Detailed Multistate Development
As certain parts of the country begin to reopen, state and local governments continue to issue guidance on tax matters stemming from COVID-19, including guidance on teleworking employees. The Illinois Department of Revenue, in Information Bulletin FY-2020-29, addresses the withholding requirements for out-of-state employers who employ Illinois residents working from home due to COVID-19. The general rule in Illinois is that employee compensation is subject to Illinois Income Tax Withholding when the employee has performed normal work duties in Illinois for more than 30 working days. However, the Department will waive penalties and interest for out-of-state employers who fail to withhold Illinois income taxes for Illinois employees if the sole reason for the Illinois withholding obligation is that the employee is working from home due to the COVID-19 pandemic. Employees that do not have Illinois income tax withheld may need to make estimated payments. Illinois estimated tax payments are required if employees reasonably expect their tax liability to exceed $1,000 after subtracting their Illinois withholding, pass-through withholding, and various tax credits.
Generally, having employees working in Iowa will be considered “doing business” in Iowa and will create nexus. The Iowa Department of Revenue, in a FAQ, stated that solely having an employee working remotely in Iowa during the declared state of emergency, will not create nexus or necessarily cause the company to lose Public Law 86-272 protection. The Department also noted in the FAQs that Iowa’s individual income tax filing and withholding requirements have not been modified by the COVID-19 pandemic and that employers transacting business in Iowa are generally required to withhold Iowa income taxes.
The Nebraska Department of Revenue announced it will not require employers to change the state which was previously established in their payroll systems for income tax withholding purposes for employees who are now telecommuting or temporarily relocated to a work location within or outside Nebraska due to the COVID-19 pandemic. A change in work location is not required beginning with the date the emergency was declared, March 13, 2020, and ending on January 1, 2021, unless the emergency is extended.
In Rhode Island, Advisory 2020-22 explains a recently promulgated emergency regulation that addresses employee withholding during the pandemic. Under the emergency regulation, Rhode Island will not require employers located outside of Rhode Island to withhold Rhode Island income taxes from the wages of employees who are Rhode Island residents temporarily working within Rhode Island solely due to the pandemic. Likewise, the income of employees who are nonresidents who normally performs tasks in Rhode Island but are temporarily working outside of Rhode Island solely due to the pandemic will continue to be treated as Rhode Island-source income for state withholding tax purposes. In Advisory 2020-24, the Division of Taxation announced that for the duration of Rhode Island’s coronavirus state of emergency, the Division will not seek to establish nexus for Rhode Island corporate income tax and sales and use tax purposes solely because an employee is temporarily working from home during the state of emergency. In addition, the performance of any services by such employees within Rhode Island will not, of itself, cause their employer to lose the protection of Public Law 86-272. This policy is predicated on the condition that there are no other activities being conducted in the state that would cause the business to establish nexus, including meeting the sales or transactions threshold for sales tax nexus.
In South Carolina, Information Letter #20-11 provides that effective from March 13, 2020 through September 30, 2020 (the COVID-19 relief period), an out-of-state business will not be subject to South Carolina’s withholding requirement solely due to the shift of employees working on the employer’s premises outside of South Carolina to teleworking from South Carolina. Accordingly, the wages of a South Carolina resident employee temporarily working remotely from South Carolina instead of their normal out-of-state business location are not subject to South Carolina withholding if the employer is withholding income taxes on behalf of another state. Further, the Department will not use changes solely in an employee’s temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period as a basis for establishing nexus or altering apportionment of income.
In other news, the Nebraska Department of Revenue issued a report discussing whether the state conforms to various aspects of the federal CARES Act and the revenue impacts to the state. The report appears to confirm that Nebraska will conform to the federal treatment of forgiven Paycheck Protection Program (PPP) loans and the lack of deductions for business expenses paid for with loan proceeds.
In Mississippi, legislation (Senate Bill 2772) was signed into law providing that “funds received under the PPP shall not be subject to tax; however, eligible expenses for which PPP funds are received may not be itemized as tax deductions.” Finally, in Iowa guidance was issued providing that a taxpayer's PPP loan that is forgiven and properly excluded from federal gross income under section 1106 of the federal CARES Act in a tax year beginning on or after January 1, 2020, will not be include in income for Iowa purposes. However, in years before 2020, Iowa has fixed date conformity to the IRC. Therefore, the state is not conformed with section 1106 of the federal CARES Act for PPP loans forgiven for tax years beginning prior to January 1, 2020.
To read about the recent state and local tax guidance on extensions in response to COVID-19, please click here and bookmark KPMG TaxNewsFlash-United States to stay current as more guidance is regularly released.
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