be much more significant as it is not a “stewardship” tax (passed onto consumers and only collected/remitted by retailers) but an income statement impact that could be significant.

Final items:

1. If you have a client with at 163j limitation, states have been slow to comment on their conformity with the updated 50% limit.  
2. NOL carrybacks and IRC Section 461 amended returns and carrybacks. The states are slow to respond, but this could be an area of opportunity at the state level as well.

Nicholas Rochedieu is a Tax Manager in our Hamden, Connecticut office. Nicholas has more than 13 years of experience in public accounting, focused primarily on state/local taxes. He has a practice concentration in retail, manufacturing and distribution, and insurance. He specializes in research and compliance, audit defense, nexus studies, and refund claims.  

Contact:

nrochedieu@WAdvising.com

860-559-0476