Pennsylvania and Philadelphia Tax Updates: Considerations for Post-COVID Remote Work

Businesses with employees in Pennsylvania and Philadelphia should be prepared to adapt to a post-COVID world as temporary guidance regarding remote work expires and pre-COVID rules regarding employment tax withholding and nexus are applied.

Pennsylvania

In the spring of 2020, the Pennsylvania Department of Revenue (DOR) announced that remote work by employees as the result of the pandemic would effectively be disregarded for Pennsylvania tax purposes. If an employee was working from home due to the COVID-19 pandemic, the DOR did not treat that as a change to the sourcing of the employee’s compensation. Therefore, for non-residents who were working in Pennsylvania before the pandemic, their compensation remained Pennsylvania-source income for all tax purposes. Likewise, for Pennsylvania residents who were working out-of-state before the pandemic, their compensation would remain sourced to the other state.

Effective July 1, 2021, the DOR announced that its prior guidance no longer applies. If an employee is working remotely from his or her home, such home location must be treated as that employee’s work location for purposes of sourcing his or her compensation. Likewise, a non-resident employee who is required by his or her employer to work remotely full-time from home in another state should treat his or her compensation as a non-Pennsylvania source income even if the employer is located in Pennsylvania and the employer is not required to withhold personal income tax from the employee’s compensation.

Post-COVID Employment Tax Considerations

For persons who live and/or work in a state with which Pennsylvania has tax reciprocity, this should have little practical effect. For example, in the case of an employee who lives in Pennsylvania and who–pre-pandemic–worked in New Jersey, they likely would have had Pennsylvania tax withheld prior to and during the pandemic and will continue to be subject to Pennsylvania personal income tax.

However, for persons who live and/or work in states where there is no reciprocity (e.g., New York and Delaware), this change in work location could result in a change in where such a person is subject to tax. For example, a Pennsylvania resident who, before COVID, reported to an office in New York every day but who now is working from home will be deemed to have a Pennsylvania work location beginning on July 1, 2021.

Post-COVID Nexus Considerations

The DOR also announced that pre-COVID corporate net income tax nexus rules will apply beginning on July 1, 2021–i.e., the presence of employees in Pennsylvania working from home will be sufficient―by itself―to give rise to nexus for corporate net income tax and sales and use tax (without regard to any economic thresholds). Therefore, businesses with employees working remotely in Pennsylvania could have tax obligations as the result of such employees.

With respect to corporate net income tax in particular, Pennsylvania apportions income based solely on sales using market-sourcing rules. Therefore, the mere fact that employees are located in Pennsylvania may not change the amount of income that would be subject to corporate net income tax. However, for corporations with no physical presence in Pennsylvania, the DOR’s position is that a corporation does not have nexus with Pennsylvania unless the corporation has $500,000 or more of sales to Pennsylvania. For corporations with physical presence (e.g., remote workers in Pennsylvania), it is the DOR’s position that $500,000 threshold is inapplicable. A corporation with physical presence is subject to corporate net income tax unless its activities are protected by P.L. 86-272, which law prohibits a state from imposing a net income tax on income derived within its borders from interstate commerce if the only business activity of the company within the state consists of the solicitation of orders for sales of tangible personal property.

Therefore, although there may be some questions regarding precisely what jobs performed by an employer in Pennsylvania should cause a corporation to have nexus, effective July 1, 2021, corporations with remote workers who are working in Pennsylvania no longer can rely on the $500,000 threshold to avoid corporate net income tax filing requirements.

Philadelphia

The response to the pandemic by the Philadelphia Department of Revenue (the Department) was similar to, but not identical to, the DOR’s.

Like the DOR, the Department issued guidance providing that remote work should be effectively disregarded for business tax purposes. The Department announced that, when sourcing receipts within and outside of Philadelphia for business income and receipts tax (BIRT) and net profits tax (NPT) purposes, BIRT and NPT taxpayers should treat employees who were working from home solely as the result of COVID as though they were still working from their pre-pandemic office location, i.e. Philadelphia for employees with office locations in Philadelphia.

However, the Department also announced that for Wage Tax purposes nonresident employees were subject to Wage Tax only if they actually worked within Philadelphia. The Department has traditionally employed a “convenience of the employer” rule under which nonresident employees who are based in Philadelphia are subject to Wage Tax unless they are working remotely for the convenience of their employer (e.g., a nonresident employee who works at home one day per week for personal reasons is subject to Wage Tax with respect to his/her pay even while working from home).

The Department issued a helpful set of FAQs applying this rule to pandemic-related remote work. Those FAQs clarified that when workers work from home because of an employer policy that materially limits their ability to come into the office, nonresident employees are only subject to Wage Tax for the days spend actually working in Philadelphia.

Post-COVID Employment Tax Considerations

In light of virtually all pandemic-related restrictions now being lifted in Philadelphia, employers should consider how the Department’s rules will apply as workers begin to return to offices in Philadelphia with some frequency.

It would seem that, for employers that are instructing employees to work remotely when possible and that are requiring employees to complete health certifications and to request permission to come into the office, nonresident employees still would only be subject to Wage Tax on wages paid for time actually spent in Philadelphia. But, if working from home becomes purely voluntary and offices reopen, the Department’s position likely will be that nonresident employees based in Philadelphia are subject to tax on all wages, even if such employees elect to work remotely for a substantial portion of time. Employers should review flexible arrangements (i.e., work policies that allow employees to work a few days from the office and a few days at home) to make sure that such arrangements are clear and support a position that the time worked from home is for the employer’s convenience, rather than the employees’ convenience.

Employers also should consider how they communicate these policies to employees to best document a position that Wage Tax withholding from nonresident employees for work performed outside of Philadelphia is not required or that Wage Tax refunds may be available to employees from whom Wage Tax is withheld.

Post-COVID Nexus and Apportionment Considerations

The Department recently announced the “end dates” for its COVID-related business tax guidance (the announcement is available here).

Beginning on July 1, 2021, the Department will apply the pre-COVID nexus rules for BIRT purposes. Therefore, beginning July 1, 2021, a business entity will be considered to have nexus for BIRT net income tax purposes when it has one or more employees conducting business activities on its behalf in Philadelphia. If a business has employees working remotely from home from within Philadelphia, those employees will be sufficient to cause an employer to be subject to BIRT, unless its activities are protected by P.L. 86-272.

The Department also announced that pre-COVID apportionment rules would apply to activities in Philadelphia beginning on June 10, 2021, the date that the Governor’s emergency declaration expired. As a result, for purposes of sourcing receipts for both BIRT and NPT, the business activity of an employee working remotely from home in Philadelphia on or after June 10, 2021 will determine whether receipts are taxable receipts for BIRT and NPT purposes.

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We will continue to monitor Pennsylvania and Philadelphia’s guidance regarding the tax implications of remote work as COVID-related restrictions lapse and as employers and employees have more choices regarding remote work.

For questions about these, and any other state and local tax issues, please contact Wendi L. Kotzen or Christopher A. Jones. 

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