What COVID-19 Tells Us About … SALT

COVID-19 may be the newest exacerbator of high blood pressure in humans, and it is having an effect on another well-known catalyst for stress, SALT. But this is not your old-fashioned table variety we are referring to. In the accounting department at the University of Maryland’s Robert H. Smith School of Business where I teach, we think of SALT as state and local taxation.

For the practicing tax accountant, the mere mention of SALT is enough to cause one to cringe. How so? Imagine the confusion we would have in the USA if every state printed its own currency. Every time you crossed state lines, you would have to worry about exchange rates as you conducted transactions. Interstate commerce would be a nightmare.

Well, this is the exact scenario between the states today with regard to sales taxes and income taxes, both for individuals and businesses: Every time an individual or business has interstate business, a new set of rules comes into play and along with it heavy-duty compliance issues.

The artery-constraining pressure that the coronavirus pandemic is having on the SALT world can be boiled down to one word: telecommuting. Employees who find themselves working from a location outside of the state where they usually work in can create new tax issues they never before needed to deal with.

For example, the general rule is that state income taxation on an employee is based on where the individual works. So, someone living and working in Florida will pay no state tax because Florida is without an income tax. No problem.

However, if because of quarantine restrictions that worker opts to live in Maryland for an extended time period, in essence telecommuting in the eyes of the Florida employer, then Maryland is going to claim the source of those dollars as belonging to the Maryland income tax system because they are being earned there. Oops, that can hurt.

Let’s reverse the scenario. Let’s imagine that the employee usually lives and works (and pays income taxes) in Maryland. With coronavirus restrictions in place, the worker decides to telecom from the beach in Florida. Ah, no income tax in Florida so no Maryland income tax while the person telecommutes from the Sunshine State, right? Wrong. Maryland’s tax authorities will say that unless the telecommuter has moved to Florida on a permanent basis—a permanent change in domicile—Maryland is the resident state and Maryland is still owed the taxes.

It can get even more complicated because some states, such as New York, do not follow the sourcing rule of where you work, but the sourcing rule of where the employer is based. So, someone telecommuting from Maryland, being paid by a New York employer, will incur Empire State taxes even as Maryland insists on a bite at the tax apple on the same income. This mismatch of sourcing rules between states creates havoc.

Businesses—the employers—face similar dilemmas. Suppose the employer is a Maryland company selling goods in various states via the internet. Having no business presence in, say Virginia, the Maryland-based business has no income tax obligation there. However, if an employee is telecommuting from Virginia thanks to quarantining, then that could create a connection to Virginia, causing the Maryland company to face income tax compliance and tax return compliance obligations there.

To be fair, most states have in place mechanisms to avoid double taxation through “credits,” and many have relaxed their rules during the pandemic. But not all. Plus, it doesn’t necessarily relieve the compliance issues of taxpayers, nor the fact that notwithstanding the “credits,” the employee still will pay the tax rate of the state with the highest tax bracket.

Even before corona, businesses faced a myriad of tax rules to follow when conducting interstate commerce. For example, internet companies today are burdened with collecting sales tax on sales to all states they ship to. That by itself is a nightmare to follow because every state has different rates and rules for sales tax, and some states have different rates by local jurisdictions. Ugh!

Now, I am not a student of political science. But it seems to me that the lack of a unified, coherent federal response to the virus has magnified and brought to the forefront what practitioners of SALT already know. In today’s multistate economic climate, maintaining certain states’ rights on taxation is counterproductive. An overhaul coming from the feds, at least in part, is needed.

About the author:

Sam Handwerger, CPA, is a full-time lecturer in the accounting and information assurance department at the University of Maryland’s Robert H. Smith School of Business. Handwerger was a senior tax researcher with EY in New York City and later led the tax planning and preparation departments of the CPA firm Handwerger, Cardegna, Funkhouser & Lurman.

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