There has long been a movement to streamline the issues surrounding taxation and telecommuting. Interestingly, the onset of the coronavirus has both made clarity on this issue more important and made it tougher to pursue due to the residual issues that need addressing. To discuss how COVID-19 shining a spotlight on Pennsylvania’s taxation of telecommuters and freelancers, we met with Jason Skrinak, founder of Pivot Strategic Consulting LLC in Harrisburg, Pa.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
Even before the onset of the coronavirus, there was a movement to address the issues around business taxation and telecommuting. However, COVID-19 and its role in driving employees and individuals to work on the home front has shone a further spotlight on how Pennsylvania taxes organizations that employ freelancers and at-home staff. To discuss this issue, today we are with Jason Skrinak, founder of Pivot Strategic Consulting LLC in Harrisburg.
With so many employees of businesses telecommuting at this time due to coronavirus, what sort of tax exposure can that bring about for a business?
[Skrinak] The biggest issue that we have with regard to teleworking, remote employees is the fact that it creates a physical presence in states where businesses did not have that physical presence before, and physical presence gives rise to what is referred to as nexus, or the minimum contact in which a taxpayer could have with the state in order for that state to impose its tax.
Currently, you have a lot of folks working remotely, a lot of folks working outside the state in which they are employed, whether it be someone working for a Philadelphia business that lives in New Jersey, that always worked at the office in Philadelphia, and now they're working in New Jersey.
That kind of gives rise to the issue with regard to the business now has a physical presence in New Jersey that they did not have before. That physical presence could give rise to multiple state and local tax issues, specifically corporate net income tax, sales and use tax, employer withholding taxes. At the local level as well, you have to be concerned with localities and whether you may be subject to a business privilege tax or a licensing requirement where the locality may impose the ability to tax you based upon having a base of operations that you did not have previous.
Pre-COVID, what was going on from a legislative perspective as far as states looking to address the telecommuting and taxation issue?
[Skrinak] Going back even before COVID – before telecommuting, teleworking – federal government had a law out there called Public Law 86-272, and it provided that a state cannot impose its income tax upon a business that only has solicitation of sales in the state. That provides a little bit of a safety net for folks that have employees throughout the country in a state that imposes an income tax. 86-272 protections basically say that if all you're doing within the state is soliciting sales of tangible personal property, the state can't impose its income tax.
That's a safety net with regard to having some type of employee in a state may not trip you up. But now we're going to teleworking and remote employees doing much more than just solicitation of sales in the state. They're actually now in the state working, doing business as normal, but it's just in a different environment.
Some of the areas that were being addressed at the federal level were with regard to mobile employees. So, employees going in and out of a state on a regular basis. There was a Mobile Workforce Act that was basically stating that if you're going into a state on a minimal level, there would be a bright-line standard, say, 30 days or less within a state, that state could not impose its personal income tax and require withholding.
That was getting a lot of attention, that was hot-and-heavy, and a lot of folks were looking at that as something that will get a lot of legs under itself, and we would have something come about with regard to the Mobile Workforce Act. However, with COVID, the mobile is no longer an issue. We're now dealing with remote employees not going anywhere except for their home offices. Now we're transitioning to a remote employee.
States have always knew that there were issues with regard to employees working remotely in a state that business was not previously filing. However, there was not much effort to really resolve that issue because, truth be told, it wasn't that big of an issue. It was an employee here or there. Now with COVID, it's a very imperative issue that states must address. Right now, states are trying to do the best they can to provide some guidance to businesses and provide some basic concepts as to what the states are going to do with regard to these remote employees currently in their states.
In a blog you had written for PICPA's CPA Now, I found it interesting and somewhat ironic that it seems that the onset of COVID had sent work toward telecommuting legislation to the back burner. Why would you say that is? Is it simply because there's bigger fish to fry in that area?
[Skrinak] A lot of the discussions previous to COVID were, like I said before, regarding mobile workforce and having mobile employees going in and out of states. Now states are pivoting here and trying to make sure that they properly handle remote employees. States are looking at providing as much guidance as possible short-term. Right now, the states are actually playing nice. They're providing a lot of exemptions with regard to having a remote employee, not creating nexus in the short term.
However, that playing nice will only last so long. I think in the near future you're going to see states try to aggressively go after and try to increase the tax base basically by pulling in more taxpayers, and that would be easily done through the physical presence established by the remote employees.
You already see this happening. Recently, last week or two, the state of New Hampshire is suing the state of Massachusetts specifically for remote employees. In the past, you had New Hampshire residents – New Hampshire doesn't have a personal income tax – that were working in Massachusetts and Massachusetts was requiring the withholding of Massachusetts personal income tax for those individuals. Well, now those individuals are not going into Massachusetts. They're working from home in New Hampshire, and Massachusetts is still trying to get those individuals working in New Hampshire to have withholdings remitted to the state.
New Hampshire doesn't like that very much, so they're looking out for their constituents’ best interest. They're now suing Massachusetts, saying, "You can't do that going forward." I think that's the first step in many battles between states and I think it's going to really push the envelope with regard to having something out there, having some type of standardized guidance to have a consistent application of remote employees across all the states.
You talk about a battle between states, and maybe this will further delineate the issue and be related. For a Pennsylvania company with staff telecommuting in Pennsylvania, that may not be a problem, but a New Jersey resident working from home for a Pennsylvania company, that can be an issue, right? Can you explain why that is? What are the tax issues presented and what has Pennsylvania done about the issue so far?
[Skrinak] What we have there, if you have a Pennsylvania business with a Pennsylvania employee for the most part, from the state issue, from the state perspective, you really don't have an issue. It's pretty much doing business as normal, doing the same tax filings, having the same tax impact that you had as before COVID.
From a local perspective, if you have an individual working from home, I'm curious whether the local governments in Pennsylvania may try to assert a filing requirement on the business. Basically, stating that this remote employee has now created a base of operations in our locality and now we have a filing requirement. That's at the micro level.
Taking a look at it from Pennsylvania to New Jersey, before the individual resident from New Jersey would come in to work in Pennsylvania, they would not create a sales or use tax or an income tax issue or a filing requirement for New Jersey. However, now you have the individual that's physically located in New Jersey. They're performing their jobs in New Jersey. Now you do have nexus in New Jersey. Now you do have a filing requirement. You may have a filing requirement with regard to sales and use tax, corporate net income tax.
The one issue they have to take a look at, too, is I talked about withholding for personal income taxes. The one nice thing in this particular example is New Jersey and Pennsylvania have a reciprocal agreement, whereby if you are a New Jersey resident working in Pennsylvania, Pennsylvania would not require withholding for personal income tax in Pa. You just file and pay the New Jersey tax, and vice versa. You have an individual in Pa. working in New Jersey, same thing. They're not going to be withholding New Jersey personal tax. You'll be subject to the Pa. personal income tax. So that remote employee is creating a potential filing requirement going forward with regard to various taxes in other states, income taxes, sales and use taxes.
What Pennsylvania has done is that they have provided some guidance, basically stating that if you have a remote employee working in Pennsylvania due to the COVID issue, that will not create nexus or a filing requirement for Pennsylvania for corporate net income tax or sales and use tax purposes. It's effective until the earlier of June 30, 2021, or 90 days after Pennsylvania provides that this is no longer a declaration of emergency with regard to COVID.
And you see some other states doing something similar, providing just having a remote employee may not cause sales tax nexus. It may not cause income tax nexus. It may not cause nexus for either one of them, but it's a state-by-state issue and you have to take a close look at each of the states and see where your exposure may be.
It's interesting. We look at this perhaps as being a problem during coronavirus, but many people have gotten a taste of the working from home that they've been doing and it could become a little bit more permanent. There have, of course, been freelancers and telecommuters pre-COVID. How important is it for states to get out ahead of this in case this temporary fix of people working from home becomes more permanent and widespread?
[Skrinak] I think you hit the nail right on the head there. That it's not going to be temporary. I think this is going to be the status quo for some time. People have realized you do not have to work in an office environment to get the job done. I think remote working is going to be the trend going forward. With that, having uncertainty with regard to state and local taxes is not something anyone wants. Businesses don't want it, states don't want it, localities don't want it. Well, I say the localities don't want it, but sometimes I think they like the wild, wild West atmosphere, and running and doing their own thing. But from a business perspective and from the state tax perspective, you want to have certainty, and right now that's far from what we have. No one's quite sure what's going to happen down the road.
States are trying to piecemeal this, try to put a patch on it, like Pennsylvania did with regard to their guidance issued on remote employees and creating nexus. But I think going forward, it would be great if states can get together and come up with a game plan as to, this is how things should be treated going forward with regard to remote employees. Do I see that happening short-term? Not really. It takes quite an amount of time for states to agree on anything, let alone for a state to agree internally with regard to a policy such as this.
What would you say are the key questions that businesses have to have answers to in order to not run afoul of the rules around telecommuting?
[Skrinak] It's interesting. I've been practicing close to 25 years and the first thing I always talk to with regard to potential clients or current clients is what's your nexus exposure? Where do you potentially have state and local tax filing requirements in which you're not currently filing? The main question is where are you currently filing? That's pretty easy. You should have a good grasp as to where you're filing.
The second issue is where do you currently have employees? Where are they working from? If they're in states in which you're not filing, you have to take a look. You have to start doing some due diligence and some research to figure out how is that state handling temporary remote employees.
One area I always stress is you don't want to look at this in a bubble. You don't want to say, "Okay, as of now, we have remote employees. Let's figure out what our tax filing should be from here going forward." You have to take a whole picture. You have to take a look at what was being done in the past. Did you have employees in states in which you weren't filing in the past, before COVID?
That's no longer a remote … that's potential exposure going much further beyond the start, the onset of COVID. It's a matter of taking a look at where do you have employees in the past? Where did you have employees going into states? Are you providing any service in the state in which you're not filing?
I think that the remote employees are a very important key and getting a feel for that is paramount, but having an overall feel for where your potential exposure is for past business operations. It's opening people's eyes as to where they're currently filing and where they may have a filing requirement or may have exposure for additional state and local tax liabilities.