States End COVID-19 Tax Relief as Pandemic and Work-From-Home Arrangements Continue, Creating Liability Risks for Employers

As the COVID-19 pandemic and work-from-home arrangements continue, state and local jurisdictions are ending the temporary tax relief granted in 2020 for employees working in their jurisdiction. An employer with remote employees that fails to adjust to this change could face significant tax liabilities. Below is a discussion of the temporary policies and their expiration dates in Pennsylvania, Philadelphia, New Jersey, Delaware, New Hampshire and Massachusetts.

The U.S. Constitution requires that a business exceed a certain threshold of activities within a state before the jurisdiction can consider the company to be doing business within its borders. A state may deem a company that meets this threshold as having a taxable presence or nexus with its jurisdiction. Under normal circumstances, states consider a company to be doing business within their borders and thus have nexus that gives rise to one or more state tax filing obligations if the company has one or more employees working in the state. In a large number of states, the presence of even a single telecommuting employee is enough to trigger filing requirements. In addition, some states specifically base nexus determinations on a certain threshold of payroll in the state, which can be exceeded through the presence of just one employee.

A limited exception to this general rule exists for an out-of-state company with a telecommuting employee solely engaged in activities related to the solicitation of orders for tangible personal property.

To comply with health and safety protocols as a result of the COVID-19 pandemic, many employers implemented remote work arrangements in which employees teleworked from their homes. In some cases, employees worked at locations other than a state in which their employer had a taxable presence. Employees working in states in which their employer lacks a taxable presence can trigger new obligations for their employer to pay and/or collect that state’s individual or corporate income tax, sales and use tax or withholding taxes. As a result, several states issued temporary pandemic guidance/directives indicating that they would not enforce tax obligations against employers that otherwise lacked a taxable presence in their jurisdiction, but for employees working from a home located in their jurisdiction. For more information on the impact of work-from-home arrangements arising from COVID-19, see this Tax Release.

Many, if not all, of the temporary relief periods effectuated by state and local governments have expired or are set to expire in the coming months. As a result, the pre-pandemic taxable presence or nexus standards and corresponding tax laws will once again become effective in many jurisdictions. As many employers have recently instituted remote or hybrid work policies, the tax implications associated with the expiration of the temporary guidance should be revisited.

Pennsylvania

The temporary guidance regarding telework during the COVID-19 pandemic expired on June 30, 2021. Beginning July 1, 2021, the pre-pandemic nexus standards will apply. A non-filing out-of-state corporation that has employees working from home in Pennsylvania may now have nexus based on the activities of its employees. This nexus determination is applicable for both income and sales and use taxes.

For purposes of state individual income and withholding tax, a Pennsylvania resident who is required to telework full time from home in Pennsylvania rather than at the employer’s location outside of the state must treat their compensation as Pennsylvania source income. A nonresident employee who is required to telework full time from home in another state would treat their compensation as non-Pennsylvania source income even if the employer is located in Pennsylvania. Existing law will also govern as it relates to employee wages and expenses sourced to Pennsylvania for the application of development programs and tax credits.

Philadelphia

Similarly, the Philadelphia Department of Revenue’s temporary COVID-19 pandemic guidance applicable to Business Income & Receipts Tax (BIRT) and the Net Profits Tax (NPT) nexus expired on June 30, 2021. Beginning on July 1, 2021, nexus will result in Philadelphia for a company located outside of the city due to the presence of employees working remotely from within city limits. In addition, the temporary COVID-19 pandemic guidance regarding apportionment and the determination of taxable receipts from the performance of services expired on June 10, 2021. Beginning June 11, 2021, the pre-pandemic rules apply for the sourcing of business activity for apportionment purposes for both BIRT and NPT receipt factors.

New Jersey

The New Jersey Division of Taxation announced August 3, 2021 that they will end the temporary suspension of employer withholding rules for teleworking employees effective beginning on and after October 1, 2021. Beginning October 1, 2021, employers must resume sourcing income based on the pre-pandemic rules, which require income to be sourced where the service or employment is performed. For example, an employee working remotely in New Jersey will create a requirement to withhold New Jersey income taxes for an out-of-state employer. For purposes of the employer triggering nexus for New Jersey’s corporate income tax or sales or use tax, the waiver for corporation business tax and sales tax nexus for employees working in New Jersey no longer applies on and after October 1, 2021.

Delaware

Prior to the COVID-19 pandemic, Delaware utilized the convenience-of-the-employer rule to determine how nonresident remote employees should be taxed on their income. If an employee worked from home in another state for their own convenience (rather than at the employer’s convenience), any compensation was treated as earned at the employer’s location rather than the location of the employee.

The Delaware Division of Revenue issued Technical Information Memorandum 2021-2 (March 18, 2021) addressing the treatment of wage income of nonresident employees who were required to telework full time from home in another state. Wages earned by nonresident employees between March 22, 2020 and May 31, 2020 during Delaware’s state of emergency were to have been reported as days worked outside of Delaware.

Effective June 1, 2020, any wages earned while teleworking outside of the state should be reported as days worked outside of Delaware only if an employer mandates a work-from-home policy or strongly encourages telework and requires employees to obtain the employer’s permission to work at the employer’s location in Delaware.

Delaware did not provide any temporary guidance regarding nexus for corporate income taxes and does not impose a sales tax.

State of New Hampshire v. Commonwealth of Massachusetts

Massachusetts adopted a controversial emergency regulation to enforce income tax withholding against telecommuting nonresidents working for Massachusetts-based employers (see this Tax Release for more information). The state’s policy was challenged by New Hampshire in the U.S. Supreme Court. On June 28, 2021, the U.S. Supreme Court declined to hear the case. As a result, nonresidents working in Massachusetts prior to the pandemic must still have Massachusetts income tax withheld during the state of emergency even if the work was performed remotely in another state.

Additionally, the Massachusetts Department of Revenue announced in its monthly newsletter DOR News (June 2021) that it will again impose corporate income and sales tax nexus for employees temporarily teleworking in Massachusetts starting September 13, 2021.

The Takeaway

Despite the fact that many employees are still working from home as a result of the COVID-19 pandemic, states and localities are revisiting their nexus standards and ending the use of temporary relief guidance issued in 2020. It is important for employers to consider the pre-pandemic laws/guidelines for employee withholding as well as nexus for both corporate income and sales and use taxes. An employer failing to comply with the standard nexus rules due to the presence of telecommuting employees could find themselves facing additional filing requirements and potentially significant liabilities (additional tax, interest and penalties) in state and local jurisdictions.

Contact an Andersen SALT advisor to learn how these changes impact your business.