The Virginia Department of Taxation recently issued a letter ruling which determined that an employee working from home within the state creates corporate income tax nexus.

Letter Ruling

The Virginia Department of Taxation (the Department) recently responded to a request for a letter ruling regarding the issue of whether a single employee working from a home office in Virginia creates corporate income tax nexus for an out of state corporation. Va. Dep’t Tax, Pub. Doc. No. 16-15 (Mar. 3, 2016). The taxpayer is an S corporation headquartered outside of Virginia that provides Internet-based templates for customers to produce their own websites.

The taxpayer has a single employee residing in Virginia and working from a home office. The employee is primarily responsible for bookkeeping and accounting matters, human resources and payroll, customer support conducted entirely by email, and legal consultative matters. The employee does not develop software, program computers, work on website templates, or solicit new customers.

The Department determined that the employee’s administrative and accounting activities from a home office within Virginia are sufficient to create nexus for Virginia corporate income tax purposes. The Department supported its position based on the positive Virginia payroll factor from the compensation paid to the Virginia employee. While the Department noted that de minimis activities within Virginia do not create nexus, it lacked sufficient factual information for a full examination of whether the employee’s activities within Virginia are de minimis compared to the taxpayer’s overall operations.

Considerations for Employers with Telecommuters

On a multistate basis, there is a split among states regarding whether an employee working from home providing nonsolicitation activities creates nexus, and potential challenges to states’ assertion of tax filing obligations may be available depending on the facts. In addition, states may have different requirements depending on the tax type at issue (e.g., corporate tax, sales and use tax, payroll tax).  

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