Withholding of State and Local Income Taxes from Military Pay

• Author: by Lieutenant Colonel David C. Cummins
• Pages: 02

Fedem1 t u m f o m leg~slnfia?,enacted in 1976 and 297:

provides that. nf the request of State atid local goi'erm nients, money may be rithheld by federnl j'?i,zavee offices f7"m rnziztary pay fw payment "f state and loenl iiic",iie tams. .tifang states have made use of lhis apttav conside78 lhe irnplieatio,ts of firrsr

1 light of thefaef ihof idmfifimltm 01

1. INTRODUCTIOS

   The amendments to the federal tax lane proceed apace, with eon-sequent disruption, required re-education, and mental and economic

   *The opinions and eon elusion^ expressed m this article are those of the aurhor and do not neeessanly represent rhe $lev% of The Judge Advocate General's School, the Department of the Army, or any other governmenial agenr)

   adjustment aa the mentable if unaanted progeny. The Tax Reform Act of 19i6 and the Tax Reduction and Simplification Act of 19ii are the latest enactments. They directly affect militaq personnel in a number of ways. hut certainly one of the most important concerns withholding of state and local income taxes from military pay.

   Section 1207 of the Tax Reform Act of 1976.' and B 408 of the Tar Reduction and Simplification Act of 19ii,* together provide that. at the request of state governments. actire dut) military personnel may he subject to withholding and remission of applicable state and District of Columbia income taxes from their military pa). Further, at the request of state or local governments, members of the Ready Reserve and National Guard may be subject to withholding and re-mimon of applicable state. District of Columbia, and also cit) and country income taxes. This nen legiilation does not affect the power of state and local governments to levy a tax upon the receipt or accrual of income by military personnel.

   11. JURISDICTIOXAL BASES FOR TAXATIOS The jurisdictional baser for the imposition of state and local income taxes are twofold, residential3 and territorial. Viewed nith reference to income ieceired or accrued for the rendering of personal services, the first basis focuses on the political and legal re-lationship, or relational status, herween the taxing authority and the performer of ,etricei. The second basis focuses on the place where the transaction OCCUE (i.e.. employment or conduct of husiness activities) h) means of which the senices are performed

   An individual who 1s dolniclleri wthm a state or a political subdivision and nho earns income by rendering personal serwces

   'Pun L h o 94.466 $ 1207. 90 5ra: 1520 a. 1704-1:GS larrerding 5 U 6 C i$

   6616. 6517 :197hll

   "Pub L So 96-30 3 408 91 Stat 126 at 167 lsrnendmg S T.S C S 6620 11976)

   19191 STATE IKCOME TAXES within that jwisdiction is clearly subject to the perr~nal~income tax

   levy of that jurisdiction Additionally, it has been clear for many yeare that there is no constitutional impediment to taxation by the state of domicile with respect to income derived b? the domiciliar? from services rendered outside that state.s The relational 8tatus of domicile or residence is sufficient to support the levy.

   It is just as clear that, an the territorial jurisdiction baeia, a state may consitutionaily tax the personal income of nonresidents or nandamiciliaries when that income is earned or received from sources within the stake The economic activity irhich is the occasion for the receipt or accrual of income occurs within the territorial boundaries of the state and that fact 1s sufficient to support the levy.

   It necessarily follows that, if income is earned outside the resi-dent or domiciliary government's territory, there is a possibility of multiple taxation. The due process clause of the 14th Amendment offers no protection against such multiple taxation,' notwithstanding that there is a due procesa distinction between the taxing power of a domiciliary government and that af a nondamiciliar) govern-ment. That distinction is often referred to as the nexus or sufficiency of contacts between the taxing entity and the subject of the tax, or, more graphically, the correlation between a taxing entity's right to tax and the opportunities it has provided for, the protection it has afforded to, and the benefits it has conferred upon the tarpayL?r.n

   From a federal constitutional viewpoint, aa long aa the domiciliary or resident taxpayer and the nondomiciliary or nonresident taxpayer are each afforded equal protection under the law, and no unreasonable or discriminatory burden is placed on interstate com- 'Personal income tares are to be distinguished from net 01 grass income taxes

   l e w d mlely againit buiineas oiganmtmi Theae larfer taxes include corporate income tsres. frsnchme tares measured by income, and unincorporated business

   "[Dlamlale in itself establishes B haeis for taxation" Lairenee Y State Tax Comm'n, 286 U S 276 at 279 (19321. New York ex ?e!. Cohn 5 Graves, 300 U.S. 308 (1937)

   'Travis V. Yale & Taine Mfg Co , 252 U S 60 (19201, Sharer I Carter. 252 T.S37 119201,Guar. TI"&[ Ca Y Ynglnia. 30: U.S.

   19 (1936) lWiscanrin v J C. Penney Co.. 311 U S. 435 (1940)

   organiznnon taxes

   Given this context, it might seem that multiple taxation of income aould be pervasive. Thiie it does exist. it is relativel? confined because of (1) federal protectire legislation: (2) state and local g ~ \ - ernments not exercising their full constitutional powers of taxation: (3) deference to other taxing entities by granting credit for taxes

   paid to them:g and (4) attempts to share a single total tax burden by OF apportionment of the income base betueen taxing en^

   tities

   111 TAXATION OF MILITARY INCOhIES

   Turning specificaily to armed forcer personnel. the Buck Actr1 is the opposite of protective iegislation because it provides that f d era1 ernpioyeea' income earned i\-hile residing on post or earned through performance of service8 on a federal post or reservation IS not immune from state and local government income taxation The statute makes reference to both the tax-significant factors. residence of the taxpayer and the territory nhere services are performed.

   Some bfafer a130 offer a credit to nondomirilinries or nanrcnidenti fur taxes paid b) them to their etne of domicile or rebidenre, but YJYPII)only If the latter stare

   reelpraaates The effect of this credit is to defer tu the treaiur) of the state of domirile or residence but onl) 11 that state has B mmil~rpolicy of deference Here again. B Ihabht) sfill exlets if the crediting state's tax IS mare one~our V S hdviiary Comm'n on Interg~veinmenfal Relatms. Federal-Stale Coordination oi Personal Income Taxes 21-29 142-48 1196;).'owhen the measure of the tax 18 net ~niame,the all~eaii~ne m be either UI both of f n o things It ma) be. firrf an exemption from ~ n d u a m

   ~n groas ~nmme or, second a grant of B deduction reierable to the confsii xifh the orher sfate lLCadlfled 814 U.S C II 106-311 (1916)

   The purpose of the Buck Act is to equate federal agents and employees with privately employed off-post pereons, and to permit no distinction according to whether the federal government has erclu-sive or only concurrent jurisdiction over the post The rationale id

   that the post ahould not be a refuge ii-here federal agents and employees can avoid bearing the reasonable fiscal buidens of the stater and thev political subdivisions.

   The Buck Act states in relevant part,

   No person shall be relieved from liahiliti for any income tax lened by ani State, or by an) duly constituted taxing authority therein, haring jurisdiction to ley such a tax, by reason of hie residing within a Federal area or receiring income from transactions occurring or services per-formed in such area: and such State or taxing authority shall hare full jurisdiction and power to levy and collect such tax in any Federal area within such State to the same extent and uith the same effect as though such area was not a Federal area.12

   Since armed forces personnel, in response to their military orders, travei to and reside within the jurisdiction of many different states and locai governments during their periods of service, it was apparent to Congress that their presence at these locations could yield a proliferation of governmental claims asserting. on the one hand, either a domiciliary or resident status, or, on the other hand, a power to tax the military pay of the itinerant nonresident sen-icemember within the territory ahere he or she is stationed. It was because af that assumption, and with a view toward protecting the servicemember, that 5 614 of the Soldiers' and Sailors' Civil Relief Act was enacted.13 This legislation sought to minimize the risk of multiple taxation of service personnel and to protect their assertion of a more permanent domicile than then rotating duty stations might indicate.

   The second rentence of the statute prerenta taxing entities from using territorial jurisdiction to tax mhtar? pay as freely as the) might otherwise be inclined to do:

   "4 C S.C. B 106ia3 (1976)

   "50 L' 6.C App I514 (19703 The basic alatule was firat enacted in 1940 and !+a6 amended in 1942 and 1962

   MILITARY LA\!' REVIEW- [VOL. 85

   For the purposes of taxatmn in respect to the income or gross income of an? such person by any State . . or political subdivision . or the District of Columbia, of which such person is not a resident or in which he 1s not damicilerl. compensation for militar) or naval service

   subdirision. or District . . .

   Ai a result of the foregoing prohibition. domicile or reiidenc? is the only junsdictional basis available for taxation of the military pay of rerricememberr an extended PCIIYC duty.

   The first sentence of the statute is consistent oith the above. in providing that domicile or residence for tax purposes is not lost by reason of absence from an area due to compliance with military orders. nor is domicile or residence for tax purposes gained or ac-within an area due to comphance with military of a poaer to tas militar) pay b) reason of ent status are not prohibited but the junsdicions cannot be absence from one...