May 11, 2020
New Jersey updates guidance concerning nexus and income tax withholding for temporary work from home due to COVID-19
On May 6, 2020, the New Jersey Division of Taxation expanded on its March 30, 2020 guidance concerning the assertion of nexus and the income tax withholding requirements that apply for employees temporarily working in the state due to COVID-19.
In its March 30th guidance, the Division explained that during the period of the COVID-19 national emergency it will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) that treats employee work from within New Jersey as sufficient nexus for out-of-state corporations. It also stated that if employees are working from home solely as a result of closures due COVID-19 and/or the employer's social distancing policy, no threshold will be considered to have been met. (See EY Tax Alert 2020-0797.)
Additional guidance on nexus for sales tax
The Division states that pursuant to the COVID-19 pandemic, it will temporarily waive the sales tax nexus standard that is generally met if an out-of-state seller has an employee working within New Jersey. Accordingly, as long as the out-of-state seller did not maintain any physical presence other than employees working from home in New Jersey and is below the economic thresholds, the Division will not consider the out-of-state seller to have nexus for sales tax purposes during the period of the COVID-19 emergency.
Additional guidance on income tax withholding
Under the normal rules, New Jersey dictates that income is sourced to the state based on where the service or employment is performed using a day's method of allocation. However, during the temporary period of the COVID-19 pandemic, the Division states that wage income will continue to be sourced as determined by the employer in accordance with the employer's jurisdiction. The Division notes that because of the reciprocal agreement between New Jersey and Pennsylvania, New Jersey nonresident income tax is not required on wages for services performed within New Jersey by Pennsylvania residents.
When asked if the Division would advise New Jersey employers to not change the current work state set-up for employees in their payroll systems who are now telecommuting or temporarily relocated at an out-of-state employer location, the Division responded that it would not require employers to make that change for this temporary situation; however, employers must consider their unique circumstances and make that decision.
If examined at a later date for the period of the COVID-19 emergency, the Division said that relief from assessment for underwithheld tax, penalties and interest will be granted on a case-by-case basis if circumstances warrant.
Finally, the Division states that it does not plan to alter its audit enforcement approach pursuant to telework arrangements instituted in 2020 due to the COVID-19 emergency because its current audit program already includes the review of sourcing of income.
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