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The challenges and complexity of multistate taxation place employers in a balancing act weighing risks with the costs of compliance, representatives from Ernst & Young, LLP, said June 21 during a webinar.
Panelists discussed the multistate compliance landscape and the results of the 2016 Multistate Payroll Tax Compliance Survey by Bloomberg BNA and Ernst & Young LLP.
Responses are being accepted for the 2017 survey.
Employers are part of a compliance spectrum when it comes to multistate taxation, said Candylin Mendoza, senior manager with Ernst & Young's employment tax services.
“Most employers fall somewhere in between or in the middle, such that they adopt a level of compliance that aligns with their business landscape, their risk appetite, and their resources to implement such a program,” Mendoza said, referring to the 2016 survey results.
When it comes to creating a program for multistate tax compliance, employers should know it is not one size fits all, Mendoza said. “What we would recommend is that employers perform some sort of a risk assessment as their first step to enable them to quantify their risks, identify their high-risk jurisdictions, and identify their employee populations that contribute the most to that risk.”
On an operations level, employers should identify the level of risk and compliance they are comfortable with, how frequently they want to make adjustments and payments, and how they want to track where employees travel and perform services, Mendoza said.
Tracking employee travel and gathering employee data more generally pose challenges to employers implementing compliance plans, Mendoza said.
“Most employers don’t have an accurate way of tracking and identifying where employees travel and perform services,” Mendoza said. Employers may rely on travel suppliers, expense reimbursements, or badge-entry systems, she said.
Another challenge is tracking the state requirements to apply when employees travel and work in multiple jurisdictions, Mendoza said.
“It doesn’t help that rules vary from one state to another,” Mendoza said. “Employers simply do not have the resources to research and maintain up-to -date state tax rules for all the jurisdictions that are relevant to their businesses.”
Rules that differ by state for establishing residency and creating nexus for employers complicate complying with multistate taxation rules, webinar panelists said.
“I think it’s really important to understand that each state defines residents differently,” said Steven Wlodychak, a principal with Ernst & Young’s indirect tax practice.
Some states, such as New York, may have a threshold for when an individual should be considered a resident. Others, such as California, may rely more on facts and circumstances, such as where workers registered to vote or where children attend school, Wlodychak said. “It’s important to understand the context of these different rules,” he said.
Nexus is an issue employers should be aware of when employees work in multiple states or from a home in another state, said Peter Berard, a senior manager for Ernst & Young's employment tax advisory services.
If an employee's presence in a state creates nexus, the employer may be liable for taxes in that state in addition to employment tax. As with residency, states may have different thresholds for considering an employee to have a level of presence that would trigger nexus.
Employers should be cautious when it comes to employees who telecommute from a different state, Wlodychak said. “Having a home office in a particular state could be considered having a work location in that particular state, resulting in nexus for other taxes, whether that be income tax withholding, unemployment insurance, or other employment taxes.”
If employers are hoping for relief from multistate headaches in the form of federal action, they should not hold their breath, said Debera Salam, director of payroll information management services for Ernst & Young.
The Mobile Workforce State Income Tax Simplification Act of 2017, a bill ( H.R. 1393) that would prohibit states from assessing income tax liability or reporting requirements on nonresidents conducting business in the state for up to 30 days a year, passed the House on June 20, but is unlikely to move forward in the Senate, Salam said. Similar bills were approved by the House in 2012 and 2015, but failed to find support in the Senate, she said.
“Clearly states that want to keep their right to collect revenue are not going to be very happy with this, particularly states like New York that have a lot of short-term business travelers and a lot of revenue at stake,” Salam said.
Additionally, higher-profile issues such as health care and tax reform likely are to take priority in the Senate, Salam said.
The 2017 survey may be accessed at https://www.bna.com/2017-multistate-payroll-m73014450965/.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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