State Tax Considerations for the New Year
01.17.23 | SALT Chat
As we move into 2023, here are some state and local tax issues and compliance challenges to consider.
State Tax Implications of Teleworking Employees
During the pandemic, millions of employees shifted to remote work arrangements, and many employers have adopted a hybrid or remote working policy in this post-pandemic era. The presence of employees in a state may trigger state tax nexus and filing requirements for various types of state taxes such as income tax, sales and use tax, employer withholding tax, and payroll tax. States that temporarily provided tax relief for the increased compliance burden created by the presence of teleworkers have rescinded the relief. To reassess their state nexus profile and state tax issues associated with a dispersed workforce, businesses should examine their current employee work locations and have procedures in place to keep track of any changes.
In addition, employees working from home states that are different from their work states may be subject to double taxation on their wage income due to convenience-of-employer rules. Employees need to understand the income tax implications of their flexible work arrangements to not be surprised by its consequences.
State Economic Nexus on Income Taxes
The 2018 Wayfair decision established that a state can require a business to collect and remit sales taxes if there is an “economic nexus” between the business and the state. Businesses with remote sales should comply with the various states’ sales tax collection and remittance requirements when their activity exceeds economic nexus thresholds, which are generally determined by the amount of sales or the number of transactions made in the state.
While the Wayfair decision specifically dealt with sales tax nexus, many states applied the concept of economic nexus to income tax as well based on the reasoning in the Wayfair decision that a physical presence is not necessary for a state to assert taxing authority. But in the absence of a U.S. Supreme Court decision on an income tax nexus case, there is uncertainty over the constitutional limits on state economic nexus from an income tax perspective. Businesses should continue to monitor state tax developments in this area to ensure compliance.
Pass-Through Entity Tax
In response to the $10,000 cap on the amounts of state and local tax deductions for individuals enacted under the Tax Cuts and Jobs Act, many states have passed the Pass-Through Entity Tax (PTET) as a workaround. With Connecticut being the first state to adopt a mandatory PTET in 2018, currently, about 30 states have an elective pass-through entity tax legislation. For tax years beginning on or after January 1, 2022, New York City adopted an optional PTET for eligible pass-through entities (PTEs) that have elected into the New York State PTET. PTEs are encouraged to look into the mechanics of various PTETs and their interplay with other state taxes when making an election decision.
Sarah S. Kim is a Tax Principal in Berdon’s State and Local Tax Group with over 11 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, withholding tax, pass-through entity tax, commercial rent tax, and real estate transfer tax.