Are you protected from state liability tax changes?

By Toria Lessman, SVP, Underwriting Leader, Transactional Liability, Danielle Nieh, VP, Underwriting Leader and Hannah Tucker, Senior Underwriter. To set up an appointment with any of our authors, simply click on their name to generate an email request.

Tax insurance can be a great resource to provide companies with the assurance they need for a particular tax position. The current tax market is inundated with tax laws and regulations because of COVID-19. The ever-changing tax landscape has left many companies uneasy in instances such as credits, nexus, apportionment positions, among others. This can leave them vulnerable and open to extensive exposure as it becomes increasingly difficult for multi-state companies to ensure they are complying with each state’s tax laws. As a large source of revenue, state tax authorities are cracking down on noncompliance.

The following are a couple examples of recent tax changes for consideration:

Nexus: income and payroll tax impacts due to COVID-19

While numerous states are waiving nexus determinations due to COVID-19, many are still taking a business-as-usual approach. Employees are working from home now more than ever, with many employers anticipating a more permanent remote workforce. This is triggering a previously unforeseeable income tax nexus and has also created payroll tax obligations that never existed.

If an employee is telecommuting, some states are requiring employers to withhold income tax and register for payroll taxes based on the employee’s residence as opposed to their designated office. With this new payroll requirement, which is a factor many states look at to determine income tax nexus, more companies are also facing additional income tax filing obligations. Consequently, companies must decide how they want to proceed in terms of filing and apportioning their income to each state. The variations in this planning can lead to large swings in tax liabilities. This is where tax insurance can come into play and offer the right amount of comfort to allow companies to proceed with confidence in their multi-state tax planning decisions.

Public Law 86-272 (PL 86-272) and e-commerce

Some companies have chosen to assert the protections of Public Law 86-272, which allows a company, whose only activity in a state is sending representatives to solicit orders for tangible goods, to not file an income tax return in each respective state. As referenced, teleworking employees could also forfeit a taxpayer’s ability to assert the protections of PL 86-272 in some states, because they now have activity beyond mere solicitation. While PL 86-272 sounds straightforward, states are also scrutinizing what exactly “soliciting” orders means, with a special focus on e-commerce businesses and their online solicitation of goods. In today’s current technology-heavy market, tax liability insurance will allow these companies to confidently take these tax positions.

Given all the recent tax law changes, it’s important for companies to have a proper multi-state tax plan in place. State tax compliance can be tricky with many moving parts. Companies can protect themselves by securing tax insurance with a carrier that has specialized expertise in this risk.