BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 500 |Hearing |4/15/15 |
| | |Date: | |
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|Author: |Hertzberg |Tax Levy: |No |
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|Version: |2/26/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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PERSONAL INCOME TAXES: NONRESIDENTIAL DE MINIMUS INCOME
Excludes "De minimis income" of a nonresident taxpayer.
Background and Existing Law
The United States Constitution grants the power to Congress to
"regulate Commerce with foreign nations, and among the several
states, and with the Indian Tribes;" a provision widely known as
the Commerce Clause (Article I, Section 8). The United States
Supreme Court established a doctrine, known as the "dormant" or
"negative" Commerce Clause, which bars states from regulating or
taxing interstate commerce. States generally determine their
own standards for taxing its resident, nonresidents entering the
state and generating income, as well as multistate or
multinational corporations' activity consistent with this
doctrine.
I. Income Taxes. California taxes its residents on all income
regardless of source, including income from residents performing
services outside California. Part-year residents pay tax on all
income generated while they are a resident, again including from
sources outside the state. Nonresidents pay tax based on all
income from California sources. California applies various
sourcing rules to certain items of nonresident income for
retirees, nonresident salespeople's commissions, performances by
athletes and entertainers, professional services like attorneys
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and physicians, officers of corporations, and operators of
trucks, trains, and ships.
Specific sourcing rules do not apply to nonresident employees
who are continuously employed in the state for a definite
portion of the taxable year. These employees must compare the
total amount of days employed in California to their total days
worked, and multiply that fraction by their total compensation
for professional services if paid on a daily, weekly, or monthly
basis. The employee must file a return, and pay tax according
to the appropriate marginal rate if the amount exceeds the
filing threshold, currently $16,000 for filing individually with
no dependents in 2014.
II. Withholding. State law requires employers who pay
employees California-sourced income to withhold expected taxes.
Businesses with one or more employees in the current or
preceding taxable year, and who pays wages in excess of $100 per
quarter must register with the Employment Development Department
(EDD). Whenever wages are paid to a nonresident employee
performing services in California, the employer must withhold
expected taxes, and deposit them quarterly with EDD. The
general penalty for failing to withhold is the greater of $500,
or 10% of the amount withheld, but may be abated upon showing
reasonable cause.
For many years, businesses have argued that withholding is an
excessive burden when simply sending an employee into a state
for only a few days, especially when withholding requirements
can often differ from state to state. Additionally, employees
don't want to comply with California's income tax filing and
payment requirements when spending only a few days of the year
working in California. Congress has considered bills like the
Federal Mobile Workforce State Income Tax Simplification Act of
2015 (S. 386), which preempts state tax authority by limiting
withholding requirements to only the employee's state of
residence and those states where the employee works more than 30
days. The Act would similarly bar states from collecting taxes
from employees working in states less than 30 days per year. In
response, the Multistate Tax Commission (MTC) drafted a model
statute for states to adopt that attempts to address issues
raised by federal legislation without preempting state tax
authority. The author wants to enact the MTC model statute in
California.
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Proposed Law
Senate Bill 500 excludes "De minimis income" from a nonresident
taxpayer from sources within California, beginning in the 2016
taxable year, if the taxpayer:
Has no other income from sources within the state,
The nonresident is present in the state to perform
employment duties for less than 20 days per taxable year,
including any part of any day unless it's solely for
transit purposes, and
The nonresident's state of residence provides a similar
exclusion, or doesn't impose an income tax.
The measure does not apply to:
Professional athletes or members of professional
athletic teams,
Professional entertainers who perform services in the
performing arts,
An individual of prominence who performs services for
compensation on a per-event basis,
An individual defined as a "key employee" by the
Internal Revenue Code.
The bill makes a conforming change to ensure that nonresident
taxpayers whose only income is excluded by the bill need not
file a return; however, the Franchise Tax Board (FTB) may
require this set of nonresident taxpayers to file informational
returns. SB 500 also makes technical, clarifying, and
conforming changes, and defines many of its terms.
The measure similarly absolves employers of withholding
requirements for its employees whose income is excluded by the
bill. Employers who erroneously apply this provision may be
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subject to a penalty, unless the employer relied on a regularly
maintained time and attendance system that:
Requires the employee to record each day his or her
location when present in a state that isn't his or her
state of residence on a contemporaneous basis, and
Is used by the employer to allocate the employee's wages
between all taxing jurisdictions.
Additionally, the penalty doesn't apply to employers who don't
maintain a time and attendance system, and instead rely on
employee travel records or travel expense reimbursement records
that the employer requires must be maintained or submitted on a
contemporaneous or regular basis. \
State Revenue Impact
According to FTB, SB 500 results in revenue losses of $200,000
annually.
Comments
1. Purpose of the bill . SB 500 will reduce the burden the state
places on traveling nonresident employees and their employers,
thereby eliminating a key barrier for out-of-state companies to
send employees to California for work. This bill simplifies
nonresident employee and employer requirements to report and
withhold state income taxes, which causes a tangle of paperwork
when a firm has to send an employee to service its customers in
multiple states. Additionally, the measure sends a message to
Congress that California wants to work with other states to
solve this problem from the ground up, instead of having a
solution imposed from above by Congress. SB 500 strikes the
correct balance between the business needs of today's mobile
workforce and California's authority to determine its own tax
law.
2. Paying Dues . When dissenting in Compania General De Tabacos
De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100
(1927), Justice Oliver Wendell Holmes famously stated that
"taxes are what we pay for civilized society," a variation of
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which hangs above the entrance to Internal Revenue Service
headquarters today. Reasonable disagreements will always exist
regarding the level and cost of public services, but taxes are
necessary to ensure that government can deliver on its side of
the social contract. While SB 500 relieves a particularly acute
burden on mobile employees and their employers, in so doing, it
shifts the costs of public services off of nonresident employees
who travel to California. These individuals benefit from
transportation infrastructure, as well as an educated and
healthy populace, among others, but SB 500 absolves these
individuals from paying the costs of public services. The
Committee may wish to consider the particular burden current law
places on mobile employees and employers, and whether it's
sufficiently disproportionate to merit removing requirements to
file returns and pay taxes placed upon other consumers of public
services.
3. Ground up . Congress has considered legislation in recent
years to limit a state's authority to apply income taxes to the
same mobile employees and employers affected by SB 500; however,
federal legislation has usually been different in two key
respects: first, SB 500 excludes income from employees spending
less than 20 days in a state, while Congress has generally uses
30 days. Secondly, federal legislation would apply to all
states, while SB 500 would only exclude income from nonresidents
from states that either don't have an income tax, or enact a
similar exclusion, known as "reciprocity." Several states, such
as Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West
Virginia, have enacted agreements similar to SB 500. If enough
states enact measures like SB 500 which implement MTC's model
ordinance, the less likely that Congress will supersede
California's tax law.
4. Wynning all the time . The United States Constitution,
federal law enacted by Congress pursuant to the Commerce Clause,
and case law, determine the limits on state taxing authority.
While these limits haven't changed significantly in recent
years, the United States Supreme Court recently heard oral
arguments in November, 2014, regarding a case that may cause a
metaphorical earthquake in the tax world in Maryland Comptroller
of the Treasury v. Wynne. A decision on the case is expected in
June. In 2006, Brian and Karen Wynne held a stake in a
multistate business headquartered in Maryland, and about half of
the Wynnes' income that year came from out-of-state earnings.
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While Maryland allows a credit for taxes paid to other states,
it doesn't allow a similar credit against the part of its income
tax that's allocated to local agencies. The Wynnes claimed a
credit against their Maryland income tax for taxes paid to other
states, but the Comptroller disallowed the credit against the
local share. The Wynnes filed suit, claiming that not allowing
the credit was double taxation, and that the dormant commerce
clause prevents states from taxing its residents on their
non-state income, an unfair burden on interstate commerce.
Maryland counters that states can tax its residents on all
income regardless of source to pay for public services. While
the Court's decision may only apply to this specific case,
experts have cautioned that the Court could use the case to
apply the dormant commerce clause to limit all states from
taxing its residents on income from outside the state, which
would result in significant revenue losses to California.
5. Related legislation . Last year, the Committee approved SB
560 (Anderson), which enacted sales tax exemptions and income
tax exclusions for firms that lack taxable nexus in California,
but gain it when providing disaster relief in the state. The
Senate Committee on Appropriations held the measure on its
suspense file.
Support and
Opposition (4/9/15)
Support : California Taxpayers Association.
Opposition : Unknown.
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