Lance S. Jacobs
and Callie Perkins
Recently introduced legislation aims to simplify global income tax
reporting by establishing a national standard for filing and withholding
income taxes for nonresident workers. Currently 43 states and the
District of Columbia assess a personal income tax, each with varying
rates and requirements. This causes confusion for workers and businesses
alike when attempting to compute the proper amounts to report and
withhold, respectively. In an increasingly mobile business community,
more workers than ever travel for business. Technology further
complicates the issue as the Internet enables employees to work from
home and businesses to conduct meetings remotely. Consequently,
compliance will only become more difficult unless the administrative
burdens are lessened.
The new legislation, the Mobile Workforce State Income Tax Simplification Act of 20111
(the Act), seeks to reduce the complexity of the varying rules in each
state by limiting the authority of states to tax income of nonresident
employees in most situations. Specifically, the Act would preempt
conflicting state rules and establish a 30-day de minimus
threshold for a state to be able to tax the income of a nonresident
employee. Professional athletes and entertainers, as well as certain
public figures, would be excluded from the Act because the majority of
them are paid on a per-event basis. Compliance with the current system
is both timely and costly as employees who travel outside their state of
residence must file income tax returns not only at the federal level
and in their home state, but also in every other state to which they
travel for work, assuming that state is one of the 43 with a personal
income tax. Employers face related difficulties in complying with
varying withholding requirements. Not only is this inefficient for those
filing income tax returns, but it is not beneficial for the states as
it invites non-compliance.
The Act was previously introduced in 2006,2 20073 and 20094
as the Mobile Workforce State Income Tax Fairness and Simplification
Act. After having undergone several modifications, the Act was most
recently introduced in May 2011 by Representatives Howard Coble (R-NC)
and Hank Johnson (D-GA).
The Federation of Tax Administrators (FTA) has opposed the bill from
the outset. The FTA's chief argument is that the Act intrudes upon state
sovereignty and tax authority and too greatly impacts state tax
revenues, while not having an adequate federal justification. In 2007,
the FTA argued that the Act directly conflicted with the guiding
principle of state tax policy that income should be taxed where it is
earned or where the services giving rise to the income are performed. It
also took issue with the original 60-day shelter for nonresident
employees as opposed to the 30-day tax-free shelter as currently
proposed. The FTA argued that a 60-day threshold would allow individuals
to "conduct substantial amounts of economic activity within a state"
without having to pay taxes on such activity, effectively creating "tax
havens" that would substantially and negatively impact state tax
revenues. The FTA was particularly concerned about the negative impact
on places such as New York City, to which many workers travel for
temporary work periods. To limit the negative impact upon state
revenues, the FTA proposed a two-tiered system for exemption, consisting
of both a time component of some time less than 60 days and a value component with a maximum dollar amount allowed to be exempted.
At a recent hearing, representatives of the FTA again testified
against the Act. Despite reducing the period from 60 days to 30 days,
the FTA still believes that the Act "invites tax avoidance" and intrudes
upon state sovereignty. It is concerned that the Act does not make
clear that it is limited to wages only and wants the Act to more
definitely say that states may still tax non-wage income earned within
the state. It also still favors a two-tiered system with an added value
component. Furthermore, the FTA does not support the "physical presence
standard" for the imposition of tax liability as written in the current
Multiple proponents firmly advocate the Act's administrative
simplicity. With ever-increasing numbers of workers traveling for
business, usually for a limited amount of time, the varying filing and
administrative requirements are exceedingly outdated and inefficient,
and creating a uniform standard is the most practical solution. Although
reciprocity agreements are meant to ameliorate compliance burdens, they
only make tracking responsibilities more difficult because they only
extend to states that have agreed to be included, and there are multiple
such agreements between various states.
The AICPA argues that the current system takes resources away from
businesses, particularly small businesses that are forced to hire
additional staff to comply with the varying requirements of each state
where they do business. These costs are subsequently passed on to those
businesses' customers and clients, thus impeding interstate commerce.
Considering all the different ways in which states tax income and the
difficulty of identifying all the different reciprocity agreements,
recordkeeping becomes more burdensome as employees travel more often. To
simplify administrative compliance for all, proponents argue, the best
solution is to establish a national standard for filing and withholding
income taxes when doing business in multiple states. The AICPA argues
that doing so would not only stimulate interstate commerce, but would
also invite compliance and benefit the states. It maintains that any
concerns opponents of the Act have about individuals and businesses
avoiding tax liability or shifting liability to a state with a lower
rate are addressed by the 30-day shelter rule.
COST supported its endorsement of the Act by providing details on the
withholding requirements in varying states. For example, Arizona does
not require withholding if a nonresident is in the state for fewer than
60 days, but Maine's threshold is only 10 days. A uniform standard would
provide certainty for employees when filling out their income tax
returns and create greater efficiency for businesses. COST says that the
effects on state revenues would be negligible at best. This is because
all states that levy a personal income tax also provide credits for
nonresident personal income taxes paid to other states. Based on the
most recent figures available provided for the 111th Congress, COST estimates that 44 states either gain a small amount of revenue or lose only 0.01 percent or less.
The bipartisan support for this bill is encouraging, as in our
increasingly mobile economy, where geography is relatively unimportant
but it is nonetheless necessary to travel at times to a customer
location, business travel is at an all-time high. The perception that
employees are spending a minimal amount of time in each individual
location yet are traveling to multiple locations, seems to be correct.
If this perception is correct, the economic justification for
withholding income tax from an employee for a minimal amount of time
spent in a jurisdiction seems flimsy at best, as the state in question
is not really providing many services to the employee that allows him to
The FTA's arguments for the status quo seem flimsy - the whole point
behind the state tax credit system, whereby a resident of a state gets a
credit on his or her income tax return for taxes paid to other
jurisdictions, is to ensure that the employee is not out-of-pocket as a
result of his or her travel. While there are imperfections in the system
because of the way that differing states calculate the credits allowed
(typically, for example, a resident of a state with a lower tax rate
does not get a full credit for taxes paid to a state with a higher rate
that he visited as a non-resident), it seems that the proposed
legislation would reduce these imperfections. Further, conceptually, it
is hard to understand how this could have a significant impact on the
states as a whole, as the reduction in non-resident tax revenue would be
offset by fewer credits given to residents for non-resident taxes paid.
The FTA's defense seems to be less about reducing some systemic
unfairness and more about retaining marginal revenues.
1 112 H.R. 1864.
2 109 H.R. 6167.
3 110 H.R. 3359.
4 111 H.R. 2110.
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