The fallout from the coronavirus (COVID-19) pandemic continues to have a significant impact on the way employers conduct business, with many employees working on a remote basis much longer than initially anticipated. As the consequences of long-term remote work have continued to grow in prominence across the country, many states and localities have issued guidance regarding the income tax treatment of teleworking employees and business tax nexus policies. Several controversial policies have invited lawsuits, however, as states continue to grapple with the long-term effects of a remote workforce. This article explores the latest state tax developments and issues to be considered as taxpayers continue to navigate the remote work environment.


Although the concept of remote work is not new to the state and local tax field, the COVID-19 pandemic has amplified the tax and business consequences of telecommuting employees over the past year. Given the prolonged length of the pandemic and the adjustment to remote work for both employers and employees, remote work may very well become a regular part of business operating and hiring models for the foreseeable future, with many employers allowing or requiring their employees to work remotely on a part-time or even permanent basis. Although states and localities initially issued guidance generally providing for a “status quo” method of taxation for nonresident employees working traditionally in their states, many are struggling with the longer-term effects of telecommuting employees who no longer physically work within their jurisdictions.

Given the fact that many states continue to face substantial budget deficits for the 2021 fiscal year as a result of an uncertain economic environment, they are looking for ways to maintain revenue collections, including from nonresident employees, who remain an important source of revenue for states such as New York. For jurisdictions following the “convenience of the employer” standard, extensive remote work during the pandemic has challenged the application of such rules, raising the question of whether these states may legally tax the income of nonresidents who begin telecommuting on a permanent basis.

Telecommuting and Nexus

Due to the COVID-19 pandemic, millions of people have been telecommuting for over a year, either from their home state or elsewhere. Even as some states reopen their economies, it does not change the fact that companies have been allowing employees to telecommute for a significant amount of time. And many companies are allowing employees to telecommute on a more indefinite basis. Allowing employees to telecommute from states in which they do not normally work can create a host of issues for employers, but there are two big tax questions to focus on:

  • The first question is: will the presence of an employee working from home create a taxable nexus for the employer in that state?
  • The second question relates to identifying which state is owed income tax when an employee is telecommuting from an out-of-state location. Is it possible that states could have contradictory rules, creating a double tax situation for many employees? (Spoiler alert: yes.)

Before answering these questions, it is necessary to define “nexus.” The term generally refers to the nature and frequency of contacts that an out-of-state company must establish in a state before it becomes subject to that state’s tax laws and jurisdiction. Basically, nexus is the link between a taxpayer and a state that provides the state with the legal authority to impose its tax laws upon the taxpayer. Some level of minimal contact with the state is required under the U.S. Constitution before an out-of-state company is subject to the state’s tax laws. In broad terms, nexus can be created by a taxpayer’s: 1) physical presence, 2) factor presence (sales, property, or payroll of a certain percentage or amount), or 3) economic presence (value or frequency of transactions in a state). In the aftermath of the U.S. Supreme Court decision in South Dakota v. Wayfair [138 S. Ct. 2080 (2018)], many states have adopted an economic nexus factor presence standard—meaning the state will assert nexus on a taxpayer if its sales, property or payroll in the state exceed a certain monetary or transaction-based threshold. With the nexus threshold so low, most states have said that the presence of one to six telecommuters in the state would give rise to an income tax filing obligation for an out-of-state company.

Telecommuting Tax Implications for the Employer

Physical presence, or more specifically the presence of employees, in a state generally provides the state with jurisdiction to impose corporate income and franchise taxes, as well as sales and use taxes. There have even been cases holding that the presence of a single, telecommuting employee creates nexus [see, Telebright Corp., Inc. v. Director, New Jersey Div. of Taxation, 25 N.J. Tax 333 (Tax 2010) (affirmed 424 N.J. Super. 384, 2012)]. For employers, telecommuting employees can potentially create nexus in new states or cause an employer to exceed the protection of P.L. 86-272 in a state. P.L. 86-272 is a federal law that restricts states from imposing an income-based tax on a company if the company’s only activity in the state is the “mere solicitation” of sales of tangible personal property in the state to be fulfilled from an inventory outside the state.

Growing numbers of states have issued guidance stating that the presence of a telecommuting employee in the state, if her presence is a result of COVID-19, will not create nexus with the state. Some states have explicitly stated that this applies for purposes of corporate income tax nexus as well as sales tax nexus. Employers have also been faced with the challenges of potential additional business tax filing obligations as a result of employees telecommuting from jurisdictions in which the employer does not otherwise have a physical presence or other nexus. In response, approximately one-third of states have issued guidance providing for the temporary suspension of corporation income tax and sales-and-use tax nexus thresholds where the pandemic has forced certain employees to work remotely in a state in which the company would otherwise not have nexus. But the operative word is temporary. For example, Pennsylvania’s teleworking nexus relief expired on June 30, 2021 (“Telework During the COVID-19 Pandemic,” Pennsylvania Department of Revenue, Nov. 9, 2020). Similarly, Indiana had announced in 2020 that an employer would not be viewed as having nexus in Indiana due to an employee remotely working in Indiana because of COVID-19. That accommodation expired on June 30, 2021, absent a “doctor’s order” issued prior to that date ( And California ended its temporary COVID guidance as of June 11, 2021. See Executive Order N-07-21 available at: Other states, such as Minnesota, have not yet provided a specific end date to their temporary guidance, explaining that the waivers will remain in effect if the employee is temporarily working from home due to the COVID-19 pandemic. See other states, such as Georgia, have announced that an out-of-state taxpayer will not lose the protections of Public Law 86-272 if the corporation’s only presence in a state is an employee who is currently teleworking in the state due to the pandemic (see, e.g., “Coronavirus Tax Relief FAQs, Georgia Department of Revenue,” May 2020).

Certain states have also issued specific guidance regarding the impact of telecommuting employees on the apportionment of corporate or pass-through business income. Many states may not consider temporary changes in an employee’s physical work location to alter the apportionment of income during the periods in which temporary telework requirements are in place, or through a specific end date. Some states requiring apportionment of income using a three-factor formula consisting of receipts, payroll, and property have specified that employees working in their state due to the pandemic will not increase the numerator of their employer’s payroll factor (e.g., Advisory 2020-24, Rhode Island Division of Taxation, May 28, 2020; SC Info. Letter 20-24, South Carolina Department of Revenue, Aug. 26, 2020).

Telecommuting and Sales Tax

Most businesses are probably aware that if they sell goods or services across state lines they might have to collect and remit sales tax in other states if their sales exceed applicable thresholds. In the wake of Wayfair, every state that imposes a general sales tax (and the District of Columbia) has enacted legislation or otherwise promulgated a rule that establishes a bright-line economic test for determining nexus. If the amount or frequency of a business’s sales into the state exceed the applicable thresholds, then the business has to collect and remit the state’s sales tax on taxable sales to customers in the state. But with all the attention being paid to these thresholds over the past three years, it is important to remember that physical presence creates nexus too. And this includes, in most states, the physical presence of telecommuting employees.

Consider the following scenario, which CPAs are encountering all too frequently today. During an initial intake conversation with a new client, a CPA asks the business about its sales tax compliance. The business responds that it carefully tracks its sales and registers, and collects tax in any state where it exceeds the applicable thresholds. The CPA might think the business has a good handle on its sales tax obligations and end the conversation there. But it is important to recognize that these state thresholds do not function as “shields” against the assertion of nexus if a business otherwise has a physical connection with a state due to the presence of a telecommuting employee. In other words, if a business has a telecommuting employee, most states take the position that the business has nexus with the state for sales tax purposes, even if the business’s sales to customers in the state do not exceed the applicable threshold. On audit, it is no defense to argue that the businesses sales are below the applicable thresholds—the presence of a telecommuting employee makes the economic nexus analysis moot. To put it another way, a business only has to track its sales against the applicable thresholds if it is not otherwise physically in a state (through its property or people). In this case, physical presence trumps the economic thresholds. So for sales tax compliance purposes, businesses must track both the amount and frequency of their sales, as well as the location of their people.

Telecommuting Withholding Implications for Employees

Telecommuting employees may also trigger income tax withholding obligations. Employees can now perform their work duties remotely, even in states where their respective employers have no physical location. This situation can have income tax withholding implications if no reciprocal agreement exists between the states involved. A reciprocal agreement is one reached between two states that allows employers to withhold tax for employees in their residency state even if the employees are working in the other state.

As a practical matter, the question remains: which state gets to tax the work-at-home employee’s wages? What happens in situations where an employee is working from home in another state during COVID-19? Generally, for personal income tax purposes, most states have the rule that the employee’s physical presence dictates where tax is due. For example, an employee working from her Michigan home for her employer in Illinois is required to pay Michigan income taxes, because she is physically present in Michigan doing work. Before the pandemic, there were five states that imposed a “convenience of the employer” rule that treated days worked at home outside the state as days worked in the state for purposes of determining nonresident withholding and personal income tax obligations. (These states included Arkansas, Delaware, Nebraska, New York, and Pennsylvania. Arkansas eliminated its convenience rule this year. Connecticut applies the rule only on a reciprocal basis.) Under the “convenience of the employer” rule, if the employer or the employee’s principal office is located in one of those states, then the employee’s compensation earned while telecommuting will be treated as if earned in the employer’s location, and not in the state from which the employee is telecommuting, if the employee is working remotely for their own convenience and not the employer’s necessity.

Some states have decided not to change the employee’s income tax obligations (or the employer’s withholding obligations) based on the employee’s temporary work in their home state—meaning that the tax will still go to the employer’s state, that is, the state where the employee regularly worked before COVID. In other words, these states have effectively enacted a “convenience rule.” But others have said that they will continue to apply the physical-presence rule and impose tax based on the location where the employee performs services. This sets the stage for disadvantageous double-tax results for employees and employers who straddle two states with opposing rules, both of which claim the tax.

Many states have issued specific guidance over the last several months addressing the income tax withholding treatment of telecommuting employees working remotely from a different state as a result of the pandemic. States such as Georgia, Maine, and Pennsylvania have indicated that employer state income tax withholding requirements will not change during the time that employees are working remotely (See Coronavirus Tax Relief FAQs, Georgia Department of Revenue, May 2020,; Maine Tax Alert, Maine Revenue Services Announces Tax Relief Updates for COVID-19 Emergency Period, Maine Revenue Services, Oct. 2020,; Telework During the COVID-19 Pandemic, Pennsylvania Department of Revenue, Nov. 9, 2020, In other words, wages paid to nonresident employees normally working in one state before the pandemic are considered income earned in that state, and are thus subject to tax withholding. But these states have also indicated that if an employee normally works in another state and is temporarily working in their resident state due to the pandemic, wages earned during this period would not be subject to tax withholding in the resident state.

The New York State Department of Taxation and Finance released guidance clarifying its position on the sourcing of income for New York nonresidents working outside the state for the duration of the pandemic (Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax, New York Department of Taxation & Finance, updated Oct. 19, 2020, Specifically, the guidance states that for nonresidents whose primary office is located in New York, days spent telecommuting during the pandemic are considered days worked in the state unless the employer has established a bona fide employer office at the nonresident’s telecommuting location. The guidance aligns with New York’s often rigid application of its “convenience of the employer” rule, under which a nonresident employee is subject to New York personal income tax on income earned when the employee works from a nonresident location at the employee’s convenience, rather than as a requirement of the employer. [The “convenience of the employer” rule was affirmed by the New York Court of Appeals in Zelinsky v. New York Tax Appeals Tribunal, 801 N.E.2d 840 (N.Y. 2003).] It appears that New York is going to apply this aggressive position, even in situations where the employer temporarily closed its New York office during the pandemic and the nonresident employee had no option to work in the state.

The sidebar Sourcing Rules by State contains a brief review of states that have issued guidance on this topic.

State Disputes over Telecommuting Tax Policies

The state telecommuting tax policies adopted in both Massachusetts and New York have raised concerns in neighboring northeastern states, to the extent that states have begun challenging these rules in court. In the most high-profile litigation to date, New Hampshire filed a motion for leave to file a bill of complaint with the U.S. Supreme Court in response to Massachusetts’ recently finalized income sourcing regulation for nonresident telecommuters (New Hampshire v. Massachusetts, U.S. Supreme Court, No. 22O154, filed Oct. 19, 2020). In the bill of complaint, New Hampshire alleged that the regulation unconstitutionally imposes income tax on New Hampshire workers who lack a connection with the state during the pandemic. Alleging a Commerce Clause violation, the state contended that the regulation fails the four-part test established by the Court in Complete Auto Transit, Inc. v. Brady [430 U.S. 274 (1977)], in that tax is imposed solely based on an employer’s location without regard to where the employee conducts work, such that New Hampshire residents may be subject to double taxation. New Hampshire also argued that its resident workers receive no benefit from the protections and services offered by Massachusetts, constituting a due process clause violation. Notable for lacking a personal income tax, New Hampshire contended that Massachusetts is seeking to override the state’s sovereign discretion over its own tax policy. While New Hampshire argued that the Court lacks the discretion to reject a case of original jurisdiction arising between two states, the Court disagreed and declined to hear the case (

In addition, New Jersey is considering legislation that would direct the state treasurer to study New York’s taxation of New Jersey residents and the long-term fiscal impact on the state, given the possibility that residents may continue to work from home after the pandemic (S.B. 3064, A.B. 4897). Though this bill passed the New Jersey Senate, it is currently awaiting action in the New Jersey Assembly, where it was referred to the Assembly’s State and Local Government Committee. Currently, New Jersey offers a broad resident credit that allows New Jersey residents who pay tax to New York under its convenience rule to avoid double taxation. If New Jersey were to disallow or limit this credit, it would only be hurting New Jersey residents. Considering that the Supreme Court seems uninterested in examining the convenience rule, the authors submit that a better solution for protecting New Jersey’s tax revenues would be to impose a reciprocal convenience rule, as Connecticut has done.


Employers should pay close attention to tracking employee locations for payroll tax withholding, sales tax, and business tax purposes, given that the state in which an employee is working during the pandemic may not be consistent with the employee’s primary work location. Depending on the facts and circumstances, there may be additional payroll tax withholding, sales tax, and business tax filing obligations based on an employee’s remote work location. In many cases, employers lack the proper resources and systems to track employee travel and work locations on a daily basis for purposes of accurate payroll tax withholding and reporting. Given the prevalence of telecommuting, such deficiencies can now lead to broader tax problems, such as income and sales tax liabilities. Moreover, employers may also need to consider other payroll implications, such as unemployment insurance withholding, worker’s compensation, and disability.

Prolonged remote work has the potential to impact other aspects of state and local taxation, notably business income tax apportionment. Unless a jurisdiction has issued temporary guidance stating otherwise, remote employees may impact how businesses apportion their taxable income due to changes in the receipts and payroll factors. For example, businesses may experience a shift in the sourcing of service revenue in states that follow a cost of performance sourcing methodology, especially where labor costs are a significant cost component. Conversely, a shifting customer market may impact the sourcing of tangible goods or service revenue in those states following a market-based sourcing approach. For those states that continue to apportion income using a payroll factor, employers may be faced with the decision of whether to source payroll to the employer’s base of operations or the location where the work is performed. Companies should also consider whether payroll sourcing rules differ from employer withholding rules. Such apportionment issues warrant consideration, especially if remote work arrangements are expected to persist well beyond the length of the pandemic.

The shift to remote work should give employers plenty to think about in terms of their state income tax, sales tax compliance, and withholding and other business tax policies and procedures, given the varied—and often conflicting—approaches taken by the states.

Mark Klein, JD, is a partner at Hodgson Russ LLP, New York, N.Y.
Joseph Endres, JD, is a partner at Hodgson Russ LLP.
Katherine Piazza, JD, is an associate at Hodgson Russ LLP.

Sourcing Rules, by State

State Sourcing Rule
Alabama Sourced to employer’s office
Arkansas Sourced to employer’s office until 12/31/2020

Sourced to state where employee performs services starting 1/1/21

California Sourced to state where employee performs services
Colorado Sourced to state where employee performs services
Connecticut Sourced to state where employee performs services
Delaware Sourced to state where employee performs services for 3/22/2020 through 5/31/20 and after 6/1/20 if the employee is not permitted to work in the office
Georgia Sourced to employer’s office
Illinois Sourced to Illinois if employee is telecommuting from there for more than 30 days
Iowa Sourced to state where employee performs services
Kansas Employer option: sourced to state from where employee is telecommuting or employee’s regular place of work for period of 3/13/20 to 12/31/22
Kentucky Sourced to state where employee performs services
Maine Sourced to employee’s regular place of work (i.e., employer’s office)
Maryland Sourced to state where employee performs services
Massachusetts Sourced to employee’s regular place of work (i.e., employer’s office)
Minnesota Sourced to state where employee performs services
Mississippi Sourced to employee’s regular place of work (i.e., employer’s office)
Missouri State from where employee is telecommuting or, for certain employers, employee’s regular place of work (i.e., the employer’s home state) if elected
Montana Sourced to state where employee performs services
Nebraska Sourced to employee’s regular place of work (i.e., employer’s office)
New Jersey Employer’s home state’s rules dictate which state gets the tax
New York Sourced to employee’s regular place of work (i.e., employer’s office)
Ohio Sourced to employee’s regular place of work (i.e., employer’s office) for municipal income tax
Oregon Sourced to state where employee performs services
Pennsylvania Sourced to employee’s regular place of work (i.e., employer’s office)
Rhode Island Sourced to employee’s regular place of work (i.e., employer’s office)
South Carolina Sourced to employee’s regular place of work (i.e., employer’s office)
Vermont Sourced to state where employee performs services
Wisconsin Sourced to state where employee performs services

Additional detail and support for the conclusions above are available at: