- We previously discussed the employee-driven economic nexus implications of WFH. But the tax exposures don’t stop there.
- Businesses also need to examine the implications of sales and use taxes, tangible personal property taxes and credits and incentives.
- Did you get tax breaks from a state or local government for locating in a particular jurisdiction? Check the clawback clause.
Among the most significant changes arising from the coronavirus pandemic is a dramatic acceleration in the number of companies reimagining the workplace — specifically, by enabling some or all employees who can perform their jobs virtually to do so for the foreseeable future.
Take finance, traditionally an “in-person” function. Brainyard’s Summer 2020 Survey found that 16% of respondents plan to require all or most finance team members to work remotely. A further 58% expect to incorporate flexibility into the office/home work arrangement, with just 26% saying all or most finance employees will be required to return to the office.
However, making a long-term shift to remote is not as straightforward as it may seem. In fact, there can be significant tax implications for everything from employee income taxes to incentives paid by state and local governments. To find out how the Brainyard’s audience will be affected, we reached out to Brian Kirkell, a tax principal at audit, tax and consulting firm RSM.
In the first installment of this two-part Q&A, Kirkell covered the nexus implications that govern income taxes. Here we’ll cover sales and use taxes, tangible personal property taxes and credits and incentives to examine prior to making the shift to remote.
Brainyard: We’ve discussed how economic nexus should be a major consideration when companies are evaluating the move to remote. What is another tax area that needs to be top-of-mind for companies?
Brian Kirkell: From a tax perspective, sales and use tax is a complicated element that warrants examination. Where we have the biggest problem there is in technology. A company assigns employees computers, software and perhaps access to a number of cloud systems. Now, employees are using all of that in their states of residence, since they are working from home right now due to the coronavirus pandemic and will continue doing so if the company chooses to go remote.
Sales and use taxes are generally based on the location of first use, meaning that sales taxes on hardware, software and any other items needed to perform a given job were likely paid in the state where each employee’s assigned office is located. But now, it’s all clearly being used in another state. That other state, potentially, has a right to tax it but has to give the company a credit for the taxes paid to the state of first use.
If the employee is in a low-tax state and the company is in a high-tax state, from a sales tax perspective, there’s no additional tax due because the credit wipes out the tax. If the employee went the other direction though — from a low-tax state to a high-tax state — all of a sudden there’s a sales tax or a use tax responsibility.
And that responsibility isn’t a one-time thing. It triggers every time licenses are reviewed and paid, every time new software is added or a piece of hardware replaced. That will occur for every jurisdiction the company has an employee in, which means that the company will have a sales tax filing responsibility in each location. That can be complicated because — especially in the case of software and software as a service — there is a patchwork of different rules. It depends on how it’s characterized. Sometimes it’s taxable, and sometimes it’s not. Sourcing can depend on the jurisdiction.
A company suddenly has to suddenly navigate all of this, where previously, finance may have had to worry about only one or two locations — and the team probably knew those states’ rules pretty well. Now, companies considering an expansion to multiple locations as a result of remote work will have to get new systems, new processes and new guidelines in place to do compliance analysis correctly. And if they don’t, they’re on the hook.
BY: So we’ve seen that these taxes can affect your company if going remote. However, could they affect you as a software provider if your clients go virtual?
BK: Yes. These issues don’t just have to be considered from a company employee perspective. It’s also relevant if a company’s clients are the ones making the move to virtual.
From a sales tax perspective, let’s say you sell software as a service. Your clients may be closing their offices and spreading their people out to wherever they want to go. You can’t just keep charging sales tax based on the rules of the state where the client had its headquarters. You’ll have to figure out where your customers’ people are now located and everywhere the software you’re selling is going to be used. You will then have to make the determination of whether it’s taxable in each locale.
You suddenly have more of a compliance burden along with requirements to look deeper into how to charge, how to collect and remit the tax and to which localities it needs to be remitted.
BY: We’ve talked about property taxes from the perspective of saving when shutting down offices. However, is there anything around personal property taxes that businesses should know?
BK: From a property tax perspective, a company will likely realize a lot of savings from shutting down offices. (Here’s how to run the numbers for your business.) It will have no real property taxes because the company doesn’t have any property, unless it’s keeping, say, server farms or storage centers. But what it does suddenly have is a much broader exposure to the majority of states that impose tangible personal property taxes.
When states impose tangible personal property taxes, a work computer is subject to that tax. It might only be $1 or $2 of tax every year, so it’s not a significant amount. But filing a return could cost a couple hundred. If a company has thousands of employees spread out to localities throughout the United States — and say a couple hundred of those people are sitting in tangible personal property states — all of a sudden you’re paying a negligible amount of additional tax at $1,000, but it’s costing $50,000 in additional compliance fees to file and have someone handle that process.
That’s an area where we try to guide our clients because they’re going to have people who want to go to those states and localities. It’s important to understand what that means from a financial and compliance standpoint. It may be necessary to say to employees, “If you’re going to move to this place, there is going to be a hit to your income because your choice to move there is going to cost the company. However, if you move to this place, it doesn’t cost the company, so your income will stay the same.”
There’s going to be a lot of that navigation going on from an employer/employee-relations perspective, and it’s really being driven by not just the additional tax dollars but additional compliance costs.
BY: Final question: What didn’t we ask that businesses should know when contemplating a virtual transformation?
BK: I’d say the last piece of the equation is credits and incentives. Many businesses have negotiated incentive packages for putting their headquarters or facilities in a specific location and thus creating economic activity. Most of us think of Amazon HQ2 in 2018, but this happens often on a smaller scale for a variety of businesses, from life sciences to those who hire minorities.
If a company is still inside the clawback period for those incentives and decides to shift to work from home, it better figure out what it’s going to have to pay from an incentive clawback perspective when it shuts those facilities down.
Of course, any company has the opportunity to renegotiate with the state. But do that on the front end — if you make the move without an agreement in place, you could be caught out of compliance. A company would be much better off to proactively say to the state, “Look, this is what we’re looking at doing, and circumstances are changing. Let’s negotiate some kind of settlement here.”
On the flip side, if a company has a lot of employees going to one state, there could be statutory or negotiated credits and incentives available. Generally speaking, credits and incentives require some kind of investment in tangible property or real property, which a company is not really going to have when it does a virtual transformation. But there are some opportunities out there that are investment-agnostic. It’s all about adding quality jobs and doing training in the area. So, to the extent that a company has many people going to any one state, the finance team needs to keep track of that and make sure that they’re capturing as much of that potential value as possible.
About Our Expert
Brian Kirkell is a Principal of Washington National Tax at RSM US LLP, based in Washington, D.C. He tracks significant state case law and legislative and administrative activities and coordinates the firm’s response to law changes. Mr. Kirkell provides tax services to clients across the U.S., including advice on sales and use, credits and incentives, income and franchise and property tax issues. Prior to joining RSM, he was a manager of state and local taxes at Gannett and a senior manager of state and local taxes at Crowe Horwath LLP. He holds a Juris Doctor from the George Washington University School of Law and a Bachelor of Arts from the University of Rochester.
Megan O’Brien is Brainyard’s business & finance editor, covering the latest trends in strategy for CFOs. She has written extensively on executive topics as a former content creator for Deloitte’s C-suite programs. Got thoughts on this story? Reach Megan here.