The Mobile Workforce State Income Tax Simplification is one of the most popular bills on the Hill today and would establish a uniform standard to determine whether an employee who works in multiple states is subject to personal income tax in a given state. In this post, guest blogger Nicole Belson Goluboff, who writes frequently on the legal consequences of telework, argues that there is much room for improvement in the proposed bill.
As of October 19, over 200 organizations had signed a letter to U.S. Senate Majority Leader Harry Reid, expressing their support for the Mobile Workforce State Income Tax Simplification Act (S. 3485; H.R. 1864). This legislation, which passed the House in May and is now pending before the Senate Finance Committee, would establish a uniform standard to determine whether an employee who works in multiple states is subject to personal income tax in a given state, i.e., whether the employee has income tax “nexus” in that state. Specifically, the bill would require that a nonresident employee be present and working in a state for more than 30 days during the year before the state could tax his wages. The goal of the bill - to simplify tax compliance for multistate workers and their employers - is worthwhile. However, the measure, as currently drafted, is unlikely to achieve its goal. To be effective, the Mobile Workforce bill must be amended to abolish a state tax rule known as the “convenience of the employer” rule.
I. The Goal of the Mobile Workforce Bill
States currently have varying requirements concerning when nonresident individuals owe personal income tax and when employers must withhold for nonresident employees. According to the Mobile Workforce bill supporters, “Most individuals are not aware of this patchwork” of nonresident filing rules, and many employers must “incur extraordinary expenses” to meet withholding requirements. The Mobile Workforce bill is intended to eliminate confusion for both employees and businesses by replacing the “patchwork” of nexus rules with a uniform rule requiring an employee’s presence in the state for at least 31 days and by creating uniform withholding rules.
II. A Key Weakness of the Mobile Workforce Bill
The Mobile Workforce bill will likely miscarry as long as states remain free to apply a “convenience of the employer” rule. The convenience rule subverts the federal bill’s simplification goal in a number of ways. For example, the rule permits states to dodge the 31-day requirement, assuring that the current confusion concerning nexus will persist.
The convenience rule also adds to the confusion by requiring mobile workers to use different - contradictory - definitions of whether they are “present” in a state, depending on which part of the analysis concerning their income tax liability they are addressing:
(1) The issue of nexus (whether they are subject to tax at all in a state); or
(2) The issue of apportionment (if they are taxable in that state, what part of their salary is subject to tax).
A. The Convenience of the Employer Rule
To flesh out just how the convenience rule can gut the Mobile Workforce bill, let’s consider how the rule works in a state that applies it especially aggressively: New York.
Under the rule in the Empire State, if a nonresident works for a New York employer and chooses to split his work time between the New York office and his home office, the nonresident must pretend that the days he spent in his home state were days he spent in New York. He must then treat all of his salary - including the part he earned in his home state - as New York income and pay taxes to New York on it. He may owe taxes to New York on 100% of his salary even if he earned 99% of that salary at home, in a different state.
Although, under the rule, a nonresident may avoid New York’s extraterritorial taxation if he can prove that his telework arrangement was an employer necessity (rather than merely a convenience for him or his employer), few telecommuters can make the case. The test for proving employer necessity includes three sets of factors, and telecommuters must demonstrate that their arrangements satisfy a specified combination of these factors. Many of the listed conditions are not present in most telework arrangements. (For example, in most cases, the company does not require the employee to telecommute as a condition of employment; identify the telecommuter’s home office as one of the company’s places of business in its advertising material or pay the telecommuter rent for use of his home office.)
The rule’s impact is harsh. New York insists on taxing the wages nonresidents earn at home despite the fact that their states of residence can tax the same income. As a result, workers nationwide risk double taxation for telecommuting across state lines. While some states provide their telecommuting residents with a credit for taxes they pay to New York on the wages they earn at home, telecommuters still suffer: When New York’s tax rate is higher than the tax rate in a telecommuter’s home state, the worker must pay the higher New York rate on the wages he earned at home.
New York businesses also suffer as a result of the rule. The rule is one source of the confusion payroll departments face when their firms engage multi-state workers: Should the company withhold on the wages a nonresident telecommuter earns at home in the telecommuter’s state, New York or both? To avoid the time-consuming and expensive effort required to determine how to comply, businesses may simply refuse to authorize telework, surrendering the significant reductions in hiring costs and the productivity gains that telework promises.
B. How the Convenience Rule Permits an End-Run Around the Mobile Workforce Bill's Uniform Nexus Rule
How would the convenience rule enable New York to circumvent the 31-day nexus requirement and perpetuate the current confusion? By forcing nonresidents who spend fewer than 31 days in New York to pretend that days they worked in their home state were days they worked in New York.
Suppose the Mobile Workforce bill becomes law, and a technology firm in Manhattan hires a computer programmer in California. The programmer and his company agree that, rather than relocating his family to New York, he will work primarily from home, travelling to New York only as needed. During the year, he works only in California and New York. At tax time, to determine whether he has nexus in New York, the employee tallies the days he spent working in New York. He was physically present and working in New York 10 days during the year. In light of the 31-day threshold set forth in the Mobile Workforce legislation, the programmer concludes that he does not have nexus in New York.
Despite the logic of the programmer’s conclusion, New York may reject it. Rather, New York may take the position that, under the convenience rule, the multi-state worker must pretend he was a single-state worker: He must treat the days he spent working from home as days spent working in New York for purposes of determining whether he reached the 31-day threshold. Based on this mandatory fiction, the programmer will have to assert that he worked more than 30 days in New York and submit to taxation there.
The history of the Mobile Workforce bill underscores the risk that the convenience rule will eviscerate the bill’s uniform nexus rule. Versions of the Mobile Workforce bill that were introduced in previous sessions of Congress provided that the nonresident employee had to be “physically present” in the state for the standard number of days before a state could subject the nonresident to tax. However, the word “physically” has been dropped in the current version of the bill: Now, the employee need only be “present” for more than 30 days for the state to exercise tax authority over him. If a nonresident need only be “present” in the state - not “physically present” - New York, for example, can easily claim that days nonresidents choose to work at home, outside New York, are days they are “present” in New York. These nonresidents will reach the 31-day threshold long before they have actually spent 31 days within New York’s borders. Thus, as long as states are permitted to apply a convenience of the employer rule, the Mobile Workforce bill cannot succeed in providing a clear, uniform nexus standard.
C. How the Convenience Rule Adds to the Confusion
The convenience rule does not undermine the Mobile Workforce bill merely by preserving the current nexus confusion, however. It also undermines the bill by creating additional confusion.
Imagine that the Mobile Workforce bill becomes law and all agree that, under the bill, only the days a nonresident is physically present in his employer’s state will count as employer-state days. Suppose, too, that our California computer programmer travelled to his employer’s New York office 40 days during the year. Having worked in the state more than 30 days, he concludes that he has nexus in New York and is subject to tax there. Now, he must determine the correct apportionment of his salary - what part of his salary is taxable in New York.
Although the programmer just counted his California days as California days for purposes of determining whether New York has authority to tax any of his salary, under the convenience of the employer rule, he must now count those same California days as New York days for purposes of determining how much of his salary New York can tax.
The employee is not likely to realize he must treat the California days differently for nexus and apportionment purposes. The two issues are integrally connected, together comprising one fundamental question for the mobile worker: What is his tax exposure in a state where he works but does not live? Requiring a worker to apply different definitions of “presence” depending on which part of this question he is answering adds senseless complexity to tax compliance.
How great is the risk that the convenience rule will enfeeble the Mobile Workforce bill? New York, as I noted earlier, has applied the rule zealously and will surely not hesitate to invoke it to sidestep the federal bill. Moreover, any state can do the same: Any state can use the rule to evade the 31-day nexus requirement; any state can use it to insist that nonresidents working in the state were somehow both absent and present in the state at the same time. Several states already have the convenience rule on their books and can easily summon it to action. Those states that oppose federal limits on their authority to tax nonresident income but have not yet adopted the rule have an especially compelling incentive to adopt it now.
III. How Lawmakers Can Strengthen the Mobile Workforce Bill
For the Mobile Workforce Bill to succeed in its simplification mission, it must establish a clear physical presence standard for determining both whether a nonresident employee has nexus in a state and for determining what portion of the nonresident’s income can be taxed. Lawmakers must, at a minimum:
a) Amend the current statement of the uniform nexus rule (which requires a nonresident employee to be “present” and working for more than 30 days in a state before the state can tax his wages) by inserting the word “physically” before the word “present;”
b) Provide that states may not apply a convenience of the employer rule, or any similar test, in determining whether a nonresident is physically present for nexus purposes;
c) Provide that, when a nonresident does have nexus in a state, the state may not tax any part of the nonresident’s compensation that he earned while physically present in a different state;
d) Provide that states may not apply a convenience of the employer rule, or any similar test, in determining whether a nonresident is physically present for apportionment purposes;
e) Provide that, for purposes of determining (in the apportionment analysis) which days are paid work days, states may not treat a day that a nonresident is physically present and working at home as a non-working day or an unpaid day - unless the nonresident’s employer considers that day to be a non-working day or an unpaid day. (The goal of this provision is to assure that New York, for example, does not unilaterally declare that days a nonresident chose to work from home were non-working or unpaid days and that, as a result, 100% of his salary must be sourced to New York.)
These edits require virtually no effort to make. The Senate Finance Committee can draw on the provisions of another bill that is also currently before the Committee: The Telecommuter Tax Fairness Act (S. 1811; H.R. 5615).
The Telecommuter Tax Fairness Act has already tackled the question of how to simplify apportionment for mobile workers. It prohibits states from taxing income nonresidents earn when they are physically present in another state and from applying a convenience rule to determine physical presence. That is, it already achieves (c) through (e), above. Thus, to help assure that the Mobile Workforce bill creates a true physical presence standard for determining apportionment, lawmakers can simply add the provisions of the Telecommuter Tax Fairness Act to the Mobile Workforce bill.
To help assure that the Mobile Workforce bill also creates a true physical presence standard for determining nexus, lawmakers can add to the section of the revised bill concerning nexus the same language the Telecommuter Tax Fairness Act uses to bar application of a convenience rule when determining apportionment.
Note that, while the Telecommuter Tax Fairness Act covers both employees and independent contractors, the Mobile Workforce bill covers only employees. To assure that the Mobile Workforce bill achieves its simplification goals for the greatest number of interstate workers and businesses, lawmakers should also revise the bill to cover both.
An amended Mobile Workforce bill - one that eliminates the convenience of the employer rule and creates a clear physical presence standard for both nexus and apportionment purposes - would do the job the measure is intended to do: simplify income tax requirements for multi-state workers and withholding requirements for their employers. That is the bill Congress should pass.
Nicole Belson Goluboff is a lawyer who writes and lectures on the legal consequences of telework. She is the author of The Law of Telecommuting (ALI-ABA 2001 with 2004 Supplement), Telecommuting for Lawyers (ABA 1998) and numerous articles on telework. She is also the Legislative Advisor to the Telework Coalition. Nicole thanks Professor Edward A. Zelinsky for his comments on an earlier draft of this article.
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