This is the archive of CPA Now blogs posted on the PICPA website through April 30, 2025. Want more recent blogs?
State and Local Tax Responses to COVID-19 Economic Challenges
For the 50 states and thousands of local taxing jurisdictions, “Tax Day” this year will include varying due dates for different tax types. Taxpayers need to carefully navigate rapidly changing tax filing and payment rules for state and local tax relief.
By Matthew Melinson, CPA, Drew VandenBrul, CPA, Patrick Skeehan, JD, and Thomas Boyle, JD
The IRS may have postponed federal income “Tax Day” from April 15 to July 15, 2020, due to the COVID-19 pandemic, but for the 50 states and thousands of local taxing jurisdictions, “Tax Day” this year will include varying due dates for different tax types. Taxpayers seeking to preserve cash by deferring state tax filings and payments need to carefully navigate a set of rapidly changing rules. We have examined the state and local tax relief offered to date (April 3, 2020) and provide here some key trends and observations.
State Tax Changes
The IRS released Notice 2020-18 on March 20, extending the deadline for filing and paying federal income taxes from April 15, 2020 to July 15, 2020. The relief applies to corporate and individual federal income taxes for the 2019 tax year and first quarter estimated income tax payments for the 2020 tax year. The IRS action set a precedent that many jurisdictions are beginning to follow.1
States are facing unique challenges, weighing uncertain fiscal situations with growing pressure to offer relief to taxpayers. States and localities with fiscal years ending June 30 may wish to collect revenue to the extent possible in the current fiscal year, and may be less inclined to offer lengthy extensions. New Jersey is even pushing to extend its fiscal 2020 year-end from June 30 to September 30.
From an income tax standpoint, states have generally fallen in line with IRS guidance, extending filing and payment deadlines through July 15. Here are some of the trends thus far:
- Most states are modeling their income tax relief based on IRS action by extending filing and payment deadlines to July 15, 2020, for returns and/or payments due on April 15. Some states, including Virginia, offer payment relief only.
- Other states (Pennsylvania included) expanded their filing and payment deadlines to include partnership and S corporation returns.
- Some states (including Mississippi, Idaho, and New Hampshire) have only extended deadlines into May or June.
For nonincome taxes, states have taken vastly different approaches to filing and payment extensions. Some states have offered extensive filing and/or payment relief for sales and use tax through June or July. Others are offering limited relief for small businesses or food and beverage taxpayers.2 Some have declined to offer relief for multiple reasons. First, sales tax is a “trust fund” tax collected on behalf of the taxing jurisdiction (analogous to payroll taxes), and it should generally be reported and paid timely unless a state has provided clearly written guidance allowing a deferral. Second, states such as Texas and Florida rely heavily on sales tax revenue and may be less willing to provide sales tax filing and payment relief.
In the world of local taxes, significant variations abound. Cities imposing local gross receipts taxes (including Seattle and San Francisco) have offered filing and payment extensions. Some localities that impose property taxes have offered different forms of relief, with some extending filing and payment deadlines, while others are waiving penalties and interest for late filed returns.
States have also shown some flexibility with ongoing audits by postponing response deadlines, and some have extended filing deadlines for tax appeals and refund claims. Taxpayers should not assume they qualify unless there is clear written guidance from a state or locality. Even with clear written guidance, if the business can meet the deadline, it is a best practice to comply and avoid potential future issues.
Telecommuting
Payroll Taxes – Business may face new payroll tax issues as a result of the COVID-19 disruption. Most employees who are still working are doing so from home, presenting unique challenges for employers attempting to comply with complex income tax withholding rules. Generally, states require businesses to withhold personal income taxes in the state where services are performed, or the employee’s resident state if a reciprocal agreement is in place. When employees are required to work from home, businesses may need to reevaluate withholding for employees.
For example, this new arrangement presents issues for Philadelphia-based employers. Similar to New York, Philadelphia uses a “convenience of the employer” standard, meaning that nonresident employees choosing to work from home, at their own convivence, are still subject to the Philadelphia wage tax.3 However, when the employee is required to work from home, the wage tax does not apply. Philadelphia has issued guidance clarifying that nonresident employees required to work from home in response to COVID-19 will not be subject to its wage tax.
Business and Sales Taxes – Employers should also consider if the physical presence of a telecommuting employee in a new state provides sufficient connection (nexus) to create additional business and sales tax filing requirements for the employer.4 States including New Jersey, Mississippi, and Pennsylvania have already begun to provide relief in this area, announcing that they will waive the nexus thresholds that would otherwise be created by employees working from home. Multistate businesses need to think through other business tax considerations, such as sourcing of sales and payroll for apportionment.
Pennsylvania’s Response
Pennsylvania issued guidance on March 21 extending personal income tax filing and payment deadlines to July 15, 2020, noting that the state automatically conforms to the federal deadline. Pennsylvania also announced that it will waive accelerated sales tax prepayment requirements for sales tax collected in March. Pennsylvania also extended the deadline to Dec. 31, 2020, to apply for property tax/rent rebatement and extended the time to file assessment appeals and refund petitions.
On March 27, Gov. Tom Wolf signed legislation (Act 10) authorizing the Department of Revenue to extend the deadlines for estimated personal income tax payments, along with estate and trust tax returns.5 The legislation also extends the filing and payment deadline to July 15 for passthrough entities and nonresident withholding. On April 2, the department issued guidance to this effect, also confirming that the filing and payment deadline has been extended to Aug. 14 for corporate net income tax. The PICPA recently held a live Q&A session with Revenue Secretary C. Daniel Hassell to discuss numerous state tax matters. You can view a recording of the session here.
Philadelphia and Other Pennsylvania Local Taxes
Philadelphia released guidance extending deadlines for numerous business taxes. Taxpayers now have an extra 30 days (until April 30) to pay real estate taxes and until July 15 to file and pay business income and receipts tax and net profits tax returns, including estimated payments. Recent guidance clarifies that businesses are not subject to use and occupancy tax while access to their place of business is restricted. School income tax returns remain due on April 15, but a payment safe harbor has been provided and taxpayers have until July 15 to file a return and pay any difference in tax owed.
Other Pennsylvania localities have begun extending deadlines for various local taxes. Act 10 authorized the Department of Community and Economic Development to coordinate with local governments to extend the filing and payment deadlines to July 15 for local earned income taxes (EIT). Keystone Collections Group and Berkheimer Tax Innovations – tax collection agencies that manage 48 of Pennsylvania’s 67 counties – have already extended the EIT deadlines for their respective tax collection districts. Scranton, Radnor, and Lower Merion are among the localities that have extended their business privilege tax deadlines to July 15, 2020. Taxpayers should check with their individual locality for specific guidance.
Conclusion
The economic environment reeling from a pandemic presents unique challenges for taxpayers and governments adjusting to higher unemployment claims, remote working arrangements, decreased consumer spending, and increased economic uncertainty. Taxpayers should focus on maintaining liquidity, monitoring federal, state and local stimulus plans, and ensuring compliance to the extent possible in this fluid environment. Taxpayers and governments should be empathetic to the challenges that each face, and common sense and good judgment should prevail in decision-making.
Please look for a forthcoming feature article in the Summer 2020 issue of the Pennsylvania CPA Journal addressing the long-term SALT considerations during a period of economic uncertainty. For more immediate updates, please visit PICPA's coronavirus resources page or consider taking a PICPA coronavirus update webinar.
1 The federal CARES Act, enacted on March 27, 2020, provides tax relief for both businesses and individuals. The legislation provides rebate checks and other significant benefits to qualifying individuals; for businesses, it brings favorable changes to net operating loss rules, depreciation of qualified improvement property, payroll tax credits, interest expense deductions, and the timing of Social Security tax payments. These provisions prevent plenty of conformity issues for the states, which are expected to release guidance in the coming weeks.
2 These states include Alabama, California, Connecticut, Massachusetts, and Illinois.
3 The “convenience of the employer” standard stems from New York’s approach, which was upheld by that state’s high court in Zelinsky v. N.Y. Tax Appeals Tribunal, 801 N.E.2d 840 (N.Y. 2003).
4 Some states, including New Jersey, have taken the position that the presence of a telecommuting employee in that state will create business tax nexus for out-of-state corporations. See Telebright Corporation Inc. v. N.J., 38 A.3d 604 (N.J. Super. 2012).
5 Act 10 (H.B. 1232), Laws 2020.
Matthew Melinson, CPA, a partner at Grant Thornton LLP in Philadelphia, is leader of the Atlantic Coast Region state and local tax practice and a member of the Pennsylvania CPA Journal Editorial Board. Drew VandenBrul, CPA, is a state and local tax managing director at Grant Thornton in Philadelphia. Patrick K. Skeehan, JD, is a state and local tax manager with Grant Thornton’s National Tax Office. Thomas Boyle, JD, is a state and local tax associate in Grant Thornton’s Philadelphia office.
Sign up for weekly professional and technical updates in PICPA's blogs, podcasts, and discussion board topics by completing this form.
