COVID-19 Tax Relief, Nexus, and Audit Updates
It is a new and different world these days and we are all figuring out what this means. Many of you may be working from home for the first time and trying to juggle your work duties as well as homeschooling or potentially caring for someone who is sick. Here at the Sales Tax Institute, we have been a virtual company for 10 years – so if you ever need some ideas on working from home, just let us know.
We hope you, your family, and your team are safe and healthy. Our thoughts are with you all as you adapt to these new ways of working.
As the nation grapples with the ramifications of the novel coronavirus, taxpayers and state governments alike are coming up with plans to keep business moving forward.
State tax departments across the country are adjusting rules and regulations in light of the physical constraints of stay at home orders and to help meet some taxpayer needs.
Sales Tax Filing Extensions
One way states are responding to COVID-19 is extending sales tax filing or payment deadlines. However, what seems like a nice gesture from the states should be approached with caution. Most of the states that are offering this concession still require the return to be filed timely, but may be offering an extension on the remittance or payment of the tax. Taking advantage of sales tax extensions to improve your company’s cash flow should be one of your last efforts.
Sales taxes are trust taxes, meaning failure to pay is not forgiven in the event of a bankruptcy. If bankruptcy occurs, unpaid sales tax can become a personal liability for officers, owners, and other responsible parties. Ultimately, tax dollars do not belong to you and should not be relied upon as a way to finance your business.
However, if you need the filing extensions, here is a taste of what some states are offering. These are just examples, there are many different approaches the states are offering.
California initially announced that small businesses filing returns for less than $1 million in tax automatically have until July 31, 2020 to file and pay sales and use tax for the first quarter of 2020. The state later announced that effective April 2, 2020 businesses with less than $5 million in taxable annual sales can defer up to $50,000 of their sales and use tax liability and pay it out in 12 monthly installments. For larger businesses, the first $50,000 of sales tax liability can be deferred.
Colorado adopted a one-time, one-month extension for sales tax filing and remittance via temporary emergency rule. Colorado retailers required to file and remit sales tax on April 20, 2020 will now have until May 20, 2020 to file and remit state-administered sales tax.
South Carolina returns and payments for state sales and use taxes and local sales and use taxes collected by the South Carolina Department of Revenue due April 1 to June 1, 2020 have an extended deadline June 1, 2020.
For a full list of states offering sales tax filing extensions, check out one of the sales tax-specific COVID-19 resources found on our Coronavirus Tax Filing Relief & Resources page.
Penalty and Interest Waivers
Many states are offering waivers of penalties and interest applicable to certain taxpayers and scenarios in addition to filing extensions or just as a stand-alone COVID-19 response. You’ll see a common theme that these waivers apply to restaurants and bars that have been forced to shut down.
Alabama will waive state sales tax late payment penalties for small retail businesses whose monthly retail sales during the previous calendar year averaged $62,500 and taxpayers currently registered with the Department as engaging in NAICS Sector 72 business activities, which includes restaurants.
Illinois has implemented a limited short-term penalty and interest relief for food and drinking establishments with less than $75,000 in sales tax liability for 2019. Qualified taxpayers won’t be charged penalties and interest on late payments for sales tax liabilities due for the February, March, and April 2020 reporting periods.
New York has implemented a relief program for quarterly and annual filers affected by coronavirus. Quarterly and annual filers unable to file or pay the March 20, 2020 return deadline can request to have penalties and interest waived.
Nexus for Remote Workers
As we are all working from home, concern has been raised particularly in areas with many cross border employees as to whether the employees working from home will create nexus for the business. In a normal time and situation, home office employees typically do create physical nexus for a business. A related question is whether there is a withholding responsibility in the employees’ states. A few states and cities have relaxed nexus provisions related to remote employees temporarily working from during this time.
New Jersey and Pennsylvania will not count temporary remote employees toward nexus thresholds. These states have a Reciprocal Personal Income Tax Agreement not to tax the wages of a resident of the other state. During the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction. Philadelphia issued guidance stating that nonresidents working from home will not be subject to its wage tax.
D.C. will not impose corporation franchise tax or unincorporated business franchise tax nexus based on employees/property used to work from home temporarily located in the District.
Indiana and North Dakota state that if telecommuting is attributable to a COVID-19 response and intended to be temporary, they will not assert income tax nexus on that basis alone. Minnesota will not seek to establish nexus for any business tax solely because an employee is temporarily working from home due to the COVID-19 pandemic.
Mississippi announced the state will not change withholding requirements for businesses based on an employee’s temporary telework location.
An open question that hasn’t clearly been addressed is when will the “temporary” work at home provisions be over. Will it be when the state cancels its stay at home order? And what happens if the employee state cancels before the office state? Lots of open issues that we will all have to figure out as time moves on.
Audit Considerations
It’s no surprise that states have moved to completely remote audits. If you are currently in an audit process, most states hope to resolve in-process audits as quickly as they can. Many of the states have e-rooms and secure document transfer capabilities that allow auditors to work from home and keep the audits moving.
A couple states, Texas and Wisconsin for example, have generally committed to not starting any new audits during the widespread shelter in place orders. For completed audits, Texas is temporarily suspending the 60-day deadline for businesses to contest audit results.
The impact on state revenue at this time is significant. If you are already in an audit and have some issues that could benefit through negotiation, this could be a good time to move into a settlement with the state. States may generally be more willing to close audits right now in order to generate payments and eliminate hearings and court cases.
If you’d like to resolve an audit but can’t make the payment in full, you may be able to negotiate a payment plan. A few states have delayed payment plans that you could negotiate for.
Maintain a Watchful Eye
States roll out new plans and rule changes in response to the pandemic day by day. Keeping up with the ever-changing sales tax landscape is key for sales tax professionals under “normal” circumstances. Today, it is more important than ever. Your efforts and attentiveness to new Department of Revenue bulletins and news alerts could make a difference in helping your company move through a difficult financial time.
Whether it’s securing a penalty waiver for a late payment or negotiating a delayed payment plan for an audit outcome – the small things can really add up.
We’ve opted to curate a variety of resources on the COVID-19 response that cover more than just sales tax. Consult our Coronavirus Tax Filing Relief & Resources for a list of helpful resources from reputable organizations to help tax and accounting professionals navigate all the changes.
Please be safe, follow your state’s guidelines, and try to balance your various responsibilities. Know that we are here for you – whether it is a sales tax question or a work from home hint. Stay in touch!