Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Paul Stinson
Proposed federal legislation to curb states’ ability to tax nonresidents would lessen compliance burdens for employers and could be folded into a larger package on taxes as support for the measure grows, tax practitioners said.
“What we’re told is that if a grand bargain is able to make its way through that this may be part of that grand bargain on tax reform” between the White House and Congress, Alex Thomas of PricewaterhouseCoopers LLP in Dallas said.
The Mobile Workforce State Income Tax Simplification Act ( H.R. 1393) would simplify a national patchwork of interlocking obligations for employers and workers who operate over state lines, preventing states from taking income tax from people who work less than 30 days within their borders.
The House passed the bill June 20. It has 57 co-sponsors as of Sept. 18 but remains referred to the Senate Finance Committee, along with a Senate companion bill ( S. 540) with identical language that had a June 14 hearing before the Small Business and Entrepreneurship Committee.
As the level of sponsorship “continues to grow” and gain support in the Senate, the “likelihood is getting closer that it may pass this term,” Thomas said Sept. 15 at the American Bar Association tax section meeting in Austin, Texas.
However, the New York delegation, among other states projected to lose considerable revenue, is leading strong opposition to the legislation.
New York City’s role as the financial capital of the world underscores the state’s problems with the proposed measure, William Hays Weissman, employment attorney at Littler Mendelson, P.C., Walnut Creek, Calif. told ABA attendees.
“A lot of high-earners come to New York” and the state stands to lose revenue, Weissman told Bloomberg BNA after the panel.
They have a 14-day withholding rule “and so they’re losing that delta of 16 days basically from what their old rule is to what the new rule would be,” he said.
Illinois, Massachusetts, Illinois, New York, and many other states with job centers near their borders stand to lose revenue, according to the Congressional Budget Office score. But New York would lose the most—between $55 and $120 million a year. States like New Jersey with large populations of workers commuting out of state would stand to gain revenue, but overall the bill would reduce the amount nonresident workers would pay in taxes. The CBO projects the bill would cost states a combined $78 million in 2020.
The measure has been welcomed by organizations representing CPAs and mulitstate corporations.
“This bill represents a major assault on the sovereignty of the states and it does particular damage to my state of New York,” Rep. Jerrold Nadler (D-N.Y.) said on the House floor before the June 20 vote.
Passage of the bill would offer welcome logistical relief for employers from the status quo, Megan Marlin of PwC in Washington said during the ABA panel.
“It continues to be a challenge to determine on a real-time basis what a company’s withholding obligations are” and so this legislation presents an opportunity for companies to be assured they’re in compliance “without having that increased administrative burden of tracking their employee travel to the same extent,” Marlin told Bloomberg BNA on the sidelines of the conference.
“The positive would be that it certainly simplifies the compliance process in tracking employee travel among states,” she said.
Weissman said passage of the bill would help untangle the act of knowing when and how much to withhold for a nonresident working in another state.
“It would simplify the process considerably because you could then use a bright-line 30-day trigger for when you’re going to start withholding and when employees will start having an income tax liability,” he said.
As people work in multiple states and work away from their state of residence, “it would allow them to spend up to 30 days without worrying about whether they have to pay income tax to a state they don’t otherwise live in,” Weissman added.
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