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In TIR-20-5, the Massachusetts Department of Revenue announced that it will not assert nexus for sales and use and corporate excise tax solely because employees are working in the state temporarily due to COVID-19 and in emergency regulations updating 830 CMR 6.5A.3, the Department provides guidance concerning income tax withholding for employees working temporarily in the state due to COVID-19.

Income tax withholding on wages paid to employees working in the state due to COVID-19

To minimize disruption for employers and employees during the COVID-19 state of emergency, the Department has issued emergency regulations that set forth the income tax withholding requirements that will apply pursuant to employees temporarily working in the state due to COVID-19.

These emergency regulations are effective for the period beginning March 10, 2020, and end on the date on which the Massachusetts Governor gives notice that the state of emergency declared in Executive Order 591 is no longer in effect.

• Nonresident income tax withholding. Under the normal rules, income derived within Massachusetts from employment within the state is sourced to Massachusetts and subject to Massachusetts income tax and income tax withholding (M.G.L. c. 62, § 5A(a).)
  
  Accordingly, all compensation received for personal services performed by a nonresident, who, immediately prior to the Massachusetts COVID-10 emergency, was an employee engaged in performing services in the state, and who during such emergency is performing services from a location outside of Massachusetts due solely to COVID-19, will continue to be treated as Massachusetts-source income subject to Massachusetts personal income tax and income tax withholding. (M.G.L. c. 62B, § 2.)
  
  Note that Massachusetts has not entered into a reciprocal agreement with any other states; accordingly, there is no exception to the nonresident income tax withholding requirement.
  
  
• Resident income tax withholding. A resident employee suddenly working in Massachusetts due to COVID-19 who continues to incur an income tax liability in another state due to that state's sourcing rule will be eligible for a credit for income taxes paid to that other state (M.G.L. c. 62, § 6(a).) Accordingly, the employer is not obligated to withhold Massachusetts resident income tax to the extent the employer remains required to withhold nonresident income tax with respect to the employee in such other state.

Waiver of nexus for sales and use and corporate excise tax

• Sales and use tax. In general, a vendor has nexus for sales and use tax collection purposes if it is engaged in business in the Commonwealth. (M.G.L. c. 64H, § 1.) Generally, a vendor is engaged in business in the Commonwealth if it has a physical presence in Massachusetts, including having one or more of its employees in Massachusetts, or if it makes sufficient sales into Massachusetts in a calendar year. (M.G.L. c. 64H, § 34(a).)
  
  However, for the duration of the COVID-19 Massachusetts state of emergency, the Department announced that the presence of one or more employees who previously worked in another state but, solely due to the COVID-19 pandemic, are working remotely from Massachusetts, will not in and of itself trigger nexus for sales and use tax collection purposes.
  
  
• Corporate excise tax. A business corporation is generally subject to an excise due under M.G.L. c. 63 when it does business in Massachusetts. (M.G.L. c. 63, §§ 1 and 39.) A business corporation is generally considered to be doing business in Massachusetts when it has one or more employees conducting business activities on its behalf in Massachusetts. (830 CMR 63.39.1(3)(b)(5), (5)(b)(3).)
  
  However, for the duration of the COVID-19 Massachusetts state of emergency, the Department will not consider the presence of one or more employees working remotely from Massachusetts solely due to the COVID-19 to be sufficient, in and of itself, to establish corporate nexus. In addition, such presence will not cause a corporation to lose the protections of Public Law 86-272.
  
  
• Apportionment. In general, if a business corporation has income from business activity that is taxable both in Massachusetts and in another state, part of its net income derived from business carried on in Massachusetts is determined by multiplying all of its taxable net income by the three-factor apportionment percentage as provided in M.G.L. c. 63, § 38(c)-(g) and 830 CMR 63.38.1. That percentage is a fraction, the numerator of which generally consists of a property factor, payroll factor, and sales factor, and the denominator of which is the total number of factors utilized in the numerator. The payroll factor is a fraction, the numerator of which is the total amount paid for compensation in Massachusetts during the taxable year by the taxpayer and the denominator of which is the total amount paid for compensation everywhere during the taxable year. (830 CMR 63.38.1(8).)
  
  However, the Department will not consider the presence of one or more employees working remotely from Massachusetts solely due COVID-19 to be sufficient, in and of itself, to establish corporate nexus. Accordingly, for the duration of the COVID-19 state of emergency, services performed by such an employee in Massachusetts will not be considered to increase the numerator of the employer's payroll factor for corporate apportionment purposes.
  
  

Ernst & Young insights

The Department's guidance does not mention the applicability of Massachusetts unemployment insurance pursuant to workers temporarily working within the state due to COVID-19. However, unemployment insurance typically applies in only one jurisdiction based on the federal four-prong test. For more information see our EY Tax Alert 2020-0531.

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