BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 500 (Hertzberg) - Personal income taxes: nonresident de
minimis income
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|Version: February 26, 2015 |Policy Vote: GOV. & F. 7 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: April 27, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 500 would create a "de minimus income" exclusion for
nonresident taxpayers.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates the bill would
result in annual revenue losses of about $200,000 (General
Fund). Both FTB and the Employment Development Department (EDD)
indicate that the bill would have minor administration costs.
Background: Generally, employees performing employment duties outside of
their state of residency may incur an income tax liability and
consequently be subject to withholding in the state where those
employment duties are being performed. In California,
specifically, nonresidents pay tax based on all income from
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California sources. California applies various sourcing rules
to certain items of nonresident income for various groups of
taxpayers (retirees, performances by athletes and entertainers,
professional services like attorneys and physicians, etc.)
To compute California tax liability, nonresidents must compare
the total amount of days employed in California to their total
days worked, and multiply that proportion by their total
compensation. The employee must file a return, and pay the
computed tax liability, as specified in current law.
Furthermore, current 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 EDD, which then collects withheld
taxes. The general penalty for failing to withhold is generally
the greater of $500, or ten percent of the amount withheld.
Withholding can be an excessive burden for businesses simply
sending an employee into a state for a few days, especially when
withholding requirements can often differ across states.
Additionally, out-of-state employees can find complying with
California's income tax filing and payment requirements
burdensome when spending a few days of the year working in
California. In response, Congress has considered legislation
(such as S. 386, the Federal Mobile Workforce State Income Tax
Simplification Act of 2015 that would (1) preempt 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, and (2) 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. This bill would enact the MTC
model statute in California.
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Proposed Law:
This bill would exclude "De minimis income" from a nonresident
taxpayer from sources within California, beginning in 2016, if
the taxpayer (1) has no other income from sources within the
state, (2) is present in the state to perform employment duties
for less than 20 days per taxable year, as specified, and (3)
the nonresident's state of residence provides a similar
exclusion, or doesn't impose an income tax.
The bill would specifically not apply to (1) professional
athletes or members of professional athletic teams, (2)
professional entertainers who perform services in the performing
arts, (3) an individual of prominence who performs services for
compensation on a per-event basis, and (4) an individual defined
as a "key employee" by the Internal Revenue Code.
The bill would make a conforming change to ensure that
nonresident taxpayers whose only income is excluded by the bill
need not file a return; however, FTB may require this set of
nonresident taxpayers to file informational returns.
Similarly, the bill would remove withholding requirements for
employees whose income is excluded by the bill. Employers who
erroneously apply this provision may be subject to a penalty, as
specified.
Staff
Comments: FTB data indicate that, in 2012, about $4 million was
paid to nonresidents meeting the exclusion provisions as defined
in the bill. The Department's estimated loss assumes an average
tax rate of five percent.
With respect to both FTB and EDD, administrative impacts to EDD
would be minor and absorbable, consisting of updating
publications, manuals, and training of staff with the new income
tax withholding requirement, as well as any outreach and
marketing efforts.
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