As companies expand into new states in light of COVID-19, the complexity only increases.
The COVID-19 pandemic has created trying circumstances for businesses of all sizes. In addition to general operating strains, the pandemic has exposed companies to a greater level of risk. Legal counsel and executive management understand that failure to comply leads to financial penalties. Noncompliance can also prevent the business from hiring or retaining employees, serving customers out of state, and meeting the bottom line.
Companies with operations, employees, and customers normally contained to a limited geographical area suddenly find their nexus suddenly broadened. This has triggered a slew of additional tax and legal entity registration considerations.
This article will cover how companies can meet state employment tax requirements, protect corporate good standing, and support internal systems during uncertain times.
Hiring and Retaining Out-of-State Employees
As a direct result of COVID-19, an estimated 56% of the U.S. workforce is now working remotely. The benefits are immediate, with employers easily able to recruit top talent regardless of a candidate’s state of residence.
With activity in a new state, however, comes specific requirements for that jurisdiction. Most states have wage withholding taxes (with notable exceptions, like Florida and Texas) and unemployment insurance taxes. Employers aren’t automatically enrolled for these taxes; separate filings are typically needed to open each account to process payroll and file returns in each state.
Many states consider maintaining employees to be a form of transacting business, thus triggering the need to register the legal entity and appoint a registered agent in that state. This process, known as foreign qualification, usually takes place before tax accounts can be opened.
Together, entity registration and filing for payroll accounts can take a few weeks, depending on the state. Employers should consider adopting a longer-term view to hiring out-of-state employees and give themselves several weeks to assess their liability and file. By doing so, they help ensure top talent is onboarded and promptly paid.
Even businesses that haven’t hired new employees are open to additional requirements. Since many employer taxes are based on residency, companies should review their existing employees’ working arrangements and assess whether they face any additional payroll tax or entity registration requirements. They may similarly find themselves required to register and report outside their usual base of activity.
Selling Products and Services Virtually
In the wake of South Dakota vs. Wayfair, Inc., many states implemented a tax on the online sales of products, regardless of whether the seller has a physical location in that state. COVID-19 has only exacerbated the upward e-commerce trend. Whether or not your company has a traditional retail focus, selling virtually to customers raises the distinct possibility of creating tax nexus.
Taxes on online sales are imposed at the state level. Everything from the thresholds to the types of nexus created varies greatly. Like payroll taxes, enrollment for state sales and remote seller taxes isn’t automatic. Companies must register with state departments of revenue to open these accounts.
Many states also ask for proof of secretary of state registration and the registered agent’s information, even for sales taxes. As a result, management should account for the time needed to assess liability and register with all required state agencies before taxable sales activity begins.
Ensuring Home State Compliance
As COVID-19 stretches traditional operating footprints across multiple states, management shouldn’t overlook issues closer to home. In particular, companies should take the time to review the following:
Registered Agent Representation
A registered agent is the company’s designated point of contact to receive service of process and other legal and government notices. The agent’s key responsibility is to be physically available during all regular business hours to receive and forward these documents to the company they represent. Many businesses choose to appoint an owner or officer at the company’s address, either for perceived convenience, or to save on service fees.
With most employees—and management themselves—working from home, it’s a good idea to search for your business in state records and identify your registered agent. If the information is outdated, or no one is available to receive documents, you’ll need to file a change of registered agent form with your state.
While this may seem like a minor step, there can be significant consequences for missing a delivery of service of process. Fines, penalties, and even default judgment can occur. Management should repeat this process in each state in which their company registers, identify a reliable registered agent, then file to close the gaps.
Annual Report Compliance
Nearly every state requires registered business entities to file an annual report to stay in good standing. While submitting a single report may be a simple task, tracking deadlines and filing reports throughout the year can be a challenge. And, late or missing reports can lead to costly penalties and reinstatement fees.
As companies expand into new states in light of COVID-19, the complexity only increases.
Companies that manage annual reports on their own should ensure their employees have access to the required information, training, and resources to file on time. At some point, the company may consider using a managed solution, the efficiencies of which frequently offset the internal costs of managing annual report compliance.
Assessing Internal Systems
Regardless of their industry or specific requirements, businesses rely on internal systems and processes to ensure compliance. With employees, vendors, and management more spread out than ever, now is an excellent time to review those systems. Management should periodically review, at a minimum:
- Who ensures state annual reports, tax returns, and business license renewals are submitted on time
- If the company has engaged with a vendor, who manages the vendor relationship
- How sensitive information is stored and communicated between parties
- If those channels are secure
- If employees fully understand their responsibilities
- If management has adequate oversight of the process
- If all stakeholders have ready access and insight to the legal entity data, licenses, tax information, and company records needed to maintain compliance
Legacy systems such as physical file folders and stopping by a colleague’s desk are no longer practical. So too is the use of static spreadsheets and calendar reminders. Growing, multi-state companies need a reliable solution for entity management, records storage, and outsourced compliance. Management should also consider investments in secure collaboration tools that ensure compliance – and by extension, foster growth.
The most successful companies are adapting to the new paradigm created by COVID-19. When viewed as a tool to hire top talent nationwide, engage with new customers, and improve operating efficiency, compliance can be a driver of profitability, even in times of global uncertainty.
Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
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