Businesses, including small businesses and family businesses that operate interstate, are subject to a significant regulatory burden with regard to compliance with non-resident state income tax withholding laws. These burdens take significant resources away from operating their business. Having a uniform national standard for non-resident state income tax withholding would significantly relieve these burdens. Additionally, there is a need for a de minimis exemption from the multi-state assessment of state non-resident income tax.
Accounting firms, including small firms, do a great deal of business across state lines. Many clients have facilities in nearby states that require an on-site inspection during the course of an audit. Additionally, consulting, tax, or other non-audit services that CPAs deliver may be provided to clients in other states, or to facilities of local clients that are located in other states. Many small business clients of CPAs also have multi-state activities and are affected by non-resident state income tax withholding laws.
There are 41 states that impose a personal income tax on wages, and there are many differing tax requirements regarding the withholding for income tax of nonresidents among those 41 states. A number of states have a de minimis threshold, or exemption for non-residents working in the state before taxes must be withheld and paid. Others have a de minimis exemption based on the amount of the wages earned, either in dollars or as a percent of total income, while in the state. Further complicating the issue is that a number of these states have reciprocity agreements with other, usually adjoining, states regarding the withholding of non-resident state income taxes.
The recordkeeping, especially if business travel to multiple states occurs, can be overly burdensome, and the recordkeeping and withholding a state requires can be for as little as one day’s work in another state. Additionally, the amount of research that goes into determining what each state law requires is expensive and time-consuming. A small firm or business will often be required to engage outside counsel to research the laws of the other states on an ongoing annual basis.
Where many businesses once tended to be local, they now have a national reach. This has caused the operations of even small businesses to move to an interstate basis. Because of the interstate operations of these companies, many providers of services to these companies, such as CPAs, find that they are also operating on an interstate basis. What once were local taxation issues have now become national in scope, and burdens must be eased in order to promote interstate commerce and ensure businesses run efficiently.
Many smaller firms and businesses use outside payroll services providers, and some of these providers are unable to handle multi-state reporting. They often limit, for example, reporting to two states, the state of residence and the state of employment. Additionally, third party payroll service providers generally report on a pay period basis (e.g., twice per month, biweekly, etc.) as opposed to daily, which can be a necessity when interstate work is performed. These reporting issues require employers to track and manually adjust the reporting and withholding to comply with various state requirements. The alternative is to pay for a much more expensive payroll service.
A reasonable de minimus period would ensure that the interstate work for which an exemption from withholding is granted does not become a means of avoiding being taxed or shifting state income tax liability to a state with a lower rate. Instead, it ensures that the primary place(s) of business for an employee are where that employee pays state income taxes.
With respect to concerns that may be raised about the impact of this legislation on state revenues, studies on this legislation show the net impact on state tax receipts are minimal. According to these studies, 25 states will actually gain revenue or have no loss, and 22 states will have revenue reductions of less than .02%. For all the states combined, the net change in total taxes will be approximately a $42 million reduction in personal income tax receipts.
The first version of legislation to remedy this issue was introduced in the 109th Congress (2005-2006) as H.R. 6167, the Mobile Workforce State Income Tax Fairness and Simplification Act of 2006, and it would have created a uniform national standard and limited state or local taxation of the compensation of any employee who performs duties in more than one state or locality to:
(1) the state or locality of the employee's residence; and
(2) the state or locality in which the employee is physically present performing duties for more than 60 days.
The bill was re-introduced in the 110th Congress (2007-2008), and a hearing was held in the House Judiciary Commercial and Administrative Law Subcommittee. Subsequent to that hearing, state tax administrators and a coalition of businesses negotiated a new version acceptable to both sides. The proposed period an employee must work in a host state before having to pay withholding was reduced from 60 days to 30 days. In the 111th Congress (2009-2010), Congressman Hank Johnson (D-GA) re-introduced the bill as H.R. 2110 with the legislation attracting 23 co-sponsors before the Congress adjourned.
In the 112th Congress (2011-2012), Congressman Howard Coble (R-NC), the chairman of the subcommittee with jurisdiction over the issue, along with Congressman Johnson, reintroduced H.R. 1864, the Mobile Workforce State Income Tax Simplification Act of 2011. The legislation passed without objection in the House of Representatives. Senator Sherrod Brown (D-OH) and Senator Kay Bailey Hutchison (R-TX) introduced the identical version, S. 3485, in the Senate. The Senate adjourned last year before S. 3485 was considered.
On March 13, 2013, Congressmen Coble and Johnson re-introduced, H.R. 1129, the same version that passed the House in the previous Congress. Senator Brown is expected to reintroduce his bill again in the near future. The AICPA is a leader in the National Mobile Workforce Coalition comprised of more than 400 national businesses and groups that support this legislation.
Having a uniform national standard would enhance compliance and eliminate the burden of having to maintain a working knowledge of the state tax laws in a state where an employee does not reside.
In addition to uniformity, there needs to be a de minimis exemption of at least 30 days before an employee is obligated to pay.
Congressmen Coble and Johnson and Senator Brown have reached a balance between the states’ taxing of work done within their borders and the needs of business, and especially small business, to be able to operate efficiently in this economic climate.
AICPA submitted a letter and Written Statement to Congress on the proposed Mobile Workforce State Income Tax Simplification Act of 2013, H.R. 1129, for the House Judiciary Committee Subcommittee on Regulatory Reform, Commercial and Antitrust Law hearing on April 29, 2014, where AICPA testified. AICPA testified in support of H.R. 1129, which would prohibit states from taxing most non-resident employees unless the employee is present and performing employment duties in the state for more than 30 days during the calendar year. The AICPA believes H.R. 1129 provides long-overdue relief to taxpayers and their employers from the current web of inconsistent state tax and withholding rules that impact everyone who travels for work.