As the Covid-19 pandemic continues to subside, many companies are finding a return to a pre-pandemic, in-person work environment difficult or even undesirable for many employees. A large number of employees have gotten used to working from home and prefer a hybrid work model at the very least. While the exact nature of the future of office space remains uncertain, what is strikingly clear is that the post-pandemic “new normal” will be different going forward. As staffing companies and their clients solidify their remote-work policies, there may be potential state tax planning and savings opportunities arising from the new remote work paradigm.
One opportunity for savings is in the apportionment of income between jurisdictions for state and local income tax purposes. Apportionment is the method by which corporations, in addition to owners of pass-through entities, compute how much income should be subject to tax in a nonresident state or locality. Some states and cities still look at the location of payroll as one of the factors used in their respective apportionment formulas, while many other jurisdictions source revenue from services based on the location of performance or where costs are incurred by the service provider. A remote workforce that is no longer based in one or a few central locations can have a significant impact on these factors.
As companies de-emphasize their offices in large cities, employees may be able to work from home from lower tax jurisdictions in other states or even in the suburbs of large cities. For example, contract workers who previously would have been required to work in clients’ offices in cities like New York, Washington DC, or Philadelphia now may be allowed to work from their homes in suburban Connecticut, New Jersey, Pennsylvania, or remotely from a no tax jurisdiction such as Florida. Depending on the facts and circumstances of the situation, the staffing company supplying the contract worker may be able to source some of its income out of the high tax city, thus reducing local business taxes. In situations where the contract worker works from a lower tax state, there may be opportunities for the staffing company to source its income to the lower tax state where the contract worker works instead of the high tax state where the client’s office is. (Of course, some jurisdictions may try to challenge these methodologies if the employees and workers in question typically work from an office of the taxpayer located in the jurisdiction in question.)
Staffing companies may also want to re-examine where their clients are located, particularly when those clients have multiple locations or provide their own services to other clients using temporary staffing. This is due to the fact that many states now source revenue for services (in computing apportionment) based on the location of the client or where the client receives the benefit from the service (a concept referred to as Market Based Sourcing). Another avenue ripe for opportunities or compliance hurdles is that of specialized apportionment formulas used for software providers, data processing, and various digital related services and products. With the use of different sourcing methodologies in this arena which may be based on where costs are incurred, intangibles may be managed or where customers utilize the intangible property, this is another potential area for planning and examination based on our new normal in terms of the remote work setting.
A less discussed, but potentially as (or more) lucrative opportunity for savings is in the world of sales and use tax. Some states determine the sourcing and in turn, taxability of temporary staffing and recruiting services based, at least partially, on where those services are performed, while others may look to the location of delivery. In a pre-remote work world, those locations were often the same. Now, an IT provider can be sitting in their house in Daytona Beach providing a remote software patch and related consulting and help desk services to a Texas-based company with remote workers obtaining the benefit of these services in several other states. By way of example, Pennsylvania historically imposed tax on temporary staffing services based on where the personnel were performing services. However, in recent guidance the Pennsylvania Department of Revenue has alluded to a shift from that methodology in looking to the location of where delivery occurs, notwithstanding the location of performance. Another quirky example is Ohio, which used to impose sales tax on staffing services, but recently repealed this law. These types of policies or changes to policies and laws can have a major impact on whether tax should be due since the sourcing method dictates where tax should be paid. Staffing companies that provide contract workers to remote-first clients or that have remote-work policies themselves may now be able to source those sales to jurisdictions with no sales tax at all or to jurisdictions which do not tax the particular service at issue.
In addition, another potential savings opportunity may arise when looking into the underlying service being provided by the staffing company. States like Texas and New York may not impose sales tax on staffing services directly, but may look to what the staffing company is providing the client in determining whether sales tax is due. Since many vendors and providers may take overly-conservative positions from a collection standpoint, it is worth examining these invoices and charges.
These areas of tax law are both complex and constantly in flux. Citrin Cooperman’s dedicated team of state and local tax professionals has the experience necessary to help staffing companies navigate the ever-changing landscape of state and local tax law to maximize savings and minimize compliance costs.
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