Crossing State Lines: Proposed Federal Legislation Could Affect State Filing Requirements
Author: Mary Reiser
Congress has mulled over legislation for years that would create federal rules for determining when states have jurisdiction to tax nonresident individuals and out-of-state businesses. Out-of-state taxpayers remain frustrated by increasingly complex and inconsistent state income tax laws, prompting lawmakers to once again consider legislation to address their concerns. In the 2015 - 2016 session, legislators introduced two bills to address the issue: the Mobile Workforce State Income Tax Simplification Act of 2015 and the Business Activity Tax Simplification Act of 2015.
Mobile Workforce State Income Tax Simplification Act of 2015
Currently, states have varying rules about the amount of time needed in a state for an individual to be subject to income tax. In some states, any presence earning compensation in the state warrants jurisdiction to tax. In others, income earned in the state must exceed personal exemptions and the standard deduction. Often individuals earn income in nonresident states by performing services on behalf of their employers. It’s not uncommon for their time to be as short as a few days or a week in a state working on a specific job. Whether they realize it or not, these individuals may be subject to nonresident state income tax, and their employers likely are subject to state withholding requirements.
To create certainty about individual filing and employer withholding obligations, the Mobile Workforce State Income Tax Simplification Act of 2015 would establish a threshold of more than 30 days of presence in a state before an individual’s income would be subject to tax. The act also would establish a corresponding threshold for employer withholding. The current rules for employee filing requirements and employer withholding requirements don’t always correlate, so the act would provide ordering rules for determining where an employee is subject to tax if performing services in multiple states and a methodology for employers to substantiate where state withholding is necessary. The act was approved by the House Judiciary Committee on June 17 by a 23-4 vote.
Business Activity Tax Simplification Act of 2015
In recent years, businesses have struggled to determine what activity constitutes doing business in a state for purposes of state income and business activity taxes. The Business Activity Tax Simplification Act of 2015 would establish a definitive federal rule as to what level of activity in a state constitutes doing business for the purpose of income and business activity taxes. It would first modernize the protection taxpayers receive under federal Public Law 86-272, which explicitly protects taxpayers from being subject to income tax in a state if their only activity is the solicitation of sales of tangible personal property shipped from outside the state. The act would expand the protection to services and intangibles. It also would add protection from business activity taxes, which more states are adopting to capture out-of-state revenue.
The second and more significant piece of the act is the adoption of a physical presence standard for determining when a business is subject to tax. Several states have economic nexus standards that avow jurisdiction if an out-of-state business has a certain amount of sales into their state. The act would require at least 15 days of physical presence in a state and presence beyond transient business activity before a business would be taxable. It would allow for an agent other than an employee to create physical presence; however, the agent would create physical presence only if it didn’t perform services for any other person in the state. Notably, the physical presence standard wouldn’t preclude a state from imposing an income or business activity tax on partners and shareholders of pass-through entities physically present in a state. The act was approved by the House Judiciary Committee on June 17 by an 18-7 vote.
For more information on either of these proposed laws or how they could affect you, contact your BKD advisor.