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Editor's Notes

• #3: State income tax refers to the direct taxations for businesses that operate or earn in a particular state. States assign a portion of a corporation’s income to determine the income tax for the corporation in a specific state. The apportionment determines how much of an organization’s earnings come from activities done in the state to ensure that only the correct amount is taxed. Moreover, such tax is only imposed on C corporations as they are taxable entities. Other types of businesses are not required to pay corporate income taxes and instead pay “pass-through-taxation” where individuals from the business pay tax from the generated income while their businesses are taxed separately. For state apportionment, three types of formulas can be used and include; three-factor formula, three-factor formula with an extra weighted for sales, and single-factor formula (Li, 2020). Three-factor formula – the formula utilizes three fractions that represents three factors which include; sales, property and payroll. The fractions are then multiplied to determine the percentage of the taxable income that is then allocated to the state. Three-factor formula with an extra weighting for sales – the approach uses the same approach as the three-factor formula but with the sales fraction accounting for 60% of the percentage while property and payroll account for 20% each. Single-factor formula – the single factor formula only use the sales fraction to calculate taxable income. Payroll and property are completely exempted from this formula.
• #4: The onset of the Corona Virus (Covid-19) in late 2019 created a major threat to public health and safety across the world. Evidence on the virus showed that the Covid-19 spread easily when people came into close contact with each other, especially in the workplace. In response, states across the US imposed mandatory closure of non-essential businesses to curb the spread of the virus, majorly due to a lack of cure and vaccines at the time. The measures meant sure that people isolated themselves while observing other preventive measures such as washing hands and wearing face masks among others. Such efforts were believed to be critical in slowing down the infection rates in the country while vaccines and medications against the virus were developed. To address this new and unprecedented challenge, businesses across the US shut down their physical operations and required their employees to work remotely or from home (Brynjolfsson et al., 2020). The approach helped in protecting the employees and ensuring that the spread of the virus slowed down to containable levels.
• #5: Image 1: Covid-19 restrictions prompted employees to work from home. Source: https://riskonnect.com/covid-19/industry-news-covid-19-managing-the-work-from-home-risks/
• #6: Telecommuting employees create a nexus for employers in taxation. As such, businesses were introduced to new liabilities in new jurisdictions where their employees were now providing services. Such a nexus majorly affected payroll which had to be registered for employees who worked from home in a different state due to the pandemic. However, some states offered temporary waivers that will not require employers to require the employers to register their payrolls during the pandemic (Kern, 2021). An example of such states is Pennsylvania which offered a temporary waiver expiring June 30, 2021 (Rosenthal & Rothenberg, 2020). As such, for employers who chose to maintain remote working after the restrictions were lifted, a nexus was created and prompted them to register their payrolls to the jurisdiction. Without the waivers, employees automatically created a nexus which introduced in tax liabilities. A nuisance tax may have also applied in special situations where an employee was working in a different jurisdictions.
• #7: Businesses are required to withhold their employees income tax. This majorly became a major challenge for employers who had employees who commuted across sate borders to render their services. One of the key challenges was tracking such employees and ensuring that taxes were appropriately paid to states where they had rendered their services (Kern, 2021). Businesses struggled in tracking the employees, especially with restricted movement. Moreover, the corporations also had the obligation to register their payroll in jurisdictions that their employees were operating from. As stated earlier, payroll is one of the factors considered when calculating tax apportionment in states. As such, this was a challenge for many businesses who had to register their payroll in various jurisdictions. It also presented a challenge in determining the state withholding tax to comply with state requirements as it required employers to track down their employees across various jurisdictions (Kern, 2021). Moreover, various states used different approaches to determine how withholding state tax will be conducted. Some states such as Georgia and Maine retained their withholding laws. Employees working in the states were taxed in accordance with existing laws. On the other hand, the Massachusetts Department of Revenue stated that employees who worked in the state and had to change to remote-working due to the pandemic will still be taxed in Massachusetts as their source of income (Rosenthal & Rothenberg, 2020). As such, this created a complex environment for apportionment with many businesses working to find solutions to address these challenges.
• #8: Image 2: A representation of how states responded to income tax apportionment following the outbreak of Covid-19. Source: https://www.ghjadvisors.com/blog/covid-19-employee-tax-changes-related-to-remote-employees
• #9: Although state apportionment touches on C corporations, pass-through corporations were also impacted. Owners of pass-through corporations are required to pay distributive share of income for both their residence state and states where they sourced their income. The nonresident states comprise of states which the pass-through businesses conducted their activities while the residence state requires businesses to pay taxes to jurisdiction where their business is located. However, to prevent double taxation on such businesses, credit is offered where the nonresident states tax the same income which meant that pass-through businesses enjoyed higher credits than before the pandemic (Rosenthal & Rothenberg, 2020). However, it required them to file additional state returns to the extended nexus as they operated in different states. However, this did not affect businesses where owners operated and resided in the same jurisdiction.
• #10: As stated earlier, employers are required to withhold tax for their employees, especially when working in a new jurisdiction. This was especially challenging for businesses that had many employees as they had to track down where they worked from and withheld income tax for the particular jurisdictions. Moreover, this was done over a short period of time as businesses struggled to meet the Covid-19 guidelines and restrictions. Employers were also required to determine their employees place of work incase they moved to a new state. Many employees felt the need to move to new states to either be with their families or states that had fewer Covid-19 restrictions. As such, the employers had to keep track of such movements to determine how to withhold the taxes. This was majorly because apportionment requires corporations to withhold taxes for jurisdictions where their employers performed their services. As such, it introduced a lot of challenges, especially for organizations that didn’t have a remote work strategy in place before the pandemic.
• #11: Image 3: Employers are required to withhold taxes payable to jurisdictions where their employees provided their services. Source: https://www.wallstreetmojo.com/withholding-tax/
• #12: The Interstate Income Act passed in 1959 provides adequate guidelines on taxation for employees working remotely. the law prohibits any state from taxing employees whose major role has been solicitation within their jurisdiction. The law protects organizations and employees who work remotely. However, if an employee does more than solicitation, they will then be taxed within the jurisdictions that the services were offered (Sawyers & Sonnier, 2021). Therefore, this was one of the laws that organizations were required to observe during the pandemic, and also for organizations that look to maintain remote working after the pandemic.
• #13: In summary, businesses faced a lot of challenges during the time. They had to file their taxes in new jurisdictions where their employees were providing services, track down their employees to determine under which jurisdictions they were providing their services, and additional expenses in maintaining their payrolls especially for employees with an extended nexus footprint.
• #14: Image 4: Businesses faced unprecedented challenges during Covid-19 including closure to observe Covid-19 guidelines set by their states.
• #15: In conclusion, the Covid-19 pandemic created a major public health disaster that left millions dead around the world. In its wake, the pandemic also affected many businesses, especially relating to taxation. Many businesses were prompted to choose remote working where they paid additional taxes to other jurisdictions due to the extended nexus footprint. Some states such as Georgia and Maine maintained their taxation laws while Pennsylvania and New Hampshire offered temporary waivers to allow business to adjust to the new taxation environment. In the future, it’s recommended that businesses that intend to introduce remote work into their operations consider critical laws such as The Interstate Income Act of 1959 to determine their obligations in withholding tax in different jurisdictions. Such an approach will ensure that they avoid potential legal challenges or double taxation which could affect their operations negatively.