Remote work creates a spectrum of state and local tax issues

By Drew VandenBrul, CPA, Jennifer W. Karpchuk, J.D.

Editor: Bridget McCann, CPA

The pandemic has upended life as we knew it. It has created many hardships and drastically changed lives. But the pandemic also has brought one change that is a welcome relief to many employees: remote work. Over the past two years, many employees have grown accustomed to remote work and the flexibility it provides. Many have relished the ability to work from home without the hassle of a commute or a rushed daily morning routine. In turn, many employers have already decided to move to a fully remote workforce or a hybrid approach — allowing employees to work from home for some portion of time. Meanwhile, others are still contemplating whether to make this change permanent.

However, no good deed goes unpunished; such changes require a reevaluation of tax obligations. While employees focus on employment taxes, employers need to consider not only employment taxes but also a broad array of other state and local tax issues, including nexus, apportionment, compliance, and financial statement reporting. All of these present a rapidly changing range of impacts on effective rates and financial statement reporting, registrations, tax compliance, data gathering, and documentation. This column discusses items tax professionals should consider when evaluating the state and local tax ramifications of a remote work environment.


As businesses enter the clichéd "new normal," it may appear everything has changed. In fact, the issues that have surfaced because of the increased remote workforce are not new. Almost a decade ago in Telebright Corp. v. Director, New Jersey Division of Taxation, 424 N.J. Super. 384 (N.J. Super. Ct. App. Div. 2012), the New Jersey Superior Court's Appellate Division affirmed that an out-of-state employer could be liable for the state's corporation business tax (CBT) by virtue of one employee telecommuting from the state. It is worth examining this case in more detail.

The employer maintained its principal place of business in Maryland but employed one telecommuting employee in New Jersey. The employee worked from New Jersey writing software code for the company, which was incorporated into a web application provided to TeleBright's clients. Apart from the one employee telecommuting from the state, TeleBright had no other connections with New Jersey.

The New Jersey Division of Taxation (Division) took the position that TeleBright was liable for the CBT because it was "doing business" in New Jersey by permitting the employee to work from her home within the state. In response, TeleBright asserted that it was not "doing business" in the state and further challenged the Division's position based on both Due Process and Commerce Clause grounds under the U.S. Constitution.

As with many states' business taxes, the CBT is imposed upon the "privilege of doing business" within the state. In Telebright, the court analogized the employee's software writing to that of a manufacturing employee who fabricated parts in New Jersey for a product that was then assembled out of state.The court reasoned that the statute should be construed broadly and, without difficulty, concluded that TeleBright was "doing business" in the state by virtue of the telecommuting employee.

Turning to the constitutional issues, the court explained that the Due Process Clause is concerned with "fairness." Citing to U.S. Supreme Court cases in which the Court has held that the presence of one employee within a state is sufficient to subject a company to that state's business tax without violating due process, the New Jersey court determined that TeleBright had sufficient minimum contacts with the state to satisfy due process.1

Regarding the Commerce Clause, TeleBright argued that employing one individual within New Jersey was de minimis and did not create a "definite link" or "minimum connection" between TeleBright and New Jersey to justify imposition of the CBT. With arguments similar to those that would be raised later in Wayfair,2 TeleBright argued that taxing businesses on the basis of telecommuting employees would impose "unjustifiable local entanglements" and an "undue accounting burden" upon businesses employing telecommuters.

Rejecting these arguments, the court reasoned that the telecommuting employee was working full time in New Jersey creating a portion of the taxpayer's product and, as such, the company benefited from all of the protections New Jersey law afforded the employee. Moreover, TeleBright was already withholding and paying New Jersey state income tax on the employee's salary — thus, the additional effort of calculating and paying the CBT should not constitute an undue burden.

While Telebright involved New Jersey law, the issue raised is not unique to New Jersey. In fact, the majority of states take the position that a telecommuting employee creates sufficient nexus to subject an employer to the state's business taxes. Although the issues themselves are not new, the impact of those issues is now much greater since more individuals are working remotely than ever before. Thus, Telebright is an important reminder of the position taxing authorities can take, as this column next delves deeper into the issues raised by a growing remote workforce.


Generally speaking, a remote employee will create nexus for the employer for tax purposes and — as Telebright illustrates — such connection will likely withstand constitutional scrutiny. Nexus created by remote-working employees can create significant tax liabilities in new jurisdictions, especially for income tax purposes where the company has significant receipts from the state and the state apportions using a single sales factor formula.

Some states have crafted nexus waivers during the pandemic, whereby they explicitly stated that the presence of a remote employee working in the state solely due to the pandemic would not create nexus for certain taxes. While temporarily beneficial to taxpayers, some of those policies have already expired. For instance, Pennsylvania implemented a nexus waiver policy that expired on June 30, 2021.3 Therefore, employers that continue to maintain a remote workforce after June 30will be considered to have nexus with Pennsylvania for the entire year ending after June 30, 2021. Similarly, New Jersey revised its administrative guidance4 setting Oct. 1, 2021, as the expiration date of its temporary nexus and withholding guidance.

Absent any special waiver, a remote employee can create nexus for various taxes, including income taxes, gross receipts taxes, sales taxes, and local business taxes. In many cases the employee's presence may amount to a nuisance tax, but compliance is still key to avoiding unwanted penalties and interest for failure to abide by a jurisdiction's tax rules.

Additionally, those companies claiming the benefit of P.L. 86-272 (the Interstate Income Act of 1959) should pay particular attention to their remote workforce. P.L. 86-272 applies to companies with sales of tangible personal property into a state where the only other connection with the state is the solicitation of orders that are approved and shipped from outside the state. P.L. 86-272 provides a valuable protection — those companies that fall within its parameters are not subject to a state's income tax, despite having the requisite nexus. There have been recent attempts to limit the federal law, most notably the Multistate Tax Commission's guidance, which seeks to address how the law should (or should not) apply in the modern world.5 However, the federal law is still valid, and some companies continue to claim its protection.

A remote employee could negate a company's existing P.L. 86-272 protection if the employee does anything more than solicitation within a particular jurisdiction. Therefore, it is crucial that companies consider what their remote employees' job responsibilities are and whether remote work in a particular jurisdiction jeopardizes claims of P.L. 86-272 protection.

Where remote work exposes the company to liability, such companies may need to consider creating "blacklist states" — states where employees are prohibited from working remotely. However, all of this is predicated on the idea that the employer can both track the remote work location of all its employees and successfully limit their mobility to certain states.


Apportionment drives the calculation of state taxable income or the taxable portion of a state's franchise tax base. It also is a key driver of a taxpayer's effective tax rate for financial statement reporting of current and deferred taxes. As such, it is imperative to accurately reflect changes in the calculation of apportionment during the tax year, as well as part of the tax compliance process.

State and local income and franchise tax apportionment formulas are based on a receipts factor and, in some cases, still include a property and payroll factor. Remote and hybrid work has the potential to affect all three of these factors to differing degrees.

Property factor

The property factor looks to the value of a company's real and tangible personal property owned or rented and used within a state. In response to an increased remote workforce, businesses may shift the location of offices, or possibly provide office space more conveniently located for those remote employees. In addition, where there is a shift in work locations, there is an anticipated corresponding movement of certain technology, furniture, and other equipment.

Payroll factor

Sourcing of payroll for apportionment purposes usually either follows a hierarchy similar to that used for unemployment compensation purposes or is based on employee withholding rules, as discussed in greater detail below. Therefore, the shifting of employee work locations, whether on a permanent or hybrid basis, has the potential to affect the payroll factor. Again, it is important to note that in order to apply this, the employer must have reliable data on the remote work location and wages.

Receipts factor

The receipts factor is often the most impactful, given the long-standing trend toward higher receipts factor weighting or a single sales factor. Receipts from sales of tangible personal property are generally sourced to the delivery location. As such, they are unlikely to be directly affected by remote work but may be affected by related shifts in population, or decentralized purchasing patterns associated with remote work.

Services, intangibles, and sales of other than tangible personal property are generally sourced using either market-based sourcing or the cost-of-performance method. Market-based sourcing may yield the same types of indirect implications seen with sales of tangible personal property, including shifts in where the benefits are received by customers. Cost-of-performance sourcing is likely to reflect a more significant impact related to remote working.

Payroll is often the largest single cost component when sourcing under this method, and service businesses are more likely to have remote workers than traditional sellers of tangible personal property. Therefore, in these situations, a shift in employee work locations can directly affect receipts factor sourcing for apportionment. Once again, this highlights the practical need to accurately capture the location from which compensation is earned.

All of these apportionment changes can first be expected to affect quarterly financial statement reporting and estimated payments, then ultimately the preparation and filing of state and local income and franchise tax returns.

Notably, pairing the nexus and apportionment discussions can create some positive effects. If a taxpayer creates nexus in a new state due to remote work, this may reduce throwback sales in the states from which goods are shipped. These types of considerations should be incorporated into the overall analysis of apportionment factors and effective tax rates.

Employment taxes

Employers often have employment tax withholding obligations for their employees. Failure to properly withhold can result in liability on behalf of both the employer and the employee. However, in order to properly withhold and even know whether to withhold, an employer must first understand and be able to track where its employees are working. In a remote-working environment, that challenge has increased. It can be difficult for employers to keep track of where their employees are located — and it has not been uncommon in this flexible environment for employees to move to a different state without alerting their employer (or tax department) in advance. Additionally, employers that did not previously maintain a remote workforce and for whom it was generally unnecessary to track employee work locations may find unique hurdles for compliance.

The default rule for state and local income tax withholding is that taxes should be withheld for the jurisdiction in which the employee performed the services.

However, adding to the complexity, a handful of jurisdictions take a different approach by applying a "convenience of the employer" rule that provides that only if an employer requires an employee to work from a different jurisdiction is the employee not subject to tax at the employer's normal work location. That is, if an employee works from a different location for his or her convenience, these states say that the employee is subject to income tax at the employer's location. While this is the exception to the general rule, the following jurisdictions apply a convenience-of-the-employer standard: Arkansas,6 Connecticut,7 Delaware8 (and Wilmington9), Massachusetts,10 Nebraska,11 New York state,12 certain Ohio municipalities,13 and Pennsylvania14 (and Philadelphia15).

During the pandemic, application of the convenience-of-the-employer rule has been inconsistent. For instance, Philadelphia took the position that if employees living outside the city were required to work from home by the employer because of the pandemic, those individuals were not subject to the city's wage tax. Conversely, Pennsylvania took the position that employees working in a different jurisdiction solely by virtue of the pandemic would be treated as if they were in whichever jurisdiction they would have been pre-pandemic. Thus, Pennsylvania adopted a status quo approach.

Although not a convenience-of-the-employer state pre-pandemic, Massachusetts took a similar status quo position whereby it treated employees who had worked in Massachusetts pre-pandemic as if they were still working in Massachusetts during the pandemic.16 Thus, employees working from home in New Hampshire were still subject to Massachusetts' income tax.

In response to Massachusetts' reach, New Hampshire filed suit in the U.S. Supreme Court, seeking to invoke its original jurisdiction.17 New Hampshire challenged Massachusetts' policy on Due Process and Commerce Clause grounds. However, an argument arose as to whether New Hampshire had standing to bring the suit. Since New Hampshire does not have an individual income tax, the assertion was that there was no direct harm to New Hampshire by virtue of Massachusetts' policy. Whether due to a disinterest in addressing the issue or questions over standing, the U.S. Supreme Court ultimately deniedcertiorari.

Yet, the issues raised in New Hampshire v. Massachusetts are far from settled and are of importance to anyone working in a convenience-of-the-employer jurisdiction. During July 2021, in the aftermath of the denial of certiorari in New Hampshire v. Massachusetts, a professor filed suit in New York challenging the state's convenience-of-the-employer rule.18 Professor Edward Zelinsky is a Connecticut resident, employed at a New York university, and working part time from home. Zelinsky is claiming a refund attributable to the percentage of time spent working from home in Connecticut. Notably, this is not the first time the professor has brought this case. During 2003, Zelinsky brought a similar suit in the New York courts, which he ultimately lost. He appealed to the U.S. Supreme Court, which refused to grant certiorari.19

However, as Zelinsky points out in his renewed petition, times have changed — and they have changed drastically since 2003 due to advances in technology, coupled with the need to quickly pivot to remote work on a large scale because of COVID-19. The change is analogous to the one emphasized in Wayfair, in which transformations in the economy and technology were pointed to by the Court and the state as reasons for reexamining the law and changing course.As Zelinsky's case makes its way through the New York courts, nonresident taxpayers employed in New York, but working remotely or on a hybrid basis, should consider filing protective refund claims. Meanwhile, nonresident taxpayers working in other convenience-of-the-employer jurisdictions should consider whether to file similar refund actions challenging the convenience-of-the-employer rules.

For withholding purposes, employers should be cautious when determining whether to stop withholding for remote or hybrid employees in convenience-of-the-employer jurisdictions. In jurisdictions in which an employer is required to withhold, failure to properly withhold taxes can become a liability for the employer, plus potential interest and penalties. Thus, employers who decide not to withhold on the full amount of an employee's salary should have well-crafted policies that explicitly lay out the terms of the employer's requirement that the employee work from home permanently or for a set amount of time to ensure that — on audit — the policy and position will withstand scrutiny.

Passthrough entities

The tax issues related to remote work have an effect on passthrough entities (e.g., partnerships and S corporations), not just C corporations. Similar employment tax, nexus, and apportionment issues exist. In addition, most owners of passthrough entities are taxed on their distributive share of income in their resident state and the state-sourced income in the nonresident states in which the passthrough entity conducts business. To avoid double taxation, most states allow their residents to claim a credit for taxes paid to nonresident states on the same income. While remote work may require these owners to file additional state returns based on an expanded nexus footprint, they may also see an increase in their resident state credit for taxes paid to additional states.

While a full exploration of the passthrough entity issues is beyond the scope of this column, these entities will need to take into account the remote-work impacts on entity-level taxes that may be imposed on the passthrough entities. This includes historical taxes imposed on passthrough entities and the more recent elective passthrough entity taxes designed to work around the federal $10,000 state and local tax deduction limitation included in the law known as the Tax Cuts and Jobs Act.20

Other impacts

Remote-work impacts extend far beyond income and employment taxes. Take, for example, the impact on credits and incentives. Statutory tax credits and negotiated incentives are often tied to the creation or retention of jobs within a designated geographic area (state, locality, enterprise zone, etc.). The ongoing shift to remote work calls into question the satisfaction of these existing jobs requirements, the ability to renegotiate these benefits, as well as the approach to pursuing similar credits and incentives in the future.

Another example is the likely impact on personal property and sales and use taxes as the purchase and ownership of tangible property shifts from its traditional location to the decentralized world of remote office and remote workers.

What should tax departments and tax professionals do?

Jurisdictions are shifting from temporary relief and guidance, driven by the pandemic, to enacting new legislative, regulatory, and administrative guidance to adapt to the expansion of more permanent remote-work arrangements.21 Tax professionals will find opportunities to be both proactive and reactive in addressing these evolving state and local tax issues. In either case, it is imperative to have a clear picture of the issues of importance to each organization and obtain reliable data on the remote-work arrangements, including documentation of employer policies, plans for future modifications, and detailed information on where employees are working and what job functions they are performing.

Proactive opportunities include addressing remote hiring practices to maintain current no-nexus positions, determining the optimal legal entity for hiring remote workers in new states, establishing systems and processes to gather data on actual remote work time and locations, understanding what job functions and responsibilities remote employees have in claimed P.L. 86-272 jurisdictions, and documenting employer requirements to satisfy the convenience-of-the-employer tests.

While striving to be proactive, tax professionals will also need to react to the inflow of new developments and data to continually assess and monitor, among other things, new nexus creation, expanded employment tax and withholding obligations, impacts on apportionment, financial statement reporting obligations, uncertain tax positions, and expanded tax compliance requirements.

By nature and experience, state and local tax professionals are already very adept at addressing the complexity that comes with juggling multiple jurisdictions and tax types, constant changes and developments, and the uncertainty that comes from a lack of authoritative guidance. The evolution and expansion of remote working provides tax professionals with an opportunity to put these skills to work and drive value for their businesses and clients.


1See Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975) (the presence of one employee within the state of Washington was sufficient to subject the company to the state's business and occupation tax without violating due process); National Geographic Soc'y v. California Bd. of Equalization, 430 U.S. 551 (1977).

2South Dakota v. Wayfair, Inc., 504 U.S. 298 (2018). 

3See Pa. Dep't of Rev., "Telework Guidance," available at

4See N.J. Div. of Tax., "COVID-19 Telework Guidance Updated 08/03/2021," available at

5For a further discussion of the erosion of nexus protection and the burden on small businesses, see Stanton, "Erosion of Nexus Protection and the Burden on Small Businesses," 52 The Tax Adviser 182 (March 2021).

6See Ark. Dep't of Fin. & Admin., Revenue Legal Counsel Op. No. 20200203 (Feb. 20, 2020). Arkansas recently enacted legislation reversing the state's "convenience" rule, retroactive to Jan. 1, 2021 (Ark. Act. 1019 (S.B. 484), Laws 2021).

7See Conn. Gen. Stat. §12-711(b)(2)(C); Conn. Rev. Servs., 2020 Form CT-1040, Connecticut Resident Income Tax Return Instructions, p. 27.

8See Del. Code tit. 30, §1124(b); Schedule W, "Apportionment Worksheet," of Delaware Form 200-02 NR, Non-Resident Individual Income Tax ReturnFlynn v. Director of Revenue, No. 1504 (Del. Tax App. Bd. 9/14/11).

9Wilmington Earned Income Tax Regs. §203D, effective Jan. 1, 2020.

10See Mass. Regs. Code tit. 830, §62.5A.3.

11See 316 Neb. Admin. Code §22-003.01C(1).

12See N.Y. Comp. Codes R. & Regs., tit. 20, §132.18(a); N.Y. Dept. of Tax. & Fin., Technical Memorandum No. TSB-M-06(5)I (May 15, 2006).

13See Ohio H.B. 197, Laws 2020.

14See 61 Pa. Code §109.8.

15While Philadelphia maintains a "requirement of employment" standard, temporary relief was provided during the pandemic.

16"Massachusetts Source Income of Non-Residents Telecommuting Due to the COVID-19 Pandemic," 830 Mass. Code. Regs. 62.5A.3 (as most recently proposed Dec. 8, 2020).

17New Hampshire v. Massachusetts, 594 U.S. 2 (6/28/21), cert. denied.

18In the Matter of Zelinsky, No. 830517 (N.Y. State Div. of Tax App. 7/22/21) (petition filed).

19Zelinsky v. Tax Appeals Tribunal, 801 N.E.2d 840 (N.Y. 2003), 541 U.S. 1009 (2004) (certdenied).

20P.L. 115-97, §11042. See also Bell-Jacobs, McCann, Wlodychak, "Where Individual, Corporate, and Passthrough Entity Taxation Meet," 52 The Tax Adviser 392 (June 2021).

21See also Yesnowitz, Sherr, Bell-Jacobs, "AICPA Focuses Advocacy Efforts on Mobile Workforce Legislation," 52 The Tax Adviser 50 (January 2021). 



Bridget McCann, CPA, is managing director of State and Local Tax at Grant Thornton LLP in the Philadelphia area. Drew VandenBrul, CPA, is managing director, State and Local Tax, at Grant Thornton in Philadelphia. Jennifer Karpchuk, J.D., is a shareholder and the S.A.L.T. Practice co-chair at the law firm Chamberlain Hrdlicka in Philadelphia. Ms. McCann is the chair of the AICPA State & Local Tax Technical Resource Panel. For more information about this column, contact


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