The Mobile Workforce State Income Tax Simplification Act

I was glad to see that Senator Sherrod Brown (D – OH) introduced the Mobile Workforce State Income Tax Simplification Act on August 2, 2012.  The bill is being promoted by the American Institute of CPAs, and a version of the bill passed the House on voice vote May 15^th.

The bill would establish a uniform standard for the withholding of state income taxes on nonresident employees.  It would lessen the burden the current system places on employers and traveling employees. 

Both bills would require nonresidents to work in a state for more than thirty days before becoming subject to a state‘s income tax withholding.

Why is this an issue? Let’s say that you start a consulting firm. Business takes off. You develop a national client base and hire employees. You send your employees throughout the country, sometimes for 4 or 5 days and other times for longer. You meet with me to discuss your tax filing requirements, especially your payroll. You tell me that you have engagements coming up in the following states and ask me how to handle the employee withholding.

               State                                      Exempt from Employer Withholding if …

Arizona                                               60 days or less

California                                            exempt if less than $1,500

Delaware                                             no exception

Georgia                                               23 days or less

Hawaii                                                 60 days or less

Idaho                                                   exempt if less than $1,000

Maine                                                  10 days or less

Maryland                                             exempt if less than $5,000

Massachusetts                                     no exception

Ohio                                                    less than $300 in any quarter

Virginia                                               exempt if less than $7,000

Now seriously, how are we to work with this? Remember that payroll may have some very nasty penalties for just minor errors. Do we simply withhold from day one on all employees in all states? That is the safest way to go, but now you are going to have monthly or quarterly reporting to almost every state in the nation. Perhaps the report says “zero”, but it will still take time to prepare and file. You may have additional end of year considerations, such as submitting W-2s to the state. Why not just shut down the account every time, you ask? That likely will save little to no time overall and may create more problems whenever you try to reactivate an account.

This all takes time. It may be my time, it may be your employee’s time, but you will be paying for this time. You can now see the issue. If you ship an employee into Delaware for 1 1/2 days, do they really expect you to withhold, remit and keep reporting to Delaware until the cows come home? Perhaps this made sense years ago when our parents worked at the factory down the street, but it makes no sense today. It is unreasonable to threaten an employer with payroll taxes (and penalties) because they made the mistake of sending an employee into your state for 3 or 4 days. This is not the Lewis and Clark era.

Will this bill pass Congress? My hunch is that no tax bill will pass Congress until the elections are resolved, and then only a tax extender bill passed at the last hour of the last day. This bill will not pass this Congress, but at least the issue is being discussed and highlighted. Perhaps next time and next Congress.

The President’s Budget Tax Proposals

The President delivered his proposed budget for fiscal 2013 this Monday. The budget included as one of its five tax “reform” principles the following:

• Simplify the Internal Revenue Code

Sounds good. Here are some proposed tax “simplifications”:

• Provide a temporary 10% tax credit for new jobs and wage increases
• Provide additional tax credits for investment in advanced energy manufacturing
• Provide tax credit for energy-efficient commercial building property expenditures
• Reform and extend Build America Bonds
• Provide for automatic enrollment in IRAs, including a small-employer tax credit
• Expand the earned income tax credit for larger families
• Expand the child and dependent care tax credit
• Provide tax incentives for locating jobs and business activity in the United States
• Provide new manufacturing communities tax credit
• Target the domestic production deduction to domestic manufacturing activities
• Provide a tax credit for the production of advanced technology vehicles
• Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles
• Modify certain energy incentives
• Eliminate capital gains taxation on investments in small business stock
• Expand the tax credit provided to qualified small employers for nonelective contributions to employee health insurance
• Extend and modify the new markets tax credit
• Designate growth zones
• Provide tax incentives for transportation infrastructure
• Modify tax-exempt bonds for Indian tribal governments
• Allow current refundings of state and local governmental bonds
• Reform and expand the low-income housing tax credit
• Defer deduction of interest expense related to deferred income of foreign subsidiaries
• Determine the foreign tax credit on a pooling basis
• Tax currently excess returns associated with transfers of intangibles offshore
• Limit shifting of income through intangible property transfers
• Disallow the deduction for nontaxed reinsurance premiums paid to affiliates
• Limit earnings stripping by expatriated entities
• Modify tax rules for dual capacity taxpayers
• Tax gain from the sale of a partnership interest on a lookthrough basis
• Prevent use of leveraged distributions from related foreign corporations to avoid dividend treatment
• Extend Sec. 338(h)(16) to certain asset acquisitions
• Remove foreign taxes from a Sec. 902 corporation’s foreign tax pool when earnings are eliminated
• Require a certified taxpayer identification number (TIN) from contractors and allow withholding if the contractor does not provide a TIN
• Require e-filing by any entity that must file Schedule M-3
• Authorize Treasury to require additional information to be included in Form 5500, Annual Return/Report of Employee Benefit Plan
• Allow the IRS to require prospective reclassification of misclassified workers
• Extend the statute of limitation where a state adjustment affects federal tax liability
• Require taxpayers who prepare their returns electronically but file their returns on paper to print a 2D bar code
• Impose a penalty on failure to comply with electronic filing requirements

Don’t worry too much about this. The Senate hasn’t passed a budget in years.