Pennsylvania updates remote work tax policy as COVID rates drop

The COVID-19 pandemic is by no means over, but with transmission rates down 94.4% since their January 2021 peak, many companies are back to business as usual — with or without masks and other heightened safety measures. Other businesses are finalizing return-to-office plans. In turn, some states are revising remote work tax policies adopted last year. Pennsylvania’s temporary telework tax policy will end June 30, 2021.

In 2020, the Pennsylvania Department of Revenue said it would not seek to impose sales and use tax nexus or corporate income tax nexus “solely on the basis” of employees temporarily working remotely in Pennsylvania because of the pandemic. (Nexus is the connection between a business and a taxing authority that creates a tax obligation for the business.) But starting July 1, 2021, Pennsylvania is resuming enforcement of its pre-COVID-19 telework tax policy. This will affect sales and use tax as well as corporate income tax and withholding tax.

For sales and use tax, a company that maintains a place of business in the commonwealth is required to collect and remit sales tax. Maintaining a place of business includes “engaging in any activity as a business within this commonwealth by any person, either directly or through a subsidiary, representative, or an agent.”

Consequently, any company with an employee working remotely from the Keystone State after June 30, 2021, “may have nexus for 2021 and future years based solely on the activities of that employee.” 

The temporary tax relief in Pennsylvania affected both employees and employers, as will eliminating it and returning to pre-pandemic policy.

Impact on employees

For the duration of the COVID-19 state of emergency, compensation for nonresidents who were working in Pennsylvania before the pandemic remained sourced to Pennsylvania for all tax purposes. This includes employer withholding, PA-40 reporting, and three-factor business income apportionment for S corporations, partnerships, and individuals. Likewise, compensation for Pennsylvania residents who were working out of state prior to the pandemic remained sourced to that state, and residents could continue to claim a resident credit for tax paid to the other state.

From July 1, 2021, employees must apply existing tax law to their current situation. Thus, a Pennsylvania resident working full time from home rather than at their employer’s location in another state should treat their compensation as Pennsylvania source income. Residents cannot claim a resident credit for Pennsylvania source income even if the other state taxes their income.

A nonresident employee required to telework full time from home in another state should treat their income as non-Pennsylvania source income, even if their employer is in Pennsylvania. In such cases, the employer isn’t required to withhold on the employee’s compensation.

Impact on employers

During the pandemic, Pennsylvania employers with a nonresident employee temporarily working from home due to COVID-19 in a state with no reciprocity agreement with Pennsylvania were advised to continue sourcing the employee’s income to Pennsylvania, and to keep withholding on that compensation.

Out-of-state employers whose only connection to Pennsylvania is an employee remotely working full time from home in the commonwealth may withhold on such employee’s compensation. However, withholding isn’t required.

A corporation is subject to income tax in Pennsylvania if it:

• Carries on activities in Pennsylvania
• Does business in Pennsylvania
• Has capital or property employed or used in Pennsylvania
• Has one or more employees conducting business activities on its behalf in Pennsylvania
• Owns property in Pennsylvania

According to the department, a non-filing out-of-state corporation that employs a Pennsylvania resident who works from home in Pennsylvania after June 30, 2021, “has nexus for 2021 and future years based solely on the activities of that employee unless the telework activity is protected by P.L. 86-272 [the Interstate Income Tax Act of 1959], i.e., solicitation of sales of tangible personal property with orders approved and shipped from inventory outside Pennsylvania.”

See the Department of Revenue’s Telework Guidance for more details.

A host of COVID-19 state tax relief programs have already ended. Like Pennsylvania, states that temporarily waived enforcement of certain nexus laws due to mandatory remote work requirements will be reevaluating those policies, if they haven’t already.

In some instances, this is causing friction between states. For example, New Hampshire is suing Massachusetts for taxing income from New Hampshire residents working remotely in the Live Free or Die state during the pandemic. Prior to the pandemic, close to 100,000 New Hampshire residents typically commuted to the Bay State for work.

Individuals and businesses need to consider how remote work impacts tax obligations as the deadline for remote work tax relief in Pennsylvania approaches, and as other states confront this issue. Delve deeper into this issue in Taxing Tomorrow: States reshape nexus laws for remote employees.