The Mobile Workforce Bill: addressing 'road warrior' compliance.

• Author: Yesnowitz, Jamie C.

THE MOBILE WORKFORCE STATE INCOME Tax Simplification Act (Mobile Workforce Bill) is a congressional effort to set uniform standards on the states' taxation of nonresident employee income and employer withholding on such income. (1) The centerpiece of the Mobile Workforce Bill is a provision under which states generally could tax a nonresident employee's income only if the employee is present and performing employment duties in the state for more than 30 days during the calendar year. Likewise, the bill would require employers to withhold state taxes on that income only after the 30-day threshold has been met and to catch up all required withholding at that time.

The Mobile Workforce Bill passed the House of Representatives this spring, and it is under consideration in the Senate. This column addresses the historic treatment of nonresident employee income, the variety of state efforts in this area, and the provisions of the Mobile Workforce Bill.

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Background

In an increasingly mobile environment, employees are traveling for business more frequently than in the past. Thus, a significant class of employees has emerged that has been characterized by a descriptive term: the "road warriors." A road warrior travels across state lines several days a week to visit external clients or internal colleagues from other offices, attend meetings and conferences, and otherwise transact business. The lifestyle, while ideal for cultivating business relationships and accumulating frequent flyer miles and credit card rewards points, can be very demanding and stressful. The road warrior often wakes up in the morning not exactly sure which state he or she is in, or which state he or she is expected to be in by the end of the day.

Given the lifestyle, many road warriors are blissfully unaware that for personal income tax purposes, there generally are two ways in which a state may claim the right to tax an employee's earned income. The employee's state of residence universally has the right to tax all of the employee's income. However, the states in which the employee earns income also have the right to tax the income earned within their borders. Adding to the complexity is that, as discussed in further detail below, states do not always exercise the right to tax the nonresident employee or require the employer to withhold income tax on the nonresident in such circumstances--and if they do, they vary as to when and how they do it.

Some states impose tax and withholding requirements on the first day the nonresident employee works in the state. Other states impose nonresident tax and withholding requirements after the employee earns a certain amount of income, or after the employee has been working in the state for a number of days. Still other states have entered into reciprocal agreements under which a state will not tax a nonresident on income earned in that state if the nonresident is a resident of another specified state. Likewise, under a reciprocal agreement, the employer is not required to withhold from the nonresident employee's earnings.

Given these multistate complexities, it is not surprising that employees (particularly road warriors) and their employers do not always know or follow these rules. Compliance can be difficult from the perspective of the employee, as a road warrior working just a couple of days in each of 20 states over the course of a year may be required to file 20 nonresident personal income tax returns in addition to a resident personal income tax return.

Many nonresident filings likely report only a very small amount of tax in these jurisdictions. Spending several hours to complete and file a number of tax returns that in the aggregate may show only a couple of hundred dollars in state income tax, while figuring out how to claim a state tax credit in the home state to avoid double taxation, is something the road warrior wants to avoid. Likewise, the road warrior does not necessarily want to have to pay a tax preparer a substantial amount of money to make sure these near-zero tax filings are made. Therefore, as a practical matter, most road warriors do not file the nonresident returns or have income withheld in these states unless they are forced to do so by their employers.

From the employer's perspective, complying with withholding requirements can be practically impossible if employees do not properly disclose where they are performing work for the employer. Even if the employer can track the precise locations of all of its employees, the employer's payroll system may not be able to account...