The department said the status quo will temporarily remain in place for nonresidents who work for a Pennsylvania employer and Pennsylvania residents who work out of state, regardless of whether the employee is teleworking during the pandemic. The guidance will be in effect through June 30, 2021, or 90 days after the state's coronavirus-related state of emergency ends, whichever comes first.
"If an employee is working from home temporarily due to the COVID-19 pandemic, the department does not consider that as a change to the sourcing of the employee's compensation," the guidance said.
In addition to sourcing wages to Pennsylvania from nonresidents who are now working remotely from another state, the guidance said that Pennsylvania residents who stopped commuting to employers in another state should continue sourcing their income to the state of their employer. Workers will still be able to claim a resident credit for tax paid to the other state on their compensation, the department said.
In issuing the guidance, Pennsylvania became the latest state to take the position that the sourcing of an employee's income should generally remain undisturbed by the spread of the virus, which causes the respiratory illness COVID-19. In October, New York said the pandemic wouldn't alter its method of sourcing wages, and Massachusetts finalized a temporary rule that also taxes commuters in the same manner as the state did before the pandemic.
Jeffrey Johnson, a spokesperson for the department, told Law360 that the guidance applies whether or not an employee lives in a state that has a reciprocal agreement with Pennsylvania. Under those agreements, which Pennsylvania has with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia, the states agree not to tax the employee compensation of nonresidents, subject to an employer withholding taxes on the compensation in the other state.
Employers of workers who live in states that aren't parties to a reciprocal agreement, including neighboring Delaware and New York, are required to withhold on the employee compensation rather than source the income outside of Pennsylvania, according to the guidance.
Representatives for the New York Department of Taxation and Finance and the Delaware Division of Revenue did not respond to requests for comment Monday.
The guidance also said that the department will not assert nexus for corporate net income tax purposes or sales and use tax purposes "solely on the basis" of a worker temporarily working from home in Pennsylvania.
Johnson said that the guidance was issued to help remove the guesswork for withholding and nexus determinations during the national health crisis.
"The temporary guidance that was issued [Monday] provides clarity while addressing tax-related questions the department has received from taxpayers, members of the business community and tax professionals," he said.
But while Pennsylvania may be aiming to maintain its current treatment of income tax for telecommuters during the pandemic, some states have taken exception to that practice elsewhere.
New Hampshire has asked the U.S. Supreme Court to enjoin Massachusetts from enforcing its temporary rule, arguing that taxing individuals who aren't setting foot in Massachusetts runs afoul of the U.S. Constitution's due process clause and commerce clause. And New Jersey lawmakers are weighing a bill that would study whether New Jersey should take part in that dispute and also study New York's taxation of Garden State residents.
The department recognizes that other states have varying views on how to tax wages from nonresidents during the pandemic, Johnson said. However, he said the tax agency believes the temporary guidance "was the least burdensome approach that treats all taxpayers equitably, which is the department's overall objective."
Johnson added that the department will consider feedback on the guidance when it determines what directives to release on the issue in the future.
--Additional reporting by James Nani. Editing by Neil Cohen.
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