NEXUS AND OTHER COVID-RELATED NEW JERSEY TAX ISSUES By RALPH LOGGIA, CPA
GOLDSTEIN & LOGGIA CPA’S, LLC
To address nexus issues during the coronavirus pandemic, New Jersey has implemented numerous temporary rules. Given the complexity these rules have introduced and the ongoing volatility of the COVID-19 pandemic, now is an important time for businesses to more fully review their nexus status.
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TELECOMMUTING AND CORPORATE NEXUS In 2010, the Tax Court of New Jersey ruled that an out-of-state company employing a telecommuter who resides and works in the state was “doing business” in New Jersey. This created nexus and, thus, was subject to the New Jersey Corporation Business Tax Act (Telebright Corporation, Inc. v. Director, Division of Taxation). The Tax Court cited the company’s consistent contact with the employee and the employee’s use of a company-owned computer as being sufficient to trigger a taxable presence in New Jersey. For this particular case, the New Jersey employee’s software development and coding activities, on behalf of Telebright, exceeded solicitation protected by P.L. 86-272, which requires the payment of state income tax. Due to the pandemic, working from home has become a social norm to assure public health, safety and welfare. Fortunately, the New Jersey Division of Taxation issued guidance that, as a result of COVID-19, it is temporarily waiving the impact of the legal threshold discussed in Telebright which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-ofstate corporations. Therefore, an employee working remotely in New Jersey solely as a result of closures due to the coronavirus pandemic and/or an employer’s social distancing policy does not create nexus and apportionment for an out-of-state business in New Jersey.
JANUARY/FEBRUARY 2021 | NEW JERSEY CPA
In addition, the Division stated it would not require employers to change the current work state setup in their payroll systems for employees telecommuting from or temporarily relocated to an out-of-state location. New Jersey is permitting businesses to continue to withhold income tax in the state where the employer is located. Under the normal rules, New Jersey dictates that income is sourced to the state based on where the service or employment is performed, using a day’s method of allocation. However, during the COVID-19 outbreak, the Division has stated that wage income will continue to be sourced as determined by the employer, in accordance with the employer’s jurisdiction. The Division notes that because of the reciprocal agreement between New Jersey and Pennsylvania, New Jersey nonresident income tax is not required on wages for services performed within New Jersey by Pennsylvania residents. These states have also agreed not to tax workers who have moved there temporarily because of the pandemic. THE CONVENIENCE-OFTHE-EMPLOYER TEST New York’s convenience-of-the-employer test states that when an employee is teleworking, if it is done voluntarily, at the employee’s option, withholding is done at the employer’s work location (New York) even if the employee is teleworking in a different state, such as New Jersey. If the employer requires or mandates it, then the employee can have state tax withholding where teleworking (New Jersey).
