Pennsylvania issues permanent guidance regarding its telework policy

In 2020, Pennsylvania issued temporary guidance on the tax implications related to teleworking because of the COVID-19 pandemic. This guidance is only effective until June 30, 2021. As of July 1, 2021, the temporary guidance will no longer be effective and pre-existing law will apply.

Corporate Net Income and Sales/Use Tax:

Prior guidance (effective until June 30, 2021)

The PA Department of Revenue issued temporary guidance that it was not going to impose nexus solely based on telework if it was due to the COVID-19 pandemic. Specifically, temporary activity which caused employees of a business to temporarily work remotely from home (at a location in PA) due to the COVID-19 pandemic did not create nexus for Pennsylvania Corporate Net Income Tax (“PA CNIT”) and Sales/Use tax purposes.

New guidance (as of July 1, 2021)

PA CNIT

An out-of-state corporation that continues to have a Pennsylvania resident working remotely from home during 2021 (after June 30, 2021) may have nexus for 2021 and future tax years based solely on the activities of the employee (unless the telework is protected under P.L. 86-272[1]).

A corporation is considered to have nexus for PA CNIT purposes when it has one or more employees conducting business activities (not protected under P.L. 86-272) on its behalf in Pennsylvania. Therefore, the company would be required to register for PA CNIT and file returns.

Sales/Use Tax

A company that continues to have a Pennsylvania resident working remotely from home during 2021 (after June 30, 2021), may have Pennsylvania Sales/Use Tax nexus for 2021 and future tax years solely based on the activities of the employee located in the state. Therefore, the business would be required to register for Pennsylvania Sales/Use Tax and file returns.

A business is considered to have nexus with Pennsylvania for sales/use tax purposes if it maintains a place of business in the state, which includes engaging in any activity as a business within Pennsylvania by any person, either directly or through a subsidiary, representative or agent.

Personal income tax and employer withholding

Prior guidance (effective until June 30, 2021)

Employees: The Pennsylvania Department of Revenue did not consider an employee temporarily working remotely from home (due to the COVID-19 pandemic) a change to sourcing of the employee’s compensation. Therefore, the compensation of non-residents who worked in the state before the pandemic but worked remotely from home outside of it during the pandemic was still treated as income sourced to Pennsylvania for all tax purposes (including PA-40 reporting, employer withholding and for three-factor income apportionment purposes for S corporations, partnerships and individuals). Conversely, the compensation of Pennsylvania residents who were working out-of-state before the pandemic but worked remotely from home inside Pennsylvania during the pandemic was sourced to the other state and a resident credit for the tax paid to the other state was still able to be claimed.

Employers: A Pennsylvania employer with non-resident employees temporarily working remotely from home (outside of Pennsylvania) due to the COVID-19 pandemic in states that did not have a reciprocity agreement with Pennsylvania, was required to continue withholding Pennsylvania income tax on the compensation as that compensation was still treated as Pennsylvania sourced.

New guidance (as of July 1, 2021)

After June 30, 2021, employees will need to assess their current working situation and apply existing Pennsylvania tax laws.

A Pennsylvania resident required to telework full-time remotely from home in Pennsylvania, rather than their employer’s location in another state, should treat his or her compensation as Pennsylvania source income.

Pennsylvania does not permit a taxpayer to claim a resident credit on Pennsylvania source income. Therefore, a Pennsylvania resident who is employed by an out-of-state employer but is required to telework remotely from home in Pennsylvania cannot claim the Pennsylvania resident credit on the Pennsylvania tax return (even if the state where the employer is located taxes that compensation). An employer located outside of Pennsylvania, and whose only connection to Pennsylvania is an employee who teleworks full-time remotely from home in Pennsylvania, is not required, but may, withhold on the employee’s compensation.

A non-resident employee required to telework full-time remotely from home outside Pennsylvania should treat his or her compensation as non-Pennsylvania source income even if the employer is located in Pennsylvania. In such situations, the employer is not required to withhold on the employee’s compensation.

Tax credits

Many specific Pennsylvania economic development programs and tax credits require that certain costs (e.g., employee wages and research and development expenses) be sourced to Pennsylvania or a defined location within the state. As previously indicated, beginning July 1, 2021, the temporary guidance will no longer apply, and existing tax law will be in effect.

Mazars’ Insight

Taxpayers that have employees who were working remotely from home located in Pennsylvania on a temporary basis, solely due to the COVID-19 pandemic, during 2020 and the first half of 2021, and who will now continue working remotely in Pennsylvania on a permanent basis after June 30, 2021 and going forward, will likely have nexus with Pennsylvania beginning July 1, 2021. If that is the case, such taxpayers will be required to register and begin filing the appropriate Pennsylvania tax returns (i.e., CNIT and Sales/Use Tax) as well as properly withhold for employees working in the state.     

Please contact your Mazars professional for additional information.

[1] Solicitation of sales of tangible personal property with orders approved and shipped from inventory outside PA.

Published on June 30, 2021

Authored by Harold Hecht and Harry Johnson