The New Jersey Division of Taxation (“the Division”) announced recently that the state will lift temporary nexus waivers for corporate income tax, sales tax, and withholding tax purposes beginning on October 1, 2021. The temporary nexus standards were created in March 2020 in response to teleworking caused by the pandemic.
The waivers forced the Division to disregard nexus standards that would be generally met if an out-of-state company had an employee working in New Jersey. If the company did not have a physical presence in New Jersey and did not meet economic thresholds, the out-of-state company would not have nexus for income tax and withholding purposes.
The Division’s August guidance stated that beginning on October 1, employers “should resume sourcing income based on where the service or employment is performed and withhold New Jersey gross income tax from such wages.” The timing of the guidance may frustrate employers, as some employers have pushed back office reopening plans because of recent concerns of the Delta variant. Nevertheless, New Jersey’s reversion to standard nexus rules comes as no surprise, as teleworking and hybrid work schedules have increased in popularity and will likely remain for the foreseeable future. New Jersey has joined other states in reverting back to standard nexus rules, allowing temporary nexus waivers to expire. Under standard nexus rules, remote employees generally create nexus and trigger certain tax obligations for out-of-state companies.
An important issue to consider is whether states will compute tax on the income earned prior to lifting the waivers. Typically, a company either has nexus for a full year or no nexus at all. Because New Jersey’s nexus waivers end in October, how will the state handle a company that triggers nexus at the end of a year? Would separate accounting or income averaging be appropriate in this situation? The state income tax experts at Ryan can assist taxpayers formulate an approach to this question and can help employers evaluate the tax issues created by giving employees the flexibility to telework.
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Mark L. Nachbar
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