B-176509, FEB 21, 1973, 52 COMP GEN 538

B-176509, FEB 21, 1973, 52 COMP GEN 538

TAXES - STATE - FEDERAL EMPLOYEES - LEAVES OF ABSENCE EFFECT ON TAX WITHHOLDING A NONRESIDENT FEDERAL EMPLOYEE WHO WILL NOT RETURN TO HIS DUTY STATION IN PHILADELPHIA UPON TERMINATION OF HIS SICK LEAVE STATUS AT WHICH TIME HIS DISABILITY RETIREMENT BECOMES EFFECTIVE IS SUBJECT TO THE PENNSYLVANIA INCOME TAX IMPOSED ON FEDERAL EMPLOYEES BY AGREEMENT BETWEEN THE FEDERAL AND STATE GOVERNMENTS PURSUANT TO 5 U.S.C. 5517, AND EXECUTIVE ORDER NO. 10407, FOR THE PERIOD OF THE SICK LEAVE, JULY 19, 1972 UNTIL DECEMBER 1973, DURING WHICH TIME HE WILL REMAIN ON THE AGENCY ROLLS SINCE SICK LEAVE PAYMENTS CONSTITUTE WAGES FOR TAXATION PURPOSES. THE INCOME TAX WITHHOLDING FOR THE LEAVE PERIOD IS FOR COMPUTATION IN ACCORDANCE WITH PARAGRAPH 3(B) OF THE PENNSYLVANIA PERSONAL INCOME TAX INFORMATION BULLETIN, WHICH EXCLUDES NONWORKDAYS - SATURDAYS, SUNDAYS, HOLIDAYS, AND DAYS OF ABSENCE - AND THE AMOUNT ACTUALLY SUBJECT TO TAX AND THE TAX ULTIMATELY DUE IS FOR SETTLEMENT BETWEEN THE EMPLOYEE AND THE STATE.

TO R. G. BORDLEY, DEFENSE SUPPLY AGENCY, FEBRUARY 21, 1973:

YOUR LETTER OF NOVEMBER 17, 1972, YOUR REFERENCE DSAH-CFF, FORWARDS A REQUEST DATED NOVEMBER 8, 1972, FROM MR. NORMAN MOGUL, SPECIAL DISBURSING AGENT, FOR AN ADVANCE DECISION CONCERNING THE WITHHOLDING OF PENNSYLVANIA PERSONAL INCOME TAX FROM THE SALARY PAYMENTS OF A NONRESIDENT EMPLOYEE WHO WAS EMPLOYED IN PENNSYLVANIA BUT IS NOW ON SICK LEAVE AS THE RESULT OF HIS APPLICATION FOR DISABILITY RETIREMENT AND IS NOT EXPECTED TO RETURN TO HIS DUTY STATION, BUT WILL BE RETIRED FOR DISABILITY UPON EXPIRATION OF HIS SICK LEAVE.

THE REQUEST SPECIFICALLY REFERS TO MR. JAMES P. BRADSHAW, WHO IS NOT NOW AND NEVER HAS BEEN A RESIDENT OF PENNSYLVANIA, BUT IS AN EMPLOYEE OF THE DEFENSE PERSONNEL SUPPORT CENTER (DPSC), WHICH IS LOCATED IN PHILADELPHIA, PENNSYLVANIA. HIS APPLICATION FOR DISABILITY RETIREMENT HAS BEEN APPROVED BY THE CIVIL SERVICE COMMISSION, BUT WILL NOT BECOME EFFECTIVE UNTIL DECEMBER 1973, WHEN HIS SICK LEAVE WILL BE EXHAUSTED. HE HAS BEEN ON SICK LEAVE SINCE JULY 19, 1972, AND WILL CONTINUE TO BE CARRIED ON THE ROLLS OF DPSC AS AN EMPLOYEE ON SICK LEAVE UNTIL HIS RETIREMENT BECOMES EFFECTIVE. HE IS NOW A RESIDENT OF THE STATE OF NEBRASKA AND IS NOT EXPECTED TO RETURN TO HIS DUTY STATION IN PENNSYLVANIA.

THE WITHHOLDING OF THE PENNSYLVANIA INCOME TAX WITH RESPECT TO FEDERAL EMPLOYEES IS GOVERNED BY THE AGREEMENTS ENTERED INTO BY THE SECRETARY OF THE TREASURY, PURSUANT TO 5 U.S.C. 5517 AND EXECUTIVE ORDER 10407 DATED NOVEMBER 6, 1952, WITH THE COMMONWEALTH OF PENNSYLVANIA, THE LATEST VERSION OF WHICH WAS SIGNED MARCH 14, 1972, BY THE FISCAL ASSISTANT SECRETARY OF THE TREASURY AND ON MAY 10, 1972, BY THE SECRETARY OF REVENUE OF THE COMMONWEALTH OF PENNSYLVANIA. THE CITED AGREEMENT PROVIDES IN PERTINENT PART AS FOLLOWS:

1. THE HEAD OF EACH AGENCY OF THE UNITED STATES SHALL COMPLY WITH THE WITHHOLDING PROVISIONS OF THE PENNSYLVANIA INCOME TAX LAW, REGULATIONS, PROCEDURAL INSTRUCTIONS AND RECIPROCAL AGREEMENTS, WHICH ARE APPLICABLE TO EMPLOYERS GENERALLY, EXCEPT AS OTHERWISE PROVIDED HEREIN, WITH RESPECT TO EMPLOYEES OF SUCH AGENCY WHO ARE SUBJECT TO SUCH TAX AND WHOSE REGULAR PLACE OF FEDERAL EMPLOYMENT IS WITHIN THE COMMONWEALTH OF PENNSYLVANIA.

4. THE COMPENSATION OF FEDERAL EMPLOYES ON WHICH THE PENNSYLVANIA INCOME TAX SHALL BE WITHHELD SHALL BE THEIR "WAGES" AS DEFINED IN SECTION 3401(A), AS AMENDED, OF THE INTERNAL REVENUE CODE OF 1954 AND REGULATIONS ISSUED THEREUNDER.

WHILE MR. BRADSHAW IS ON SICK LEAVE AND WILL BE RETIRED FOR DISABILITY UPON THE EXPIRATION OF SUCH LEAVE, AND DOES NOT RESIDE IN PENNSYLVANIA AND DOES NOT EXPECT TO RETURN TO HIS DUTY STATION IN PENNSYLVANIA, HE IS STILL RECEIVING COMPENSATION FROM THE DPSC IN PHILADELPHIA, PENNSYLVANIA, AND IS STILL ON THE ROLLS OF THAT AGENCY. HENCE, THE DPSC IN PHILADELPHIA STILL CONSTITUTES HIS OFFICIAL DUTY STATION AND HE MUST BE CONSIDERED AS BEING A NONRESIDENT EMPLOYEE OF THAT AGENCY INSOFAR AS WITHHOLDING FOR THE PENNSYLVANIA INCOME TAX IS CONCERNED. SINCE PAY FOR SICK LEAVE OF FEDERAL EMPLOYEES IS CONSIDERED AS "WAGES" SUBJECT TO WITHHOLDING FOR FEDERAL INCOME TAX PURPOSES, SUCH PAY IS LIKEWISE SUBJECT TO THE WITHHOLDING PROVISIONS OF THE PENNSYLVANIA TAX LAW, REGULATIONS, AND PROCEDURAL INSTRUCTIONS.

THE PENNSYLVANIA PERSONAL INCOME TAX STATUTE PROVIDES IN PART, QUOTING FROM PURDON'S PENNSYLVANIA STATUTES ANNOTATED, TITLE 72, SECTION 7316(SUPP. 1972-1973):

EVERY EMPLOYER MAINTAINING AN OFFICE OR TRANSACTING BUSINESS WITHIN THIS COMMONWEALTH AND MAKING PAYMENT OF COMPENSATION (I) TO A RESIDENT INDIVIDUAL, OR (II) TO A NONRESIDENT INDIVIDUAL TAXPAYER PERFORMING SERVICES ON BEHALF OF SUCH EMPLOYER WITHIN THIS COMMONWEALTH, SHALL DEDUCT AND WITHHOLD FROM SUCH COMPENSATION FOR EACH PAYROLL PERIOD A TAX COMPUTED IN SUCH MANNER AS TO RESULT, SO FAR AS PRACTICABLE, IN WITHHOLDING FROM THE EMPLOYEE'S COMPENSATION DURING EACH CALENDAR YEAR AN AMOUNT SUBSTANTIALLY EQUIVALENT TO THE TAX REASONABLY ESTIMATED TO BE DUE FOR SUCH YEAR WITH RESPECT TO SUCH COMPENSATION. THE METHOD OF DETERMINING THE AMOUNT TO BE WITHHELD SHALL BE PRESCRIBED BY REGULATIONS OF THE DEPARTMENT (OF REVENUE).

THE "PROCEDURAL INSTRUCTIONS" APPLICABLE HERETO, PERSONAL INCOME TAX INFORMATION BULLETIN NUMBER 3(WITHHOLDING INSTRUCTIONS FOR EMPLOYERS), ISSUED BY THE PENNSYLVANIA DEPARTMENT OF REVENUE, PROVIDE IN PARAGRAPH 3(B) THEREOF AS FOLLOWS, CONCERNING WITHHOLDING FROM NONRESIDENT EMPLOYEES:

(B) NONRESIDENT EMPLOYEES

THE TAX SHALL BE DEDUCTED AND WITHHELD ON COMPENSATION PAID TO NONRESIDENT EMPLOYEES FOR SERVICES PERFORMED IN PENNSYLVANIA. ACCORDINGLY, IF A NONRESIDENT EMPLOYEE PERFORMS ALL OF HIS SERVICES IN PENNSYLVANIA, THE TAX SHALL BE DEDUCTED AND WITHHELD FROM ALL COMPENSATION PAID HIM.

IF A NONRESIDENT EMPLOYEE PERFORMS SERVICES PARTLY WITHIN AND PARTLY OUTSIDE THE COMMONWEALTH, ONLY COMPENSATION FOR SERVICES WITHIN THE COMMONWEALTH IS SUBJECT TO WITHHOLDING. FOR EXAMPLE:

(1) THE AMOUNT OF COMPENSATION ATTRIBUTABLE TO SERVICES WITHIN THE COMMONWEALTH IS THAT PROPORTION OF THE TOTAL COMPENSATION WHICH THE TOTAL NUMBER OF WORKING DAYS EMPLOYED WITHIN THE COMMONWEALTH BEARS TO THE TOTAL NUMBER OF WORKING DAYS EMPLOYED BOTH WITHIN AND OUTSIDE THE COMMONWEALTH, EXCLUSIVE OF NONWORKING DAYS. NONWORKING DAYS ARE NORMALLY CONSIDERED TO BE SATURDAYS, SUNDAYS, HOLIDAYS, AND DAYS OF ABSENCE BECAUSE OF ILLNESS OR PERSONAL INJURY, VACATION OR LEAVE WITH OR WITHOUT PAY.

(2) WITH RESPECT TO EARNINGS OF A TRAVELING SALESMAN OR OTHER EMPLOYEE WHOSE COMPENSATION DEPENDS DIRECTLY ON THE VOLUME OF BUSINESS TRANSACTED BY HIM, THE AMOUNT ATTRIBUTABLE TO SERVICES WITHIN THE COMMONWEALTH IS THAT PROPORTION OF THE COMPENSATION RECEIVED WHICH THE VOLUME OF BUSINESS TRANSACTED BY HIM WITHIN THE COMMONWEALTH BEARS TO THE TOTAL VOLUME OF BUSINESS TRANSACTED BY HIM BOTH WITHIN AND OUTSIDE THE COMMONWEALTH.

THE PORTION OF COMPENSATION ALLOCABLE TO PENNSYLVANIA MAY BE DETERMINED BY THE EMPLOYER ON THE BASIS OF THE PRECEDING YEAR'S EXPERIENCE, OR ON THE BASIS OF AN ESTIMATE FOR THE CURRENT YEAR MADE BY THE EMPLOYEE OR HIS EMPLOYER. IN EITHER CASE, THE EMPLOYER SHALL MAKE ANY NECESSARY ADJUSTMENT DURING THE YEAR TO ASSURE THAT THE PROPER AMOUNT IS WITHHELD FOR THE CURRENT YEAR.

AN EMPLOYER IS REQUIRED TO WITHHOLD ON ALL COMPENSATION PAID TO A NONRESIDENT WHO WORKS PARTLY WITHIN AND PARTLY OUTSIDE PENNSYLVANIA UNLESS THE EMPLOYER MAINTAINS ADEQUATE CURRENT RECORDS TO DETERMINE ACCURATELY THE AMOUNTS OF COMPENSATION FROM PENNSYLVANIA SOURCES.

ALSO, PARAGRAPH 4 OF BULLETIN NUMBER 3 PROVIDES THAT: "THE PENNSYLVANIA TAX IS TO BE WITHHELD ON THE BASIS OF THE SAME PAYROLL PERIOD WHICH IS USED FOR FEDERAL WITHHOLDING PURPOSES."

IT IS CLEAR FROM THE ABOVE-QUOTED PENNSYLVANIA STATUTE AND THE IMPLEMENTING "WITHHOLDING INSTRUCTIONS" (PARAGRAPH 3(B)), THAT INSOFAR AS A NONRESIDENT EMPLOYEE IS CONCERNED ONLY COMPENSATION FOR SERVICES PERFORMED WITHIN THE STATE IS SUBJECT TO WITHHOLDING AND THAT COMPENSATION FOR NONWORKING DAYS IS EXCLUDED FROM THE FORMULA SET FORTH IN PARAGRAPH 3(B) FOR COMPUTING THE AMOUNT OF COMPENSATION ATTRIBUTABLE TO SERVICES WITHIN THE STATE. HOWEVER, IT IS ALSO CLEAR FROM THE PENNSYLVANIA STATUTE AND PARAGRAPH 3(B) OF THE "WITHHOLDING INSTRUCTIONS" THAT AN EMPLOYER MUST COMPUTE THE AMOUNT OF TAX TO BE WITHHELD IN A MANNER WHICH WILL RESULT - INSOFAR AS PRACTICABLE - IN THERE BEING WITHHELD FROM A NONRESIDENT'S COMPENSATION FOR THE CALENDAR YEAR INVOLVED AN AMOUNT SUBSTANTIALLY EQUIVALENT TO THE TAX REASONABLY ESTIMATED TO BE DUE PENNSYLVANIA THAT YEAR FROM THAT EMPLOYEE FROM SUCH COMPENSATION (I.E., THE COMPENSATION PAID THAT EMPLOYEE - FOR SERVICES PERFORMED IN PENNSYLVANIA - BY THAT PARTICULAR EMPLOYER). IN OTHER WORDS, UNDER THE STATUTE AND PARAGRAPH 3(B), AN EMPLOYER MUST WITHHOLD FROM A NONRESIDENT EMPLOYEE'S COMPENSATION EACH PAYDAY, IN A CALENDAR YEAR, AN AMOUNT SUFFICIENT - WHEN THE AMOUNTS DEDUCTED EACH PAYDAY ARE TOTALED - TO COVER THE TAX REASONABLY ESTIMATED TO BE DUE THE STATE OF PENNSYLVANIA BY THE EMPLOYEE FROM SUCH COMPENSATION.

UNDER PARAGRAPH 3(B) THE PORTION OF COMPENSATION ALLOCABLE TO PENNSYLVANIA MAY BE DETERMINED BY THE EMPLOYER ON THE BASIS OF THE PRECEDING YEAR'S EXPERIENCE OR ON THE BASIS OF AN ESTIMATE FOR THE CURRENT YEAR MADE BY THE EMPLOYEE OR HIS EMPLOYER. IN EITHER CASE, UNDER PARAGRAPH 3(B), THE EMPLOYER MUST MAKE ANY ADJUSTMENT NECESSARY DURING THE YEAR TO ASSURE THAT THE PROPER AMOUNT IS WITHHELD DURING SUCH YEAR.

SINCE MR. BRADSHAW IS A NONRESIDENT EMPLOYEE OF THE DPSC, WITHHOLDING OF THE PENNSYLVANIA INCOME TAX FROM THE COMPENSATION HE IS RECEIVING WHILE ON EXTENDED SICK LEAVE MUST BE COMPUTED IN ACCORDANCE WITH PARAGRAPH 3(B). THUS, INSOFAR AS CALENDAR YEAR 1972 IS CONCERNED, IF IT IS DETERMINED IN ACCORDANCE WITH PARAGRAPH 3(B) THAT THE AMOUNT WITHHELD FROM HIS COMPENSATION PRIOR TO THE DATE (JULY 19, 1972) HE WENT ON EXTENDED SICK LEAVE IS SUBSTANTIALLY EQUIVALENT TO THE TAX REASONABLY ESTIMATED TO BE DUE FOR CALENDAR YEAR 1972 FROM THE COMPENSATION HE RECEIVED FROM THE DPSC FOR SUCH CALENDAR YEAR, THEN NO FURTHER WITHHOLDING NEED BE MADE FROM MR. BRADSHAW'S SALARY PAYMENTS FOR CALENDAR YEAR 1972. THAT IS TO SAY, IF THE AMOUNT WITHHELD FROM COMPENSATION PAID MR. BRADSHAW PRIOR TO JULY 19, 1972, IS SUBSTANTIALLY EQUIVALENT TO THE TAX IT IS ESTIMATED HE MUST PAY PENNSYLVANIA FOR CALENDAR YEAR 1972 FROM COMPENSATION PAID HIM BY THE DPSC IN SUCH YEAR, NO WITHHOLDING NEED BE MADE FROM MR. BRADSHAW'S SALARY FOR THE BALANCE OF CALENDAR YEAR 1972.

INSOFAR AS CALENDAR YEAR 1973 IS CONCERNED, IF IT IS DETERMINED IN ACCORDANCE WITH PARAGRAPH 3(B) THAT MR. BRADSHAW WILL PERFORM NO SERVICES FOR THE DPSC IN PENNSYLVANIA IN SUCH YEAR (AND APPARENTLY HE WILL NOT), AND HENCE WILL NOT BE LIABLE FOR ANY PENNSYLVANIA INCOME TAX ON COMPENSATION PAID HIM BY DPSC IN CALENDAR YEAR 1973, THEN NO AMOUNT NEED BE WITHHELD FROM MR. BRADSHAW'S SALARY PAYMENTS IN 1973 FOR PENNSYLVANIA INCOME TAX.

IN CONNECTION WITH THE MATTER GENERALLY, WE MIGHT POINT OUT HERE, INSOFAR AS NONRESIDENT EMPLOYEES ARE CONCERNED, THAT UNDER PARAGRAPH 3(B) "SATURDAYS, SUNDAYS, HOLIDAYS, AND DAYS OF ABSENCE BECAUSE OF ILLNESS OR PERSONAL INJURY, VACATION OR LEAVE WITH OR WITHOUT PAY," ARE NORMALLY CONSIDERED TO BE "NONWORKING DAYS." HOWEVER, THE WITHHOLDING OF PENNSYLVANIA INCOME TAX FROM COMPENSATION COVERING SUCH PERIODS IS NOT NECESSARILY PRECLUDED IN A PARTICULAR CASE, SINCE UNDER THE PENNSYLVANIA STATUTE AND THE IMPLEMENTING "WITHHOLDING INSTRUCTIONS," READ AS A WHOLE, THE PORTION OF A NONRESIDENT'S COMPENSATION ALLOCABLE TO PENNSYLVANIA MAY BE ESTIMATED FOR THE YEAR AND THE AMOUNT THEREOF TO BE WITHHELD PRORATED OVER ALL THE PAYDAYS IN SUCH YEAR - WITH APPROPRIATE ADJUSTMENT WHERE NECESSARY - INCLUDING THOSE PAYDAYS WHICH MAY INCLUDE COMPENSATION FOR NONWORKING DAYS.

YOUR QUESTION IS ANSWERED ACCORDINGLY. OF COURSE, THIS DECISION PERTAINS ONLY TO THE QUESTION OF WITHHOLDING OF THE PENNSYLVANIA TAX BY THE DPSC UNDER THE STATED CIRCUMSTANCES, AND ANY QUESTION AS TO THE AMOUNT ACTUALLY SUBJECT TO TAX AND THE TAX ULTIMATELY DUE FROM MR. BRADSHAW IS FOR SETTLEMENT BETWEEN HIM AND THE COMMONWEALTH OF PENNSYLVANIA.