The department said in an informational bulletin that employers who normally don't need to withhold state income tax from employees must register with the department and withhold the tax from employees working in the state for more than 30 days, even if the work is performed at home.
As relief, the department said it will waive penalties and interest for any failure to withhold the Illinois income tax by out-of-state employers who withhold tax on behalf of an employee working from home in the state only due to the coronavirus.
The bulletin doesn't apply to out-of-state companies that are registered in Illinois, or to states with reciprocal agreements such as Iowa, Kentucky, Michigan and Wisconsin, the department said. The department added that employers should register with the department and withhold tax as soon as they can to avoid delays with processing.
Sam Salustro, a department spokesperson, told Law360 in an email that the guidance was issued to advise employers of their withholding obligations while the coronavirus pandemic altered normal work routines.
The bulletin, which discusses employees who are Illinois residents, follows department regulations proposed in January that would specify how workers should calculate their number of days worked in the state for purposes of the 30-day safe harbor against state income tax for nonresident employees.
Those rules were put forward to implement a 2019 law that created the safe harbor to ward off the possibility of double taxation. Under prior law, in-state compensation was based on the location of the base of operations, the place from which services were directed or controlled or the individual's residence in the state.
"I think this is a good recitation to employers to realize what their obligations are, and it sort of gets rid of the 'gotcha' thing," Steve Wlodychak, a principal at EY, told Law360 about the bulletin.
Wlodychak said that while the penalty and interest waiver was a good-faith effort to employers, it didn't go as far as the relief offered by other states, such as New Jersey, which said it will temporarily source wage income based around the employer's jurisdiction during the pandemic.
He added that the pandemic has created an inflection point on income sourcing rules due to the increased number of employees who are working from home and will continue to do so even after stay-at-home orders expire across the country.
"You're going to have to adjust to the new circumstances," Wlodychak said of employers. "If you have people working from home who weren't there before, and now the temporary protections are over, you're going to have withholding obligations in different places than you did before."
Douglas Lindholm, president and executive director of the Council on State Taxation, said that the different state laws regarding safe harbors imposed burdens on employers and that the withholding obligations established as a result of remote work was a form of "nexus opportunism" by states.
"They need to be more flexible in the era of lockdown because businesses are forced to do things in the era of lockdown that they otherwise wouldn't be doing," Lindholm said.
He added that COST was pushing states to adopt safe-harbor provisions with reciprocal agreements, as Illinois has, with provisions modeled off the federal Mobile Workforce State Income Tax Simplification Act, which has been proposed for several years but never received final approval from Congress. COST also supports federal legislation for safe harbor provisions.
"States need to remember that they'll get the most tax dollars the quicker companies get up and running, and easing regulatory burdens is certainly a part of that," Lindholm said. "What generates tax revenues? Economic activity, so let's try to grow the economic activity as fast as possible."
--Additional reporting by Paul Williams. Editing by Neil Cohen.
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