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CA Issues New Guidance on Taxation of Teleworking During the Pandemic

by Alex Thacher

Summary

At the beginning of the COVID-19 emergency, California Governor Gavin Newsom issued an executive order that required individuals to work from home. This order may have given corporations with no connection to California a physical presence in the state due to an employee’s teleworking from home. As a result, the state Franchise Tax Board (FTB) has compiled an FAQs list, which indicates that out-of-state corporations in this situation will not be considered to be ”doing business” in California and thus not be subject to the franchise tax.

Furthermore, the FAQs indicate that the telework activities are de minimis for the purposes of Public Law 86-272, which allows certain protections from state income tax for sellers of tangible personal property.


In Detail

Executive Order N-33-20, issued by Governor Newsom in March 2020, is a public health order that required employees to work from home. According to the FTB FAQs page, “the FAQs are applicable until the Governor's Executive Order is no longer in effect.” California “will not treat an out-of-state corporation whose only connection to California is the presence of an employee who is currently teleworking in California due to Executive Order N-33-20 as being actively engaged in a transaction.” Also, for purposes of determining nexus, California will not include the compensation paid to that employee in its bright-line payroll threshold determination.

In California, corporations are required to file a tax return and are subject to the minimum franchise tax if they are doing business in California or organized/domiciled in the state. The “doing business” standards in California apply to companies who are actively engaged in activities for financial gain and exceed bright-line standards. The 2019 bright-line standards were $601,967 for sales, $60,197 for property or $60,197 for payroll.

California also extended this protection to PL 86-272 protections as well. The FAQs indicate that California “will treat the presence of an employee who is currently teleworking in California due to the Governor's Executive Order as engaging in de minimis activities for purposes of PL 86-272 protection.”

For individuals, the FTB stated that if they have been present in California for the past nine months they will be subject to California individual income tax and must file a tax return. However, actions taken related to COVID-19 and Governor Newsom's executive order will be weighed on a facts and circumstances basis to determine if the residency was proper. These factors are related to the temporary nature of residence and will look at the activities performed by the individual related to the COVID-19 emergency.

The state has not yet clarified whether this nexus relief for telecommuting employees will also apply to sales/use tax nexus.


Insights

California has set out fairly clear guidance as to their position related to state income/franchise tax nexus due to teleworking employees. Many additional states have similar guidance and relief, while some other states are not being as lenient.

If a company has a large teleworking presence as a result of COVID-19, payroll for 2020 may not be as good of an indicator of state nexus as it has been in the past. This is something that organizations should be considering now rather than waiting until next year at return time, as it could impact estimated payments, provisions and extensions.

Refer to our State & Local Tax Relief matrix to see which other states are offering similar relief opportunities. If you have any additional questions, contact our experts.

October 27, 2020

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Authors
Alex Thacher - Partner, Tax - San Jose, CA | Armanino
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