The rise of telecommuting spurred by the ongoing pandemic could likely present tax compliance challenges for employers, particularly as certain states begin to lift policies that disregarded the presence of remote workers when making nexus determinations for businesses.

And, with telecommuting becoming a permanent fixture of many workplaces, businesses must begin to navigate a patchwork of unfamiliar rules that could significantly alter their withholding, income and sales tax obligations.

According to Evan Hamme, a New York-based Tax counsel at Pillsbury, "a more widespread workforce could have the greatest tax implications on payroll withholding and employee income tax liabilities, which might lead state policymakers to take action to protect their residents from potential double taxation."

Indeed, Hamme noted that Connecticut already took a step to do so in enacting a law that provided residents a credit for income taxes paid to New York or elsewhere in 2020 for days spent working in Connecticut. That law also barred the Connecticut Department of Revenue Services from considering activities from remote employees who were working in the state solely because of the pandemic when making nexus determinations on employers for 2020.

Because several states—most notably New York—use a convenience of the employer rule that generally sources an employee's income to the state of their employer unless it is necessary for the employee to work elsewhere, lawmakers in other states could consider passing a law similar to Connecticut's, Hamme said. If employees fan out into states that aren't experienced with dealing with the convenience rule, legislatures could explore options to ease the tax burdens on their constituents, he added.

"To the extent that you are paying New York income tax, are those states going to provide or allow that credit? Normally, state statutes aren't really designed to do that," Hamme said.

Additionally, he said it remains to be seen how stringently states will enforce withholding obligations on employers whose employees are working in other jurisdictions.

Many neighboring states also have reciprocal agreements in which they agree not to tax a nonresident employee's compensation if an employer withholds taxes in the employee's resident state. Hamme said it could be worth watching to see if states that aren't adjacent to one another give consideration to forming reciprocal agreements as remote work proliferates to provide "clarity and relief" on withholding tax obligations.

Read more in Law360.