Mobile Workforce Bill Passes House Again, Senate Fate Uncertain

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July 7, 2017

On June 20, 2017, the House of Representatives passed legislation to simplify state income tax rules for employees who temporarily work outside their home state.  Under the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393), a state generally could tax a nonresident’s wages earned in the state only if he or she is working in the state for more than 30 days during the year.  Likewise, employers would have no corresponding duty to withhold and report the tax unless the 30-workday threshold is met.  Propelled by bipartisan support, similar measures have twice passed in the House in 2012 and 2015 but failed to gain traction in the Senate.  Currently, legislation similar to the House bill is awaiting Senate consideration, and once again, faces an uphill battle amidst concerns that the bill would cause significant revenue losses to certain states—including New York—with large employment centers close to state borders.

The bill is intended to reduce confusion and compliance costs stemming from inconsistent state income tax laws on nonresident employees and their employers.  Currently, forty-three states impose personal income tax on wages, including nonresidents’ wages earned in the state.  Thus, a traveling employee working on temporary projects in multiple states may be obligated to file and pay taxes in each of those states, and the employer would have corresponding withholding and reporting obligations.  Although states have three main measures that reduce compliance costs, the measures are largely piecemeal and inconsistent.  First, states generally provide an income tax credit for income taxes paid to other states, but the credit system does not eliminate the travelling employee’s obligation to file a nonresident return and the employer’s obligation to withhold and report the tax.  Second, some states waive the income tax obligations of nonresident employees and employers based on de minimis earnings and/or time spent in the state, but the waiver thresholds vary, and not all states have them.  Third, some bordering states have entered into reciprocity agreements under which each state agrees not to tax each other’s residents’ wages (see prior coverage of NY-NJ reciprocity agreement).  But these agreements only cover one-third of the states, and are geared toward regular commuters living near state borders, rather than employees traveling to multiple states for temporary work.

The bill would impose a 30-workday threshold on state income taxation of nonresidents, but would not prevent states from adopting higher or other types of thresholds.  Reciprocity agreements of bordering states, for instance, would still be effective.  Moreover, the bill allows an employer to avoid withholding and reporting penalties if they simply rely on their employees’ annual determination of days to be spent working in the nonresident state (barring actual knowledge of fraud, collusion, or use of a daily time and attendance system).  The bill also defines what constitutes a workday to minimize double counting.  The bill would not cover the wages of professional athletes, professional entertainers, certain production employees, and prominent public figures paid on a per-event basis.  Additionally, the bill does not specifically address equity or trailing compensation and employees who work for more than one related employer.

The bill likely faces an uphill battle in the Senate because the bill would cause significant revenue losses to certain states.  Generally, states that have large employment centers close to a state border (e.g., Illinois, Massachusetts, California, and New York) would lose the most revenue, while their neighboring states (e.g., New Jersey) from which employees travel would gain revenue.  Notably, New York would likely lose between $55 million and $120 million per year—an amount greater than the estimated revenue impact on all the other states combined (a $55 million to $100 million loss).  For these reasons, three members of the House Committee on the Judiciary opposed the bill and proposed to replace the 30-workday threshold with a 14‑workday threshold.  This is, not coincidentally, the threshold New York currently has in place for employer withholding obligations (but not for employee income tax liability or employer reporting obligations).  Although rejected, the effort to reduce the threshold may ultimately reshape the bill in the Senate or signal its continued lack of action.

With the Senate preoccupied with other legislative matters such as health reform (see prior coverage of health insurance reporting under the American Health Care Act) and opposition from some powerful Senators, it is unclear whether the Senate will consider the mobile workforce bill despite bipartisan interest.  In the meantime, employers with employees temporarily working in multiple states must continue to meet their nonresident state income tax withholding and reporting obligations.  We will continue to monitor further developments on the mobile workforce bill and its impact on state income tax filing, withholding, and reporting rules.