State & Local Tax Alert - Grant Thornton LLP

State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
Release date
May 31, 2011
Mobile Workforce Legislation Considered by U.S. House
Subcommittee
On May 12, Rep. Howard Coble (North Carolina) and Rep. Hank Johnson (Georgia)
reintroduced H.R. 1864, the Mobile Workforce State Income Tax Simplification Act, into
the U.S. House of Representatives. The bill would limit the authority of states to tax the
income of nonresident employees and would provide uniformity for employer
withholding on such income. H.R. 1864 would permit states to tax a nonresident
employee’s income only if the employee has been present and performing employment
duties in the state for more than 30 days during the calendar year. In addition, the bill
would require employers to withhold on that income once the 30-day threshold has been
met, and to catch up all required withholding at that time. The House Judiciary
Subcommittee on Courts, Commercial and Administrative Law (CCAL Subcommittee)
held a public hearing on this bill on May 25. The bill is substantially similar to legislation
introduced during the previous two Congressional terms to establish a national framework
governing when states may require employers to withhold tax from nonresident
employees’ wages, as well as such employees’ return filing obligations. 1
Uniform Rule for Taxation by Nonresident States
Under current law, states have widely varying and inconsistent standards with regard to
when an employee is required to file a return in the nonresident state and when employers
of nonresident employees are required to withhold on those wages. In some cases there is
no de minimis rule and employers are required to begin withholding on the employee’s
first day of travel.
H.R. 1864 seeks to provide uniformity among the states in these two areas. Specifically,
the bill limits the taxation of wages and remuneration earned by a nonresident employee
to: (1) the state of the employee’s residence; and (2) the state in which the employee is
physically present performing duties for more than 30 days during the calendar year. The
bill also allows states to require employers to withhold on all wages or other remuneration
earned as of the first day the employee began performing work in the state once the 30-
day threshold has passed.
States
All
Issue/Topic
Income Tax
Contact details
Larry Szafasz
Chicago
T 630.873.2604
E larry.szafasz@us.gt.com
Giles Sutton
Charlotte
T 704.632.6885
E giles.sutton@us.gt.com
Dale Busacker
Minneapolis
T 612.677.5185
E dale.busacker@us.gt.com
Jamie C. Yesnowitz
Washington, DC
T 202.521.1504
E jamie.yesnowitz@us.gt.com
Adam Hines
Denver
T 303.813.4028
E adam.hines@us.gt.com
Jennifer Wheaton
Denver
T 303.813.3484
E jennifer.wheaton@us.gt.com
www.GrantThornton.com/SALT
Under the bill, an employee will be considered present and performing employment duties
within a state for a day if the employee performs the preponderance of the employee’s
1 H.R. 2110, introduced on April 27, 2009 by Rep. Hank Johnson, Georgia and H.R. 3359, introduced on
August 3, 2007 by Rep. Hank Johnson, Georgia.

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duties within such state for such day. Where an employee is present and performs
material employment duties in both the resident state and one nonresident state on the
same day, such employee will be considered to have performed the preponderance of their
duties for that day in the nonresident state. The portion of a day that an employee spends
in a state while in transit is not considered in determining the location where an employee
performed employment duties.
Employers may rely on the employee’s determination of time expected to be spent in a
nonresident state absent knowledge of fraud or collusion between the employer and
employee. If an employer, at its discretion, maintains a time and attendance system
tracking the location where an employee performs their services on a daily basis, the data
from such system will be used instead of the employee’s determination.
Exclusions from the Uniform Rule
The types of employees that are excluded from the uniform rules provided in the bill that
would apply for withholding and income tax return filing obligations remains unchanged
from the previous bills and applies to a limited number of employees who are athletes,
professional entertainers, or certain public figures who give speeches or make similar type
appearances and are paid on an per-event basis. The terms “employee” and “wages or
other remuneration” will be defined by the state in which the duties are deemed to be
performed.
Effective Date
The bill would become effective on January 1, 2013.
CCAL Subcommittee Hearing
As noted above, on May 25, the CCAL Subcommittee held a hearing to discuss the mobile
workforce bill, at which three witnesses testified: Jeffrey Porter (on behalf of the American
Institute of Certified Public Accountants (AICPA)), Joseph Crosby (on behalf of the
Council on State Taxation (COST)) and Patrick Carter (on behalf of the Federation of Tax
Administrators (FTA)). The AICPA and COST representatives supported adoption of
the bill, though the AICPA representative noted that the bill should be revised to ensure
that to the extent the 30-day threshold is passed, withholding and taxability should only
apply prospectively, rather than retroactively to the entire initial 30-day period.
In contrast, the FTA representative opposed the bill in its current format, noting that
recordkeeping requirements contained in the bill needed to be strengthened, and there
would be a substantial revenue impact on New York State due to the nature of its role as
the center of finance and business that draws nonresidents to work in that jurisdiction.
Further, the FTA representative requested that the definition of the word “day” be
changed to all or any part of a day in which an employee provides services, and the list of
employees excluded from the effect of the bill be expanded to those that are paid on a
“per event” basis.

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Following their testimony, lawmakers addressed the vast majority of questions to the
COST and FTA representatives. In the question and answer session, the FTA noted that
the current system creates administrative burdens for all types of businesses, not just small
businesses. With respect to reciprocity agreements that exist between some border states
that completely eliminate nonresident withholding and taxation issues, the COST
representative confirmed that such agreements would be left undisturbed by the proposed
bill. The COST representative also noted that a bill of this nature would not be
threatened by potential dormant Commerce Clause issues, and that keeping the status quo
would ultimately deter interstate business activity as employers could restrict travel into
jurisdictions requiring day one withholding on employees’ wages. Members of the CCAL
Subcommittee inquired as to whether there was any flexibility on the 30-day threshold.
While the FTA representative would like to see the threshold reduced, the COST
representative noted that the 30-day threshold was the product of a compromise, as earlier
versions of the bill initially set a 60-day standard, and that reducing the threshold further
would mean that fewer people benefit from the proposed rule.
Commentary
State laws often provide for disparate treatment with respect to the taxation of income
earned by a nonresident employee for work performed in the nonresident state, as well as
the requirements imposed on the employer to withhold on that income. The uncertainty
and inconsistency among states results in a significant administrative burden on multistate
employers and on the conduct of interstate commerce. In certain instances, the lack of
uniformity of state laws governing withholding of a nonresident employee’s state income
tax can also lead to double taxation. For example, an employer can be required to
withhold income tax in two states for the same days of work because any part of a day
spent working in each state may count as a working day. 2 While in many cases a credit is
available on the employee’s resident income tax return to ensure that the employee
ultimately is taxed by only one jurisdiction, the employee may need to wait until the next
calendar year to actually receive the benefit from the credit. Further, there are many
instances where an employee residing in a state with no income tax works in states that
impose income taxes. In this scenario, the employee does not receive a credit from the
resident state for nonresident taxes paid.
The Multistate Tax Commission (MTC) drafted a model statute aimed at promoting
consistent employer withholding thresholds and exclusion for employee’s personal income
tax obligation. The MTC used a 20-day threshold for taxability and withholding
obligations. Adoption of the model statute by MTC’s member states, however, is not
mandatory and would not guarantee a uniform standard of state taxation of nonresident
employee income, particularly as the federal proposal would require a 30-day taxability and
withholding threshold. At the CCAL Subcommittee hearing, the FTA representative
stated that the MTC effort has helped to some extent, though there are some issues in that
model statute that still need to be worked out, including the definition of a “day.” North
2 For example, Connecticut and New York each require withholding for a single day’s visit. See New York
Nonresident Audit Guidelines (March 31, 2009) and Connecticut Announcement No. 2010(3), Jan. 11, 2010.

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Dakota recently enacted legislation based on a draft of the MTC’s model statute and more
states may enact similar legislation limiting the taxation of traveling employees. 3 During
the CCAL Subcommittee hearing, the COST representative acknowledged the North
Dakota bill but did not think that all states would act in concert to achieve uniformity in
this area.
Arguably, a meaningful federal statute must balance the states’ legitimate interest in raising
revenue against the burdens that are imposed on multistate employers and employees.
The goal of the proposed legislation is to promote consistent employer withholding
thresholds and exclusion thresholds for the employee’s personal income tax obligations,
increase overall compliance, and mitigate the burden on nonresident employees who
temporarily perform work in several states.
A bill concerning the imposition of state income taxes on nonresidents who temporarily
work in a state has never been put to a Congressional vote, despite the vocal grievances
expressed by the business community and state tax authorities. Although it is difficult to
predict the probability of a vote on the current bill in light of these considerations, the fact
that the bill is being co-sponsored in a bipartisan manner by members of the CCAL
Subcommittee may raise the likelihood that the bill will at the very least, be passed by the
CCAL Subcommittee and the Judiciary Committee, and be moved on to the full House of
Representatives for consideration.
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3 North Dakota S.B. 2170, Laws 2011.

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