The department's temporary telework tax rules from November pertaining to nexus, income tax withholding and sourcing will sunset at the end of the month, at which point "existing tax law will govern," the department said in guidance posted online. The temporary rules said the department would not assert nexus for corporate net income tax or sales and use tax purposes "solely on the basis" of an employee temporarily working from home in Pennsylvania.
Reverting to current law means an out-of-state business that employs a Pennsylvania resident working from home after June 30 "has nexus for 2021 and future years based solely on the activities of that employee" unless the worker's activities are protected by the Interstate Income Tax Act of 1959 , according to the guidance. That law, known as P.L. 86-272, insulates businesses from tax on net income when soliciting tangible personal property orders is their only connection to a state.
For sales tax purposes, the guidance said a business that employs a Pennsylvania resident working from home after June 30 may also have nexus for 2021 and future years based on the employee's activities.
"The presence of a remote employee alone will create the nexus for Pennsylvania sales tax," department spokesperson Trevor Monk told Law360.
The department's November guidance said the temporary rules would be in effect through June 30, or 90 days after the state's coronavirus-related state of emergency ended, whichever came first. Monk said the department selected the June 30 sunset date because that aligns with the end of the state's fiscal year and coincides with quarterly employer withholding return and individual estimated payment obligations.
The nexus implications could be widespread, as out-of-state companies that didn't have any remote workers before the pandemic could be subject to Pennsylvania income and sales taxes if their employees don't return to the office, according to Andrew Moylan, executive vice president of the National Taxpayers Union Foundation.
"It is potentially a very significant issue if having even a single remote worker in a state is triggering nexus for the business," said Moylan, whose organization is pushing for federal legislation to provide nationwide standards for nexus and income tax obligations.
Pennsylvania will also end its status-quo sourcing relief that required nonresidents working for Pennsylvania employers to continue sourcing their income to Pennsylvania. Conversely, the relief allowed state residents who stopped commuting to out-of-state businesses to continue sourcing their income to the state of their employer while receiving an offsetting Pennsylvania tax credit.
As of July 1, Keystone State residents required to work remotely for out-of-state employers must source their wages to Pennsylvania, and they won't get a resident tax credit even if their employer's home state taxes the compensation, according to the guidance. That could have implications for Pennsylvania residents who work for New York businesses and are subject to New York's "convenience of the employer rule," which generally sources income to the Empire State even if an employee is physically elsewhere.
Moylan and the foundation have been critical of convenience rules, in part saying they can lead to double taxation and questionable expansion of state taxing authority. Debate over those rules has been elevated during the pandemic, in part due to New Hampshire asking the U.S. Supreme Court to strike down a Massachusetts rule that temporarily sources income from certain nonresidents to the Bay State. The justices are still weighing whether to take the case.
While Pennsylvania employs its own convenience rule, the guidance states that any nonresident employee "who is required to telework full-time from home in another state" shouldn't source their income to Pennsylvania, even if their employer is located there. Monk said the provision isn't a departure from the state's historical position.
"In the case of an employer requiring its employee to work from home in another state, the convenience of the employer rule states that income is sourced to where the work is done," Monk said.
As remote work proliferated during the onset of stay-at-home orders amid the spread of the coronavirus last year, businesses and individuals awaited guidance addressing how telecommuting may have affected their tax obligations. Pennsylvania's notice highlights that taxpayers may still have to navigate a patchwork of tax rules as restrictions are lifted, but with an additional layer of complexity now that remote work is more common, Moylan said.
"These issues don't go away once COVID goes away," he said, referring to COVID-19, the respiratory illness caused by the virus.
While Moylan said he anticipates that most businesses should be able to digest and comply with the new rules, it could be challenging for some less sophisticated companies to keep track of their burgeoning tax obligations.
"There will be folks who end up having surprise bills," he said.
--Editing by Aaron Pelc.
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