Pennsylvania's pandemic-related rules, which allow companies to ignore the presence of remote workers in the state for determining the link between corporate and sales taxes, will end on June 30, the state Treasury Department said Thursday.
The November Teleworking Department's Temporary Tax Rules on Nexus, Income Tax Withholding and Sourcing will expire at the end of the month. At this point, "the existing tax law will be decisive," said the department in a guide published online. The department said the preliminary rules would claim no connection for corporate tax or sales tax purposes "solely on the basis" of an employee temporarily working from home in Pennsylvania
The return to applicable law means that a non-state corporation employing a Pennsylvania resident from home after June 30th has "an association for 2021 and years to come based solely on that employee's activities", unless the worker's activities are protected by the Interstate Income Tax Act 1959 , according to instructions. This law, known as P.L. 86-272, isolates corporations from net income tax when ordering tangible personal property contracts is their only link with a state.
For sales tax purposes, the guidelines state that a company that employs a Pennsylvania resident who works from home after June 30th may also have a nexus for 2021 and future years based on the employee's activities.
"The mere presence of a remote worker will create the nexus for sales tax in Pennsylvania," department spokesman Trevor Monk told Law360.
The department's November guidelines said the temporary rules would apply until June 30 or 90 days after the state's coronavirus-related state of emergency ended, whichever comes first. Monk said the department chose the June 30 expiration date because it coincides with the end of the state's fiscal year and coincides with quarterly employer reimbursement withholding and estimated individual payment obligations.
The implications of the link could be far-reaching, as companies outside of the state that didn't have teleworkers 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 problem for even a single remote worker in a state to create a nexus for business," said Moylan, whose organization is pushing for federal laws to provide statewide standards for nexus and income tax obligations.
Pennsylvania will also end its status quo sourcing facilitation that required non-residents working for Pennsylvania employers to continue to source their income in Pennsylvania. Conversely, the relief allowed state residents who stopped commuting to companies outside of the state to continue to draw their income from their employer's state while receiving an offsetting Pennsylvania tax credit.
Beginning July 1, Keystone state residents who need to work remotely for employers outside of the state will be required to draw their wages in Pennsylvania and will not receive a resident tax credit, even if their employer's home state taxes the compensation under the guidelines . This could affect Pennsylvania residents who work for New York businesses and who are subject to the New York Employer Convenience Rule usually sources of income to the Empire State, even if an employee is physically in a different location.
Moylan and the Foundation were Criticism of convenience rules, partly on the grounds that they can lead to double taxation and questionable expansion of state tax authorities. The debate over these rules intensified during the pandemic, in part because New Hampshire asked the U.S. Supreme Court to repeal a Massachusetts rule that temporarily draws Bay State incomes from certain non-residents. The judges are still weigh whether the case should be accepted.
While Pennsylvania has its own convenience rule, the guidelines state that any non-resident worker "who must telework full-time from home in another state" should not receive income from Pennsylvania, even if their employer is based there . Monk said the provision was no departure from the state's historical position.
"In the event that an employer requires his employee to work from home in another state, the employer rule states that the income is drawn where the work is done," said Monk.
As teleworking increased during the onset of stay-at-home orders amid the spread of the coronavirus over the past year, businesses and individuals have been waiting for guidance on how teleworking affects their tax obligations. The Pennsylvania notice highlights that taxpayers may still have to navigate a patchwork of tax regulations once restrictions are lifted, but with an added layer of complexity as remote working becomes more common, Moylan said.
"These problems don't go away once COVID goes away," he said, referring to COVID-19, the respiratory disease caused by the virus.
While Moylan said he believes most companies should be able to digest and comply with the new rules, it could be a challenge for some less demanding companies to keep an eye on their growing tax obligations.
"There will be people who end up with surprising bills," he said.
– Editing by Aaron Pelc.
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