Now that we are months since the beginning of the COVID-19 pandemic, postsecondary education institutions have had ample time to adjust and adapt to a new reality. The work has not been easy and will remain a challenge, but to paraphrase a cliché we’re hearing a lot this year, there is opportunity to be found in crisis. Even opportunities, however, should be approached with caution.
The pandemic has forced many on-premises schools to transition fully or in part to online learning. Institutions that have successfully embraced this approach may find online programs will draw students from a much wider geographic area. Having more students is a great development, especially in times like these, but it can also lead to new state nexus issues, as formerly on-campus-only institutions begin to do business in new states.
States are increasingly paying attention to nexus, or the link between businesses and territories governed by a taxing authority. As governments look for increased tax revenue, schools that are beginning to dip into the online waters will need to be aware of nexus requirements, recent court decisions and how COVID-19 fits into these matters.
When to worry about nexus
In the past, nexus was generally created through the existence of a physical connection to a state or local taxing authority. Physical nexus is usually defined as having fixed assets, such as buildings or machinery, in a state. Another common nexus situation occurs if an institution pays the wages of an employee who lives in a given state, which may become more frequent if employees are able to work remotely on a permanent basis. These situations are nothing new for the thousands of business entities that do business across state lines, but institutions that have newly established online programs may need to adjust.
Additionally, states have been expanding their respective definitions of nexus in recent years to include the concept of economic nexus. This is because of a noteworthy decision by the U.S. Supreme Court. 2018’s South Dakota v. Wayfair, Inc. was centered on sales tax, but its largest impact was holding that a physical presence is not required for nexus and a significant economic or virtual presence can be enough. Wayfair’s repercussions give states more ammunition to go after for-profit businesses, including for-profit educational institutions, that have substantial operations in a given state — regardless of their physical presence.
Not every institution will retain their online programs, post-pandemic. As such, temporary programs and employees who are working remotely on a short-term basis are unlikely to be targets of taxing authorities. In fact, many states are giving blanket exemptions to on-campus schools disrupted by COVID-19 (see more on state and local taxes here).
What to do now
States vary on their approach to nexus, so it is up to institutions to learn the various rules of the areas where they provide service. Failing to register for a sales tax license or file income tax returns in states where it is required can lead to back taxes, penalties, interest or fines.
At McClintock & Associates, we are current on all COVID-19 and nexus-related legislation around the nation and regularly perform nexus studies for institutions. To learn more, feel free to reach out and schedule an appointment with our experts.