State Tax Nexus and Withholding Rules for a Mobile Workforce | Podcast

Private Equity in Motion

In this episode of Weaver: Beyond the Numbers, Private Equity in Motion, Sean Muller and John Westbrook break down the state tax challenges that can arise when employees travel across state lines. They explain how mobile workers may trigger withholding obligations, sales tax nexus and potential state income tax exposure for organizations. The discussion highlights how these issues surface during due diligence, what employers should be tracking and practical steps companies can take to quantify and manage multistate compliance risk.

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Detailed Description of State Tax Nexus and Withholding Rules for a Mobile Workforce

00:00:00
Sean: This is Sean Muller, and John Westbrook is joining me again, and we’re talking about issues we’re seeing on the state tax side in due diligence, right?

00:00:08
Sean: John, the big thing we see a lot recently is traveling employees. So, I’m based in Texas, wherever my home base is, and I’ve got employees who are working all over the country.

And so, my issue there is, if I’m sending John to Louisiana for a week of work and I’m not withholding taxes, right?

00:00:28
John: Right.

00:00:28
Sean: What am I running into? What are my issues there?

00:00:31
John: Well, Texas specifically doesn’t have a personal state income tax. So, fortunately, we’re good there. But you go across the border to Louisiana and, you know, they do.

And so, you have to check the regulations for each state to determine how long an employee has a presence within a state before you’re required as their employer to withhold.

00:00:53
John: In closely bunched states, more in the Northeast, there are some reciprocal agreements where it’s less of an issue. But it is a state-by-state issue.

00:01:05
John: And so, if you’re sending employees into states and they’ve got a very short window, a dozen days or something along those lines, then you may have a withholding obligation in that new state for that employee’s income tax purposes.

In addition to the employee’s personal income taxes, that’s almost always going to give you sales tax nexus in that state that the employee is traveling into, and also potentially state income tax nexus for the organization that is sending the employee in.

00:01:41
Sean: Okay. So, we have an employee withholding obligation. And if I’m in Texas and I go to Louisiana to go work, well, I’m going to want to be grossed up. So, it’s a cost of doing business, right?

So, the employer, if they’re doing it right, should be withholding for me and probably reimbursing me for it and not dinging me for that extra state tax because I’m choosing to live in a no tax state or a low tax state, right? So that’s on the employee side, right?

00:02:02
Sean: And then on the employer side, we’ve got to register for payroll taxes in that state, right? We’ve got to do the unemployment taxes. We’ve got all those issues too, right?

00:02:10
John: That’s correct. Yes. And I mentioned sales tax because sales tax is typically any presence whatsoever, and that state is going to give you a sales tax registration obligation in the state.

00:02:21
Sean: Okay. So, I haven’t been withholding any of my state taxes. My employees are traveling all around. How do I even answer that question if I’m under due diligence and they ask the question, right? What do I even do then?

00:02:34
John: Well, I think that’s a situation that we do see very frequently.

And if you don’t have sufficient controls, or you don’t have well-established controls going into diligence, then you do the best you can, maybe sometimes through expense reimbursements.

If you can track it down and you know it’s limited, then you as a seller can limit potentially the assumed nexus. Because if we’re on the buy side and we hear that we have traveling employees, then all of our nexus rules kind of go out the window and we just say anywhere where you have sales, we’re going to assume that you have withholding, or you have income tax, or you have sales and use tax nexus.

And so, then it’s kind of back on the seller to try to reel that back in.

00:03:21
John: So, if you can establish some general rules that you can apply and/or go get those additional pieces of information that can show employee travel is limited to just surrounding states, that can be beneficial to you.

00:03:35
Sean: So, the homework assignment is, if you’re not doing it and you don’t even plan to do it, at least be able to quantify it so you can put some risk around that.

00:03:43
Sean: Because there are a lot of businesses that just take that risk of sending folks around. But you at least need to do a good job of quantifying what it is the best you can, because otherwise you leave it to the professionals that say, I don’t know, I’m putting the biggest number possible, right?

00:03:54
John: Absolutely, yes.

00:03:56
Sean: Well, John, it’s been helpful. Thank you so much.

00:03:58
John: Thank you.

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