House Passes Bill to Limit State Taxation of Mobile Workers

May 15, 2012. The House passed HR 1864 [LOC | WW], the "Mobile Workforce State Income Tax Simplification Act of 2011", by voice vote.

This bill provides that a state may not impose its income tax on non-resident employees unless they earn wages in the taxing state for more than 30 days.

This bill does not address state business activity taxes. The impact of this bill on state taxation of non-resident workers on the basis that they work via phone or internet communications with persons in the taxing state is less than clear.

The Senate has not passed this bill, or a related bill.

Rep. Howard Coble (R-NC) introduced this bill on May 12, 2011. The House Judiciary Committee's (HJC) Subcommittee on Courts, Commercial and Administrative Law held a hearing on the bill on May 25, 2011. See, HJC web page with hyperlinks to prepared testimony.

The HJC amended and approved the bill on November 17, 2011, by voice vote. The HJC reported the bill on February 3, 2012. See, House Report No. 112-386. Rep. Jerrold Nadler (D-NY) and Rep. John Conyers (D-MI) wrote a short dissent.

This bill provides that "No part of the wages or other remuneration earned by an employee who performs employment duties in more than one State shall be subject to income tax in any State other than -- (1) the State of the employee's residence; and (2) the State within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned."

This bill contains a definitions section. However, it does not define the terms "present" or "performing employment duties". The bill does not expressly state that a taxing state shall not deem a non-resident to be "present" on days in which he or she works remotely via telecommunications or the internet with persons or servers in the taxing state.

The Congressional Budget Office (CBO) released a report on this bill on January 25, 2012. It states that "Generally, states that have large employment centers close to a state border would lose the most revenue; states from which employees tend to commute would gain revenue. For example, New York would likely lose the largest amount of revenue -- from $50 million to $100 million according to state and industry estimates -- and Illinois, Massachusetts, and California would face smaller losses. New Jersey and Connecticut would likely gain revenue."

House Floor Debate. Rep. Coble stated in the House that "the diversity of State income tax laws places a significant burden on people who travel for work and their employers, many of which are small businesses. Currently, 41 States tax the wages earned by a nonresident for work performed there. I do not take issue with the right of those States to impose an income tax, but I am concerned that the disparity of tax rules among those States is damaging small businesses and stifling economic growth."

He continued that "some States require a nonresident to pay income tax if he or she works in that State for just one day. Other states do not collect tax until the nonresident works for a certain number of days in the particular jurisdiction. Small businesses must expend considerable resources to figure out how much they must withhold for their traveling employees in 41 different jurisdictions. Employees are also confused about when their tax liability is triggered and in which States they must file a tax return."

He said that this bill "establishes a clear 30-day threshold for tax liability and employer withholding. Under the bill, States remain free to set any income tax rate they choose."

Rep. Hank Johnson (D-GA) (at left), the lead cosponsor of the bill, also spoke in support. He said that "this bill will greatly increase compliance rates. This bill will end up saving States the administrative costs of processing and remitting thousands of small returns from nonresidents."

Rep. Lamar Smith (R-TX), the Chairman of the HJC, stated in the House that "Under this current patchwork system, employees who travel out of state for work must file tax returns in other jurisdictions even if their ultimate tax liability to a state is a few dollars."

He added that "In addition to burdening our interstate employees, different state income tax laws require employers to comply with a wide variety of tax withholding laws. Many of those employers are small businesses who can least afford these administrative costs."

Rep. Sheila Lee (D-TX) also spoke in favor of the bill. Texas is one of the few states with no state income tax.

Prior Versions of this Bill. Rep. Johnson and others have been working on this legislation for three Congresses.

For the 110th Congress, see HR 3359 [LOC | WW], the "Mobile Workforce State Income Tax Fairness and Simplification Act of 2007", sponsored by Rep. Johnson. It had a 60 day threshold. See also, story titled "Summary of Teleworker and Mobile Worker Protection Bills" in TLJ Daily E-Mail Alert No. 1,665, October 30, 2007.

For the 111th Congress, see HR 2110 [LOC | WW], the "Mobile Workforce State Income Tax Simplification Act", introduced by Rep. Johnson. It had a 30 day threshold.

Teleworkers. The issue of telework did not arise during the floor debate in the House. In contrast, members frequently referenced traveling workers. Nor is telework addressed in the HJC report.

Also, TLJ spoke with several House staffers who declined to offer a definitive statement regarding the impact of this bill on taxation based upon teleworking.

TLJ spoke with Maureen Riehl of the Council on State Taxation (COST), a group that supports this bill. She said that this bill is directed at state taxation of business travelers. However, she added that it does impact state taxation of teleworkers.

Riehl said that the word "present" in the bill means that the employee must be "actually physical present" in the taxing state for 30 days to be subject to income taxation by the taxing state; telecommuting does not constitute presence.

No Representatives from the state of New York spoke during the floor debate. Yet, the aggressive tax policies of New York are the main target of this and other Congressional bills that would limit state taxing authority.

New York taxes non-resident non-present teleworkers. See for example, memorandum [6 pages in PDF] of the New York State Department of Taxation and Finance titled "New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others".

Members of the Connecticut delegation in the House and Senate have long been introducing bills that would limit New York's taxation of teleworkers. For the current Congress, see S 1811 [LOC | WW] and HR 5615 [LOC | WW], the "Telecommuter Tax Fairness Act".

See also, story titled "Connecticut Representatives Again Introduce Telecommuter Tax Fairness Act" in TLJ Daily E-Mail Alert No. 2,383, May 15, 2012.

And see, stories titled "Supreme Court Denies Cert in Challenge to State Income Tax on Out of State Teleworkers" and "Connecticut Legislators Seek End to New York's Taxation of Out of State Workers" in TLJ Daily E-Mail Alert No. 1,244, November 1, 2005.