By Jennifer W. Karpchuk, JD
This past June, the U.S. Supreme Court declined to review a case that potentially could have impacted Pennsylvania’s ability to collect income taxes from nonresidents and the City of Philadelphia’s ability to continue to apply its “requirement of employment” rule for the city’s wage tax. In New Hampshire v. Massachusetts, New Hampshire sought to invoke the U.S. Supreme Court’s original jurisdiction in challenging Massachusetts's policy of taxing nonresidents who previously worked in-state but were working remotely from home in New Hampshire due to the pandemic (New Hampshire raised commerce clause and due process clause challenges).
Although a hearing was denied, the underlying issues in New Hampshire v. Massachusetts are far from settled. Not only is the issue still prevalent with regard to New Hampshire residents who could individually bring claims in Massachusetts courts regarding that state’s policy, but it is also alive in those states and localities that employ “convenience of the employer” rules, including Pennsylvania and Philadelphia.
Pennsylvania taxes nonresidents working out of state unless the nonresident’s employer requires the individual to work out of state.1 During the pandemic, the Pennsylvania Department of Revenue adopted an approach like that in Massachusetts, proclaiming status quo for nonresidents who were working remotely solely due to the pandemic. Yet, even absent the pandemic, Pennsylvania’s policy does not currently have a staggering effect. The commonwealth maintains reciprocity agreements with almost all of its neighboring states, thereby limiting the revenue subject to challenge under its policy.2
However, the pandemic spurred a revolution in remote work, and many employees will not be returning fully to the office, or at all. As remote work becomes more commonplace and people have the ability to work from almost anywhere, nonresident employees may start moving to and working from states that do not have reciprocity agreements with Pennsylvania. For instance, what if an employee moves to or works part-time from Florida for their convenience. This would create a situation ripe for challenging of Pennsylvania’s convenience-of-the-employer law.
Many jurisdictions could be affected by a renewed interest in the issue spurred on by New Hampshire v. Massachusetts. Philadelphia, likewise, maintains its own convenience-of-the-employer rule for purposes of city wage tax. Again, the test looks at whether or not the decision to work outside the office is a requirement of employment. Where the employee is required to work from home by their employer, that individual will not be subject to the wage tax on those wages attributable to the work performed while outside of the office. Conversely, an employee that works from home for his or her convenience will continue to be subject to the wage tax, despite not physically working within the city limits.
During the pandemic, Philadelphia took a different view than Pennsylvania regarding its convenience-of-the-employer rule. According to the Philadelphia Department of Revenue, nonresidents were not subject to the wage tax for any period of time that they were required to work from home because of the pandemic.
A decision in favor of New Hampshire likely would have impacted the policies related to out-of-state, nonresidents working remotely for their convenience both in Pennsylvania and Philadelphia. Despite the Supreme Court’s denial to hear the case, the issue is far from settled. New Hampshire residents may still bring suit against Massachusetts challenging the policy. While it would take some time for the case to weave its way through the Massachusetts courts and back to the U.S. Supreme Court, it is within the realm of possibility.
Moreover, New Jersey signed on as an amicus in favor of New Hampshire. One of the issues with New Hampshire’s case was that the state lacked a clear harm because it does not impose an income tax, and therefore could not point to direct revenue lost as a result of Massachusetts’s policy. However, New Jersey does have an income tax and loses a great deal of money on an annual basis to New York’s convenience-of-the-employer policy. Thus, there are a number of avenues that may be pursued in the near future that could implicate both Pennsylvania’s and Philadelphia’s convenience-of-the-employer rules.
Finally, New Hampshire’s case shines a spotlight on conveniences-of-the-employer states and localities. It is possible taxpayers may challenge similar policies in other jurisdictions, including Pennsylvania and Philadelphia. In fact, during July, a Connecticut resident filed suit challenging New York’s convenience of the employer rule.3 Thus, there are several avenues that may be pursued in the near future that could implicate both Pennsylvania’s and Philadelphia’s convenience of the employer rules.
1 Pennsylvania has reciprocity agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia.
2 72 P.S. Section 7308; 61 Pa. Code Section 109.8.
3 In the Matter of Edward Zelinsky, New York State Division of Tax Appeals No. 830517.
Jennifer W. Karpchuk, JD, is co-chair of the state and local tax controversy and planning practice at Chamberlain Hrdlicka. She can be reached at firstname.lastname@example.org.
Join Jennifer Karpchuck at this year's PICPA Tax Con on Nov. 17-18. She will discuss the varying tax implications of remote work. Register for this all-virtual event today.
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