Executive Summary
Pennsylvania is considering a legislative proposal (S.B. 1315) to provide limited corporate income tax nexus relief for out-of-state businesses. Under the proposal, an out-of-state business that has a Pennsylvania-resident employee working remotely within Pennsylvania will not trigger corporate income tax nexus with the state solely based upon that remote worker’s presence as long as (1) the employee’s primary work location is outside of Pennsylvania and (2) the employee works remotely from a location in Pennsylvania less than 50% of their annual normal working hours. If passed, the proposed law would be effective for tax years after Dec. 31, 2022.
In all states imposing a corporate income tax, an out of state corporation that has employees in the state triggers nexus. If this proposal becomes law, Pennsylvania would be the first in the nation to state that remote workers do not create nexus. RSM Washington National Tax SALT professionals weigh in on this unique proposal.
Brian Kirkell:
Great idea, terrible limitations. I’m a firm believer that we should be encouraging the general adoption of a hybrid work environment. It reduces traffic congestion and fuel usage, cuts employer footprint costs and creates time flexibility that can be a boon for mental health and productivity. Plus, in all likelihood, the incremental increase in sales tax collected as a result of people spending more of their time in the state will be more than the corporate income tax collected from out-of-state businesses with remote employee nexus. I think some savvy legislators see all of that and are willing to cede a jurisdictional point in order the get Pennsylvanians off the highways and spending more time and money in the state. However, the proposed statutory language doesn’t go far enough in some ways and goes too far in others.
Why didn’t the drafters include P.L. 86-262 language? If a business has nexus with Pennsylvania for another reason but has P.L. 86-272 protection, non-nexus creating hybrid employees would still cost the business P.L. 86-272 protection. Why did the drafters include a 50% limitation? As Anna rightly points out, this is arbitrary and appears to be contrary to the policy goals I’ve discussed. Why is this provision limited to corporate income tax? Many businesses, particularly in the middle market, are passthrough entities, and it seems odd for Pennsylvania to create a benefit that does not apply to the bulk of employers. Lastly, why did the drafter choose to limit the benefit a business with Pennsylvania-resident employees? Regardless of the possibility that this requirement is constitutionally infirm, it seems like extending the benefit to businesses with any employees active in the state would be a net-win for Pennsylvania.
Anna Cronic:
We are obviously in an environment where remote or hybrid work is a permanent arrangement for many businesses. From the state’s perspective, it seems like this legislation is aimed at one thing—providing a benefit to residents who are currently unable to participate in a remote work arrangement with their current employer or who are limited in their job search (or home search) efforts because companies want to avoid triggering corporate income tax nexus in a jurisdiction with one of the nation’s highest corporate tax rates. This seems like a worthy goal, but I think the legislation as currently proposed misses the mark in important ways.
I think the 50% of total hours worked threshold is completely arbitrary and detrimental to what this is trying to accomplish. Survey data shows most hybrid work arrangements are two to three days a week in the office with the rest remote. What logic is there behind an employee working three days a week from a home in Pennsylvania triggering corporate income tax nexus while someone working only two days from home does not? It seems to favor only very specific hybrid working arrangements, but I’m not sure what incentive the state has to do so. With the recent legislation codifying the state’s economic nexus threshold, any business with substantial in-state customer activity will trigger nexus anyways, regardless of remote worker protections that may be in place. Further, Pennsylvania no longer uses cost-of-performance sourcing for any types of revenue, so there seems to be little reason in my mind the state would care whether this nexus exemption applies to a fully remote employee, one who works over 50% in the state or one who works less than 50% in the state. I think the legislation is a great idea that could be poorly executed if they leave in the 50% threshold.
David Brunori:
This is a terrific idea. In the post-pandemic world, telecommuting and remote employment are here to stay. Smart employers will take advantage of this development and when possible, allow valuable employees to work from wherever they want. But they won’t if it means triggering nexus for income tax purposes. That is inefficient. The company might lose an employee. The state will not gain anything because the company will not allow remote employees. Nobody wins under the current regime.
Right now, the existence of one telecommuting employee can trigger nexus in Pennsylvania and all income taxing states. I would ask what is the rationale for such a rule? Other than keeping auditors and tax professionals employed, I don’t see a lot of benefits. So, I applaud this proposal. Indeed, I do not think it goes far enough. I would exempt all full-time teleworkers from triggering tax nexus. It would make Pennsylvania more competitive and attract employees otherwise working in other states.
Mo Bell-Jacobs:
First, let’s make one thing clear. This proposal is almost certainly dead on arrival. Pennsylvania has already enacted a major tax bill this year (and it was a good one). There is also a close gubernatorial race, and the house and half of the senate are up for election. New nexus legislation will have to wait… probably indefinitely. Although, I will commend the bipartisan sponsorship and effort itself. Pennsylvania has had a history of declaring nexus policy through guidance rather than statute, offering tax professionals and lawyers unnecessary heartburn in the process.
That said, it is worth taking a closer look. The proposal is, outside of various temporary pandemic nexus safe harbors, fairly original. Traditionally, where an employee may lay their head at night is irrelevant when considering nexus in the Commonwealth. What matters is when and where that employee is working. Setting the 50% threshold aside (I agree with my colleagues that seems like an unnecessary threshold), I ask this: is the proposal “sound tax policy?” Certainly, we all agree that partial or hybrid remote work has become increasingly popular, but why does it matter that the remote corporation have nexus just because an employee is existing in space and time in their home office? Let me tell you some ways. When that employee begins to spend eight, nine or 10 hours at home instead of their out-of-state office location a number of changes occur: the employee uses the local roads more often, increases use of the plumbing and electricity, and may need increased protection from fire or the police – all because of hybrid environment. Services that would normally be paid for, indirectly, through taxes at the corporate location – so why not at the remote location? Sure, the employee may buy their lunch at a local hometown restaurant and kick in the 6% state sales tax, but I cannot fathom there would be a measurable impact to sales tax for employees that already live in the Commonwealth. Pennsylvania should protect its interests and consider how to attract new business rather than just embracing a remote workforce. Make Pennsylvania a destination for workers and businesses. Offer personal income tax incentives for workers moving to the state and reduce corporate tax burdens. House Bill 1342 may have been a start, but the next governor will have a great opportunity to showcase the Commonwealth as a great location to start-up and succeed.
