Today’s business travelers deal with “A patchwork of complicated nonresident income tax laws.” This assessment comes from the Mobile Workforce Coalition, an advocacy group seeking simplification of state laws taxing nonresidents who work outside of their home state. Currently, states have inconsistent standards for how employers and employees must report income earned from working out of state.
Employees are required to file personal income tax returns for the states they travel to for temporary work periods. Also, employers must withhold income tax on employees who work outside of their home state for temporary work periods. Many states require filing even if the employee is there on business for only one day of the year. With 43 states and the District of Columbia levying a personal income tax on wages and partnership income, business travelers face a significant burden every time they work away from home.
Take Georgia, for example. Its rules for withholding on nonresident employees are based on a three-part test looking at: 1) whether an employee has worked there for twenty-three days in a calendar quarter; 2) whether more than five percent of the employee’s income is attributable to work in Georgia; or 3) whether the employee has received payment for services in Georgia that exceeds $5,000.
Feds Step In
Employers have been trying for years to get Congress to create a uniform rule that would apply to business travelers across the nation. Although bills have been introduced in the past, none have made it through the legislative process. This year the bill has unusual momentum, with the House passing the Mobile Workforce Act, H.R. 1393, on June 20th, much earlier than in past years. Also, the bill has been changed from previous versions to address some of the states’ biggest concerns. The bill now heads to the Senate, which has its own companion bill, S. 540. The bills have bipartisan support, with the House bill having 20 Democrats and 37 Republicans as co-sponsors and the Senate bill having 21 Democrats, 26 Republicans, and one Independent as cosponsors.
Under H.R. 1393, employees would not be subject to another state’s income taxes unless they worked more than 30 days in a calendar year in that state. This threshold is not continuous, so an employee that makes a number of short business trips to a state might still cross it. Once 30 days is exceeded, the withholding obligation is retroactive to the first day worked in the state.
If an employee works in a nonresident state for any part of a day, then it is a “nonresident day.” If an employee works in two or more nonresident states during the same day, then it is a “nonresident day” in the nonresident state in which the employee has worked longer for that day. Time spent in transit through a state is disregarded in determining a “day.”
The bill exempts “prominent” professional athletes, entertainers, and public figures who are paid on a per appearance basis. They remain subject to each state’s laws. Film, television, and other video production employees also are excluded from the Act’s protections. The House Report on the bill notes that, like professional entertainers and athletes, these employees earn income from their work in specific states, many of which offer tax credits for local productions. They are excluded if the associated tax credits are contingent on withholding wages earned in the state.
Effective Date, Outlook
The effective date is set in the future to give states time to develop administrative guidance and to minimize fiscal impacts on the states. The bill would take effect on January 1 of the second calendar year that begins after enactment and would not apply to any tax obligation that accrues before the effective date.
Despite the bipartisan support, the bill could be derailed by the current backup in Congress on major legislation. However, its chances are bolstered by a recent Congressional Budget Office (CBO) report estimating that the bill would result in a minimal total state revenue shortfall of between $55 and $100 million in 2020 and would have no direct impact on the federal budget. Business travelers take heart. It just may happen this time.
About the Blogger
Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax Professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.