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Tax Traps Arising From Non‐Resident and Mobile WorkersAnticipate and Avoid Unwarranted Withholding Tax Duties and Nexus Triggers

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, APRIL 12, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Jerri Langer, Principal, COKALA Tax Information Reporting Solutions, Ann Arbor, Mich.g , p , p g , ,

Debra Herman, Of Counsel, Morrison & Foerster, New York

Joseph Endres, Attorney, Hodgson Russ, Buffalo, N.Y.

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T T A i i F N R id t Tax Traps Arising From Non‐Resident and Mobile Workers Seminar

April 12, 2012

Debra Herman, Morrison & [email protected]

Jerri Langer, COKALA Tax InformationReporting [email protected]

Joseph Endres, Hodgson Russ [email protected]

Today’s Program

P i i l Of St t T N I Thi A Slid 7 Slid 24Principals Of State Tax, Nexus In This Area

[Jerri Langer]

New Jersey Telebright Case And Some Other State Positions

Slide 7 – Slide 24

Slide 25 Slide 36New Jersey Telebright Case And Some Other State Positions

[Debra Herman]

Potential Federal Multi-State Solutions To These Issues

Slide 25 – Slide 36

Slide 37 – Slide 51Potential Federal, Multi State Solutions To These Issues

[Joseph Endres]

Issues With Unemployment Taxes

Slide 37 Slide 51

Slide 52 – Slide 61p y[Jerri Langer]

Issues With Withholding Taxes[Debra Herman]

Slide 62 – Slide 71[Debra Herman]

PRINCIPALS OF STATE TAX Jerri Langer, COKALA Tax Information Reporting Solutions

PRINCIPALS OF STATE TAX, NEXUS IN THIS AREA

Two Income Tax Withholding Systems8

Worksite withholding: States with an income tax will tax based on h h l k i d ’ i l k h h where the employee works; so in today’s terminology, ask whether

income is sourced from a state and if so, withhold. (One exception: Washington D.C. taxes only its residents -- need D-4A)

Residency withholding: States will also tax based on where an employee lives. Today, we speak in more complex terms as to where an employee is domiciled and/or if that employee meets the fixed-residency

if id d d i hh ld i d ld idtest – if a resident, taxed and withheld on income earned worldwide.

But, employers must have a business nexus with a state before residency-based withholding is required. (Three exceptions: AZ, DE and y g q ( p ,RI tax only work site earnings)

Employers without nexus may withhold on a voluntary basis.

Federal Statutes Can Modify When A State Can Taxy9

Military personnel and spousesT i l i i il d ki if i Transportation employees in air, water, rail and trucking, if in interstate commerce; mostly withhold based on residency, but air transport also requires withholding in state where more than 50% of earnings are sourcedearnings are sourced

Ex-pats Receipt of distributions from qualified pension plans, and certain

d f d i l d h iddeferred compensation plans taxed where reside Special rules for interstate applications of unemployment and

worker’s compensation insurance COST project – fighting for new legislation for multi-state employers Proposed legislation for telecommuters

C CO f S CCopyright 2012 COKALA Tax Information Reporting Solutions, LLC. May not be used or reproduced without permission.

[email protected]

How A State Defines What Is Subject To Wages10

An example of complexity: Illinois IITA §304(a)(2)(B)-ti i id d id i IL ( d ithh ldi q i d)compensation is considered paid in IL (and withholding required):

• If service is performed entirely within IL • Performed both within and without IL, but the outside service is

incidental incidental • Some of the service is performed within IL, and base of operations is

within IL • Some of the service is performed within IL, and if no base of operations, Some of the service is performed within IL, and if no base of operations,

the place from which the service is directed or controlled is within IL• Some of the service is performed within IL, and neither the base of

operations nor the place from which the service is directed or controlled p pis in any state in which some part of the service is performed; but, the individual's residence is in IL


[email protected]

How A State Defines What Is Subject To Wages (Cont.)11

Applications HQT i GA l i IN id t d ll i f d i IL HQT in GA, employee is IN resident and all services performed in IL, but controlled from GA = IL withholding

HQT in MD, employee is MO resident with 95% services in MO and 5% i IL ffi t b f ti IL ithh ldi in IL office at base of operations = IL withholding

HQT in OH, employee is IL resident with no base of operations, but controlled from OH and performs services in IL, IA, IN; but, no services i OH IL ithh ldi in OH = IL withholding

See IL Pub. 130 (Jan. 2012) for more examples. New York and Pennsylvania have tried to define work site to be for the

i f th l b f l ti t T l ti l convenience of the employer before location counts. Telecommuting rarely is …


[email protected]

Work Site Withholding Exceptions12

• De minimis time in state working or limited dollars earned(sourced) from state(sourced) from state• States that require withholding on first dollar and first day

or portion thereof: AL, AR, CO, DE, IA, IL, IN, KY, KS, LA, MD, MA, MI, MN, MO, MS, MT, NE, NC, ND, OH, PA and VTMA, MI, MN, MO, MS, MT, NE, NC, ND, OH, PA and VT

• ID, NY, OK, OR, SC and WI have limits on dollars earned; AZ, CT, NY, GA, HI, ME and NM have various day limits.

• Check the state’s lowest personal exemption (PE) amount for state tax • Check the state s lowest personal exemption (PE) amount for state tax return, or look to where the state starts its withholding tables

• Reciprocity agreements: Work state non-resident claim form required from employee in order not to withhold for work site state; many need to from employee in order not to withhold for work site state; many need to be renewed and in some cases must first be filed with the state


[email protected]

Reciprocity Agreements13

27 states have no reciprocity: AL, CA, CO, CT, DE, GA, HI, ID, KS, LA ME MA MS MO NE NH NM NY NC OK OR RI SC TN UT LA, ME, MA, MS, MO, NE, NH, NM, NY, NC, OK, OR, RI, SC, TN, UT and VT

Minnesota and Wisconsin are still trying to reach agreement. Audit alerts:

• Where there is no reciprocity, still need to determine whether employee is a resident or non-resident, so use state non-resident claim forms (if any)

• Where there is reciprocity, make sure you have the right employee claim form.

• For both, make sure that resident address on the claim form is the same as the one on record for the employee.


[email protected]

Determining Employee’s Residencyg p y y14

States look to place of employee’s domicile and/or apply a test to determine residencytest to determine residency If present in the state for “other than a temporary or

transitory purpose” or if domiciled in the state, only “outside the state for a temporary or transitory purpose” the state for a temporary or transitory purpose

Some tests are objective, with fixed day count; others are subjective,looking to employee’s intent while away.

ld d l d h l b l l k We could spend several days on these rules, but employers rarely know enough about employees to make this call to withhold correctly.

Some states allow you to rely on the state’s W-4; others provide a special form for non-residents; still others let you use the employee’s address in your records. Use the 2012 State W-4 Survey to learn what you need in your files.

Copyright 2012 COKALA Tax Information Reporting Solutions, LLC. May not be used or reproduced without permission.

[email protected]

Residency Withholding Exceptionsy g p15

• Some states allow offsetting of work site withholding, so resident i hh ldi li l if i hi h d h l h withholding applies only if rate is higher, and then only the excess

rate. CA, CT, KS, ME, MA, NE, NJ (but only if all services are outside NJ), NY (with many complexities), OH, VT and VA

• Other states provide for withholding only where the work-site state does not have an income tax withholding requirement, e.g. FL or TX. States that follow this rule: AL, AR, CO, GA, ID, LA, MS, MO, NC,

dND, OR, PA and SC

• Key: If an employer has no business nexus in the state where the employee lives, resident-based withholding is not required, but p y , g q ,work-site withholding is required.


[email protected]

Business Presence:What Do States Look For?

16

The degree of business presence or activity within a state before the state has the legal authority to impose a tax on the businessstate has the legal authority to impose a tax on the business Fixed facility: Business operations center, office, store, retail outlet,

factory, distribution center, etc. These are fairly obvious. Other business presence: Presence of an office phone line for office Other business presence: Presence of an office, phone line for office,

fixed property, business license, presence of intangible property (use of a copyright)

Acts of employees and independent agents in the state can cause nexus Acts of employees and independent agents in the state can cause nexus (e.g., service calls, sales, joint ventures, on detachment, and, yes, telecommuting)

Sales and use tax filings or exemption claims can draw attention.g p Merely soliciting orders may not be enough, unless a company

representative is actually obtaining and/or endorsing the order and collecting the check. Then, the nexus standard is met. (New trend: Click-through nexus.)


[email protected]

If Business Has Nexus, Then …,17

Employer must perform:R id i hh ldi ll id l h h ki • Resident withholding on all resident employees, whether working in the state or not (unless offset allowed)

• Worksite withholding on earnings from services in the state by a non-resident (unless reciprocity or meets de minimis test)non-resident (unless reciprocity or meets de minimis test)

• All the other state employer obligations, such as: Conform to state’s wage and hour laws, including overtime, pay

stub disclosures time tracking and recordkeeping in multiple stub disclosures, time tracking and recordkeeping in multiple jurisdictions to be able to prove where your employees were

Pay unemployment and other payroll taxes, such as disability insurance, where required

Consider worker’s compensation rules


[email protected]

Telecommuting18

Requires registering with the state as an employer, for purposes of for i ithh ldi SUI k ’ ti d h l income withholding, SUI, workers’ compensation, wage-and-hour laws. Points to consider:o Will having an employee in the state cause your company to also have

t t li bilit i th t t t ? corporate tax liability in that state? o Will it create business nexus such that withholding is required on all

resident employees in that state, even if they do not work in the state?d l d filo Increased sales and use tax profile?


[email protected]

Telecommuting (Cont.)g ( )19

Example from Ohio Department of Taxation Web site: “Our company has an employee that works out of their home in

Ohio. Are we required to withhold Ohio income tax on the employee’s compensation?”

Answer: “Yes, you must withhold Ohio income tax. Your company is transacting business in Ohio since you have an employee working in Ohio.”


[email protected]

Appendix: 2012 STATE W-4 SURVEY REPORTStates marked with * require use of their W-4s. States marked with ** recommend use of their W-4s. Other forms are mandated for their purpose*Alabama A-4 Resident• Exempt-student

Other forms are mandated for their purpose.

*Connecticut: • CT-W4 Resident• CT-W4NA Non-Resident

*Arizona: • A-4 Resident• WEC ExemptA-4E • A-4V Resident (working

CT W4NA Non ResidentDelaware: • W-4 Resident• W-4NR Non-Resident*District of Columbia:

out-of-state) • A-4M Military• WECI Exempt Native

American

District of Columbia: • D-4 Resident• D-4A Non-Resident **Georgia: • G-4 Resident

**Arkansas: • AR4EC Resident • AR4ECSP Exempt • AR4EC(TX) Exempt

G 4 Resident *Hawaii: • HW-4 Resident • HW-6 Non-Resident

Employer**California: • DE 4 Resident Colorado: • W-4 Resident

Employer • HW-7 Non-Resident

EmployerIdaho: • W-4 Resident

20


[email protected]

W 4 Resident

*Illinois: *Louisiana: • IL-W-4 Resident• IL-W-5-NR Non-Resident *Indiana:• WH-4 Resident

WH 4 N R id

• L-4 Resident• L-4E Exempt *Maine: • W-4ME Resident

• WH-47 Non-Resident• WH-5 Earned Income Credit *Iowa: • IA W4 Resident

IA 44 016 N R id t

• WHEX Resident Allowance Adjustment

*Maryland:• MW 507 Resident

• IA 44-016 Non-Resident • IA 44-017 Non-Resident*Kansas: • W-4 Resident

K 4C N R id t

**Massachusetts: • M-4 Resident *Michigan:• MI-W4 Resident

• K-4C Non-Resident *Kentucky: • K-4 Resident• K-4E Exempt

42A809 N R id t

Minnesota:• W-4 Resident • MWR Non-Resident *Mississippi:

• 42A809 Non-Resident• K-4FC Non-Resident (Fort

Campbell)

pp• 89-350-98-1 Resident

21


[email protected]

*Missouri: • MO W-4 Resident

**New York:• IT-2104 Resident

• MO W-4A Non-Resident

• MO W-4C Resident (working outside state)

• IT-2104.1 Non-Resident• IT-2104-E Exempt• IT-2104-IND Exempt Native

American( g )Montana: • W-4 Resident • NR-1 Non-Resident • NR-2 Non-Resident

• IT-2104-MS Military *North Carolina:• NC-4 Resident North Dakota:

Nebraska: • W-4 Resident• W-4NA Non-Resident• 9N Non-Resident

• Resident• NDW-R Non-Resident *Ohio: • IT-4 Resident

**New Jersey: • NJ-W4-WT Resident• NJ-165 Non-Resident New Mexico:

• IT-4 NR Non-ResidentOklahoma: • W-4 Resident Oregon:

• W-4 Resident g

• W-4 Resident

22


[email protected]

*Pennsylvania: • Form 1 Pittsburgh Resident

**Vermont: • W-4VT Resident • Form 1 Pittsburgh Resident

• WTEX Pittsburgh Non-Resident

• REV-419 AS (11-99) Resident• REV 420 AS (10 99)(I) Non

*Virginia:• VA-4 Resident• VA-4b Tax Adjustment **West Virginia:• REV-420 AS (10-99)(I) Non-

Resident *Puerto Rico: • 499 R-4 Resident (Spanish)• 499 R 4 1 Resident

g• WV/IT-104 Resident• WV/IT-104 R Non-

Resident• WV/IT-104.1 Exempt • 499 R-4.1 Resident

Rhode Island: • W-4 ResidentSouth Carolina: • W-4 Resident

p**Wisconsin: • WT-4 Resident• WT-4A Resident

(allowance adjustment)• W-4 Resident Utah:• W-4 Resident

( j )• W-220 Non-Resident

(IL,IN,KY,MI)• WT-4B Exempt

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[email protected]

States With Reciprocity Agreements and Appropriate Claim Forms• AR: Texarkana, AR and TX exempt from AR withholding, AR 4EC (TX)

DC M l d Vi i i D 4A• DC: Maryland, Virginia; D-4A• IL: Iowa, Kentucky, Michigan, Wisconsin; IL W-5NR• IN: Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin; WH 47• IA: Illinois; IA 44-016

KY Illi i I di Mi hi Ohi Vi i i (d il t ) W t• KY: Illinois, Indiana, Michigan, Ohio, Virginia (daily commuters), West Virginia, Wisconsin; 42A809

• MD: DC, Pennsylvania, Virginia, West Virginia; MW 507• MI: Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin; MI-W4 (line

it )item)• MN: Michigan, North Dakota; MWR• MT: North Dakota; NR-2• NJ: Pennsylvania; NJ-165 (PA local reduces NJ state w/h)• ND: Minnesota Montana; NDW R• ND: Minnesota, Montana; NDW-R• OH: Indiana, Kentucky, Michigan, Pennsylvania, West Virginia; IT-4NR• PA: Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia; REV-

420• VA: DC, Kentucky, and Maryland daily commuters; Pennsylvania, West y y y y

Virginia only if subject to taxes in those sates; VA-4 and VA-4b• WV: Kentucky, Maryland, Ohio, Pennsylvania, Virginia; WV-IT104 (back)• WI: Illinois, Indiana, Kentucky, Michigan;W-220

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[email protected]

NEW JERSEY TELEBRIGHT Debra Herman, Morrison & Foerster

NEW JERSEY TELEBRIGHT CASE AND SOME OTHER STATE POSITIONS

Agenda For This SectionAgenda For This Section• Overview of nexus

• Telecommuting creating business tax nexus for corporate income, franchise, and sales and use taxes,

• New Jersey and Telebright • Other state positions

This is MoFo. 26

Jurisdiction To Tax: NexusJurisdiction To Tax: Nexus State jurisdiction to impose tax: Nexus requirement (connection to

state)Fundamental requirement of both the Due Process andCommerce Clauses of the U.S. Constitution that there be:C C U S C

“Some definite link, some minimum connection betweena state and the person, property, or transaction it seeksto tax”to tax

Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768, 777, 112 S. Ct. 2251 (1992)International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154 (1945) (in-state salesmen triggers Washington unemployment insurance tax levy)

This is MoFo. 27

Nexus And The Mobile WorkforceNexus And The Mobile WorkforceTelecommuting employees can create nexus for:

1) Employer (employer taxes, corporate income and franchise taxes, sales and use taxes)

2) Employee (personal income tax)Employee withholdingEmployee withholding• Employee nexus

1) Resident: Subject to tax on all income in resident state2) Non-resident: Subject to tax only on income derived from sources in state

• Employer nexus1) Statutory nexus triggered by “doing business” or “transacting business” in-

state, maintaining an office, owning or leasing property, or having employees performing services for the employer in-stateperforming services for the employer in state

2) U.S. Constitution may limit statutory nexus.3) Telecommuting employees can create an in-state presence for employers.

This is MoFo. 28

Withholding And P L 86 272Withholding And P.L. 86-272 P.L. 86-272 prohibits the imposition of a net income tax by a state if

f fthe only activities performed in the state relate to solicitation of sales of tangible personal property. P.L. 86-272 will not eliminate an employer’s responsibility to withhold

income tax pay unemployment tax and disability insurance andincome tax, pay unemployment tax and disability insurance, and cover worker’s compensation. P.L. 86-272 is limited to: Sales of tangible personal propertySales of tangible personal property Net income taxes (not apply to gross receipts taxes, such as Ohio commercial activity tax and Washington business & occupation tax, see Lamtec Corp. v. Dep’t of Revenue, 246 P.3d 788 (Wash.), p p ( )cert. denied, 132 S. Ct. 95 (2011) “Mere solicitation” per Wisconsin Dep’t of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214, 231 (1992)

This is MoFo. 29

Telecommuting, And Corporate Income And Franchise Taxation

New Jersey Telecommuting employee:Telebright Case

Employer: MD office

- Software developer; no solicitation of sales

- Telecommuting fulltime from NJ residence- MD office

- Project manager, an independent contractor, telecommuting from MA

- Withheld New Jersey personal income

- Uploads work product and timesheets to company’s server

- Initially used employer-provided laptop Att d id ti i MDtax from employee’s salary and remitted

the tax to the state- Attends companywide meetings in MD,

once or twice a year- Employment contract restricts future

employment elsewhere, prohibits disclosing confidential company information, and allows company to seek injunctive relief if employee violates employment contract.

This is MoFo. 30

Telebright: New Jersey Tax CourtTelebright: New Jersey Tax Court Software developer that “regularly and consistently permits” an

employee to work from her home in New Jersey is doing business in this state and subject to New Jersey corporate business tax (CBT). Tax Court concluded that a corporation is “doing business” at the

place where its employees are expected to report for work, where they are regularly receiving and carrying out their assignments, where those employees are supervised, where they begin and end th i k d d h th d li t th i l dtheir work days, and where they deliver to their employer and customers a finished product. Contact was not “sporadic, occasional or intermittent.”

Telebright Corp. v. Director, Division of Taxation, 25 N.J. Tax 333 (Tax 2010)

This is MoFo. 31

Telebright (Cont )Telebright (Cont.) Due Process: Company had fair warning that telecommuting

relationship might subject it to the laws of New Jerseyrelationship might subject it to the laws of New Jersey. Commerce Clause: Physical presence of an employee in a state on

a daily basis for purposes of performing business assignments is sufficient “substantial nexus.” Maintenance of office and solicitation f b iof business are not necessary.

“It is for the taxpayer to make its business decisions in light of tax statutes, rather than the other way around” ... That [the company] may not have realized the State tax consequences of its business y qdecisions regarding the employment of [the telecommuting employee] does not insulate the company from corporate tax liability.” Apportionment and tax burden: Tax Court stated that TelebrightApportionment and tax burden: Tax Court stated that Telebright

would allocate to New Jersey, the employee’s payroll in the payroll factor and value of laptop in the property factor. Actual tax is unclear until Telebright files CBT tax returns and applies apportionment formula

This is MoFo. 32

formula.

Telebright (Cont )Telebright (Cont.) The Appellate Division affirmed (docket No. A-5096-09T2, March 2,

)2012). Telebright is “doing business” in New Jersey because its full-time

employee “carr[ies] out the purpose of its organization” here, by creating computer code” that becomes an integral part of the productcreating computer code that becomes an integral part of the product sold by Telebright. Analogous to “a foreign manufacturer employing someone to fabricate parts in New Jersey for a product that will be assembled elsewhere.” “Taxing a business based on its employing one full-time employee

does not violate the Due Process Clause. See Standard Pressed Steel Co. v. Dep’t of Revenue, 419 U.S. 560, 562, 95 S. Ct. 706, 708 41 L Ed 2d 719 722 (1975) ”708, 41 L. Ed. 2d 719, 722 (1975). An employee working fulltime in New Jersey creating a portion of its

product is sufficient for “substantial nexus.” The company benefits from all of the protections New Jersey law affords the employee.

This is MoFo. 33

from all of the protections New Jersey law affords the employee.

Implications Of TelebrightImplications Of Telebright A single telecommuting employee can create corporate income and

franchise tax nexus. Potential nexus for other non-income taxes and employer taxes

-Sales tax collection obligationsS g• Employers should consider the implications of telecommuting before

approving telecommuting requests, and implement tracking systems.• Apportionment issuesApportionment issues- Wages, general rule: Wages for employees reported on

unemployment tax reports are includible in the payroll factor; amounts reported on Form 1099 are not wages To which stateamounts reported on Form 1099 are not wages. To which state should wages be sourced? Physical presence vs. convenience

- Discretionary adjustmentsStates are shifting to single sales factors

This is MoFo. 34

- States are shifting to single-sales factors.

Other StatesOther States BNA April 22, 2011 state tax department survey: 37 jurisdictions indicate that

the activities of telecommuters establishes employer nexus for all business taxes. KY, MD, MS, OK and VA said the telecommuters would not establish nexus

for the employer See also Va Public Doc Ruling No 10 154 (July 28for the employer. See also Va. Public Doc. Ruling No. 10-154 (July 28, 2010) IL: Presence of one employee in the state working from home, if activities

are not protected under P.L. 86-272, is sufficient for tax nexus and requires p , qregistration for withholding purposes and the filing of corporate income and replacement tax returns. General Information Letter (GIL) No. IT-09-0004 (Ill. Dept. of Revenue, F b 9 2009) (i l i i l l f h i ’ 400Feb. 9, 2009) (involving single employee out of the corporation’s 400 employees)Private Letter Ruling No. IT 93-0042 (Ill. Dept. of Revenue, Apr. 7, 1993)

Hardship exceptions

This is MoFo. 35

Hardship exceptions

Practical ConsiderationsPractical Considerations Regulatory reporting requirements arising out of Sarbanes-Oxley

legislation Federal solutions

The Telecommuter Tax Fairness Act (S. Amdt. 1573, S. 1811; (S 5 3, S 8 ;originally introduced in 2004, reintroduced in 2005, but failed to pass each time) Not dealing with Telebright issue; would prohibit states like New g g ; pYork from applying the convenience-of-the-employer test. Taxation would be based on physical presence.

Mitigate audit risksg Voluntary disclosures and amnesties

This is MoFo. 36

POTENTIAL FEDERAL, MULTI‐Joseph Endres, Hodgson Russ

,STATE SOLUTIONS TO THESE ISSUESISSUES

Employee Filing And Employer WithholdingEmployee Filing And Employer Withholding

The problem: Every day hundreds of thousands of employees across the Every day hundreds of thousands of employees across the

country are sent by their employers to work outside their home states.

Companies face inconsistent standards governing when an Companies face inconsistent standards governing when an employee has to file personal income tax returns, and when an employer has to withhold.

Practical technological solutions can be costly and may not Practical technological solutions can be costly and may not resolve the problem.

Pervasive: The problem applies to everyone (large and small businesses charities and other non‐profits and even businesses, charities and other non‐profits, and even governmental agencies).

38

Employee Filing And Employer Withholding (Cont ) Employee Filing And Employer Withholding (Cont.)

Why is the problem becoming a crisis?

Increased enforcement activities by state taxing authorities Sect. 404 of the Sarbanes‐Oxley Act of 20024 4 y The Internet and the globalization of business Ease and increase of business travel Difficult economic environmentDifficult economic environment

39

The Mobile Workforce And State IncomeTax Simplification Act Of 2011

Possible solution: The 30 day rule The 30‐day rule

Employees working in non‐resident states for 30 days or fewer remain fully taxable in their resident state, for all y ,earnings.

If the employee works more than 30 days in a non‐resident state he or she has to file income tax returns therestate, he or she has to file income tax returns there,

If the employee works more than 30 days in a non‐resident state, then the employer must withhold., p y

40

The Mobile Workforce And State IncomeTax Simplification Act Of 2011 (Cont.)

The details:

The 30‐day requirement would not apply to professional The 30 day requirement would not apply to professional athletes, professional entertainers or certain national figures who are paid on a per‐event basis to give speeches or similar presentations.

The employer can rely on an employee’s determination of the time spent in a non‐resident state, absent knowledge of employee fraud or collusion between the employer and employee.employee.

If, however, an employer maintains a time‐and‐attendance system at its discretion, tracking where employees perform their services, then such a system must be used instead of an their services, then such a system must be used instead of an employee’s determination.

41

The Mobile Workforce And State Income Tax Simplification Act Of 2011 (Cont.)

The details (Cont.):

An employee will be considered present performing duties in a state if he or she performs the preponderance of duties in such state for such day.If th l f t i l l t d ti i l If the employee performs material employment duties in only his or her resident state and one non‐resident state during a single day, such employee will be considered to have performed the preponderance of his or her duties in the non‐

id t t t f h dresident state for such day, The terms “employee” and “wages or other remuneration”

are defined by the state in which the employment duties are performed. p

42

The Mobile Workforce And State IncomeTax Simplification Act Of 2011 (Cont.)

Impact on state taxes

Ernst & Young analysis of the effect of identical legislation shows a minimal reduction in state tax revenue.

Why such a minimal reduction? The states lose revenue only when the employee works in a non‐resident state for less than 30 days, and:

1. The employee’s resident state imposes tax at a lower rate than the non‐resident state orthan the non‐resident state, or

2. A non‐resident state tax is imposed on an employee whose resident state does not impose a personal income tax.

NY hates this approach! NY hates this approach!

43

Possible State Solutions?Possible State Solutions?

Could the states create a workable solution?Could the states create a workable solution?

The limitations of bilateral reciprocal agreements

Multistate Tax Commission model statute

Political realities in 50 different states seemingly preclude a uniform state solution.

44

The Mobile Workforce And State Income Tax Simplification Act Of 2011 (Cont.)

Likelihood this legislation will become federal law?Likelihood this legislation will become federal law?

Current status: The committees assigned to this bill or resolution sent it to the House or Senate as a whole for resolution sent it to the House or Senate as a whole for consideration on Nov. 17, 2011. The bill received bipartisan support in the committees.

But, it is an election year …

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Convenience Of The Employer RuleConvenience Of The Employer Rule

What does the rule require?o q When non‐resident employees commute to non‐resident states to

work for an employer, they must pay tax on income earned from these work days spent in the non‐resident states.

To limit a non‐resident’s ability to reduce his or her tax liability by working from home, a handful of states have adopted a “convenience of the employer” rule.

Th t f th i l i l id th t d k d The terms of the convenience rule simply provide that days worked from home would be treated as work days in the non‐resident states, unless the non‐resident employee worked outside of the non‐resident state by necessity.y y

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Convenience Of The Employer Rule (Cont )Convenience Of The Employer Rule (Cont.)

Scope of the problemScope of the problem

Thankfully, only a handful of states apply such an aggressive rulerule.

These states include New York, Pennsylvania, Delaware, New Jersey and Nebraska

B t th i t f th l b d t ti g b it But, the impact of the rule can be devastating because it can lead to double‐taxation.

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Convenience Of The Employer Rule (Cont )Convenience Of The Employer Rule (Cont.)

New York’s revised convenience ruleNew York s revised convenience rule

Perhaps buckling to pressure caused by its aggressive enforcement New York revised its convenience rule a few enforcement, New York revised its convenience rule a few years ago to arguably limit its applicability.

But, the new rule is generally regarded as one of the most complex and unmanageable constructions ever devised in complex and unmanageable constructions ever devised in state taxation.

New York tax administrators should take a hint: If you can’t explain the rule in under 5 minutes it’s probably a bad ideaexplain the rule in under 5 minutes, it s probably a bad idea.

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Telecommuter Tax FairnessAct Of 2011

Possible solution:

The proposed legislation would require a non‐resident individual to be physically present in a state, in order for that state to apply its income tax laws to the compensation of the non‐resident.

For purposes of determining physical presence in a state the legislation For purposes of determining physical presence in a state, the legislation provides that a state would not be allowed to deem a non‐resident individual to be present in or working in a state on the grounds that the individual is present at or working from home for convenience, or the individual’s work at home or office at home fails a “convenience of the employer” test or similar home or office at home fails a convenience of the employer test or similar test.

Moreover, the power to determine whether part of an employee’s time could be characterized as “not normal work time,” “nonworking time” or “unpaid time” would be left up to the employer not the statetime” would be left up to the employer, not the state.

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Telecommuter Tax FairnessAct Of 2011 (Cont.)

Limitations of the law

If enacted, this legislation would only apply to non‐resident individuals in their capacity as employees or independent contractors, and only for income tax purposes with respect to earned income.

The law would not apply to the income taxation of dividends, interest, annuities, rents, royalties or other forms of unearned incomeincome.

Finally, the legislation would not apply to corporations or other business entities; or to individuals in the capacity of partners, shareholders or beneficiaries.

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Telecommuter Tax FairnessAct Of 2011 (Cont.)

Likelihood this legislation will become law?Likelihood this legislation will become law?

Well, despite the fact that it has been introduced four times in the past seven years it has failed to move through the the past seven years, it has failed to move through the legislative process.

Is this legislation even necessary, if the Mobile Workforce and State Income Tax Simplification Act of 2011 becomes law?State Income Tax Simplification Act of 2011 becomes law?

Current status: The legislation was introduced on Nov. 7, 2011 but it has not yet been referred to committee.

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ISSUES WITH Jerri Langer, COKALA Tax Information Reporting Solutions

UNEMPLOYMENT TAXES

Misplaced Employees, For StateUnemployment Insurance (SUI) Purposesp y ( ) p

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SUI payroll taxes are solely based upon where the employee performs services the work siteservices, the work site.

If no services are performed within the state, then the state does not have SUI jurisdiction for coverage of that employee and should not collect SUI taxes for that employee even if they live there or the employer has a taxes for that employee, even if they live there or the employer has a primary business site.

Paying SUI taxes for only one location (a standard industry practice) builds liability in the other states where employees may be performing builds liability in the other states where employees may be performing services.

States are more apt to go after SUI taxes that were not paid than any other payroll taxespayroll taxes.

If work partly within and partly without a state, then must allocate SUI to the right state based on uniform laws


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Four Tests Applied To Allocate54

1. Are the employee’s services localized within the state? If it t b d t i d i hi h t t th l ’ i cannot be determined in which state the employee’s services are

localized, then ...2. Where is the employee's base of operations located? If the

employee routinely returns to a location to receive further employee routinely returns to a location to receive further instructions, contact clients, obtain supplies, and so on, then the employee’s base of operations is in that state. If not, then …

3. From what location does the employee’s employer exercise 3 p y p ybasic direction of and control over the employee? If the location from which the employer exercises direction of and control over the employee is a state, then that state will have jurisdiction for coverage over the employee's services If still no answer then coverage over the employee s services. If still no answer, then …

4. If all else fails, where is the employee’s place of residence located?


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Misplaced Employeesp p y55

If an employer can’t determine a primary UI state, most states subscribe to the Interstate Reciprocal Coverage Arrangement (IRCA) to resolve where the claim lies.

States require a written request to report wages based on this election. It applies where: Services are performed, p , Employee has a residence, or Employer maintains a place of business if the employee also

performs some services in the state.performs some services in the state.


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Failures Are Caught When Employees File Claims56

Classic state provision: If an employer fails to elect coverage in any state, and an individual files a claim for benefits based on services under the laws of [this state], it will be considered [this state’s] employment.

States will audit to collect the unpaid taxes.

Keys are to avoid penalties, pay somewhere and let the employee know where.


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Workers’ Compensation57

Out-of-state employers may need workers’ compensation if

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coverage if:• An employee is regularly employed in a state, or • A contract of employment is entered into in a state.

A state’s coverage generally follows its workers to other states in two ways - if the workers are performing temporary work, y p g p y ,through: • State reciprocity, or• Extra-territorial provisions (day limitations). Extra territorial provisions (day limitations).


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Workers’ Compensation Reciprocity

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p p y

Most states honor the provisions of other states, as long as the other states honor theirs (reciprocity)

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states honor theirs (reciprocity). • Benefits for injury are provided as if the out-of-state worker was

injured in the coverage state. For reciprocity to apply, extra-territorial provisions must also be For reciprocity to apply, extra territorial provisions must also be

met.• The permanent employment contract of hire between the worker and

the employer must be established in coverage state, and p y g ,• The employee’s presence in the other state is under a specific

number of days (varies by state). Many states do not offer reciprocity to the construction industry.


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States With WC Reciprocity59

See list of states offering reciprocity and extraterritorial terms tracked on Oregon WCD Web site

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on Oregon WCD Web site http://www.cbs.state.or.us/external/wcd/compliance/ecu/etmap.html

(last updated 2-23-11) S t t ff i it b t h d li it ti b f th Some states offer no reciprocity but have day limitations before they enforce (extra-territorial provisions): AL, AK, AZ, CO, DE, DC, HI, IL, IA, MI, MO, NE, NM, NY, SC, VA.S t t ff i it d t t it i l i i Some states offer no reciprocity and no extraterritorial provisions: CT, MA, NH, NJ, WI.

Ohio recently changed its laws to eliminate the 90-day extra-t it i l i i d i t d i i it l ti hi t territorial provisions and is studying reciprocity relationships as to which ones it will continue to approve.


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Audit Red Flagsg60

States have greater access to data warehouses, which help them track taxes owed and are leading to an increased number of audits! owed and are leading to an increased number of audits!

Auditors visit AP and look for travel reimbursement records!

Real estate transactions, bids for government construction projects, Real estate transactions, bids for government construction projects, applications for sales tax exemptions, business licenses and state secretary filings all point to employees in the state; states mine their own databases.

When subsidiaries or other related entities operate in another state it is When subsidiaries or other related entities operate in another state, it is expected that employees will travel between the entities.

Payroll auditors have been asking for travel logs for executives.

Many states have agreements to share information with the IRS, particularly regarding employee misclassification.


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Watch Out!61

Misinterpretation can be costly

Need to survey each jurisdiction where you have business sites, as to:• Rules for working in state, and• Rules for employees living in state

Need to code your system for right forms, and track expirationsy y g , p

Need to code your system for right withholding and filing requirements


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ISSUES WITH WITHHOLDING Debra Herman, Morrison & Foerster

ISSUES WITH WITHHOLDING TAXES

Withholding Tax IssuesWithholding Tax Issues Distinguish between withholding for residents and non-residents

N id t Non-residentsStates typically do not require withholding for all of a corporation’s non-resident

employees.Focus on source income

• New York: New York statutes requires withholding for non residents who• New York: New York statutes requires withholding for non-residents who have New York source income. N.Y. Tax Law § 601(a), (e)

Reciprocity agreements?Some states’ withholding triggered on first day of travelSome states have withholding thresholds for EMPLOYERS (“safe harbors”) timeSome states have withholding thresholds for EMPLOYERS ( safe-harbors ) – time

or income thresholds. • New York and Connecticut (14 days or fewer) (N.Y. Dept. of Taxation and

Finance, Income Franchise Field Audit Bur., Withholding Tax Field Audit Guidelines, pp. 50-52 (Mar. 27, 2009)(the “NY Audit Guidelines”); CT Announcement AN-2010(3)(Conn. Dept. of Revenue Services Jan. 11, 2010)

• Hawaii (60 days or fewer) (Haw. Reg. § 18-235-61-04(b)(1)• Thresholds typically DO NOT EXEMPT EMPLOYEES from personal income

ta

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tax.

Withholding Tax ThresholdsWithholding Tax Thresholds National debateHow many days of presence by a non-resident employee will result in withholding requirement?Whether such a days threshold should be used to determine whether

id t l h l i t li bilitnon-resident employee has a personal income tax liability

Federal legislationM bil W kf St t I T Si lifi ti A t f 2011 (H R 1864) Mobile Workforce State Income Tax Simplification Act of 2011 (H.R. 1864)Clarify and unify the nexus thresholds for employers and employeesIf an employee works in a state for more than 30 days, the employee would have personal income tax nexus and the employer would havewould have personal income tax nexus, and the employer would have withholding tax nexus.

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Withholding Tax Thresholds (Cont )Withholding Tax Thresholds (Cont.) Issue of what constitutes a “day”

Any part of a day? Most states say that any part of a day constitutes a full day of y y p y ypresence in the state.

Traveling through the state count?g g

Exemptions (professional athletes, entertainers, public figures, others)?others)?

Documentation issuesWh t d l l ?

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What records can employers rely on?

Model LawModel Law Model Mobile Workforce Withholding and Individual Income Tax Statute

(Multistate Tax Commission Uniformity Project)Available at http://www.mtc.gov

Nexus threshold covers both employer withholding and non-resident l l i temployee personal income tax nexus.

20 work-day thresholdExceptions for professional athletes, entertainers, persons of prominence construction workers key employees under I R C §416(i)prominence, construction workers, key employees under I.R.C. §416(i)

No income threshold Addresses only state tax (not local) Reciprocity: Exemptions contingent on enactment of substantially similar Reciprocity: Exemptions contingent on enactment of substantially similar

exemptions in the non-resident employee’s home state Employer safe-harbor from withholding penalties

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Timing And Amount To WithholdTiming And Amount To Withhold Timing: Most states follow the timing of income recognition used for federal income

ttax purposes Amount: Allocation of income issues for non-resident employees Withholding on “wages”Resident or non-resident?Resident or non resident? Non-resident: Working days in/days out, percentage of time

Deferred and special compensationBonuses Severance (past or future services?) Retirement income (precluded by federal law?)Stock option income (varying state allocation methodologies)

E l h ld i d i th i ti t t t t ifiEmployers should review and revise their practices to capture state-specific allocation periods (E.g., Georgia, effective Jan. 1, 2011, date of grant to date of vest allocation methodology, Ga. Rule of Dept. of Revenue, Income Tax Div. ch. 560-7-4.05(3)(b); Ga. Code Ann. § 48-7-1(11).

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Documentation And RecordkeepingDocumentation And Recordkeeping Important to understand state-specific documentation requirements New York: An employer cannot rely on withholding tax forms received from

employees unless it has a system in place to verify the accuracy of such forms. See N.Y. Audit Guidelines, p. 40I l t d t ti t Implement documentation system Obtain and retain state-specific formsAudit the documentation system

I l t l t ki t Implement employee-tracking systemAudit the tracking system (review expense reimbursements)Review accounts payables and receivables

E l dk i Employee recordkeeping Diaries and travel logsExpense reimbursements

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Employer PenaltiesEmployer Penalties Several states impose penalties on employers for failing to timely

and properly withhold and remit tax. New York: 25% late filing penalty on employers that non-willfully fail to withhold and pay taxes, and 25% late payment penalty; N.Y. Tax Law §685(f) California: Willful failure to withhold and remit tax is a felony ($2,000 penalty or imprisonment).

Payment of all personal income tax due by employee is not typically a defense to the assertion of employer penalties.

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Responsible PersonsResponsible Persons Unpaid withholding taxes can attach to responsible persons.Ohio: Personal liability for unpaid withholding taxes on employees of corporations having “control or supervision” over withholding and corporate officers who are responsible for the “execution of the corporation’s fiscal responsibilities.” Ohio Rev. Code Ann. §5747.07(G) New York: A responsible person may be an officer, an employee, a director or a shareholder of a corporation; a member or employee of a partnership; or some other person with sufficient control over funds to direct disbursement of such funds.New York imposes an additional penalty equal to the tax owed and interest accrued on the non-withheld and/or non-remitted funds. N.Y. Tax Law §685(g)

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Practical ConsiderationsPractical Considerations

Nexus surveys

I f ti h i ith th IRS Information-sharing with the IRS

Mechanisms to capture employee travel (location and time spent)

Mechanisms to retain state-specific documentation

Federal solutions

V l t di l d ti

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Voluntary disclosures and amnesties

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