BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 500| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 500 Author: Hertzberg (D) Introduced:2/26/15 Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 4/15/15 AYES: Hertzberg, Nguyen, Bates, Beall, Hernandez, Lara, Pavley SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15 AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen SUBJECT: Personal income taxes: nonresident de minimis income SOURCE: Author DIGEST: This bill excludes "De minimis income" of a nonresident taxpayer. ANALYSIS: Existing law: 1)Taxes residents on all income regardless of source, including income from residents performing services outside California. 2)Taxes part-year residents on all income generated while they are a resident, again including sources outside the state. SB 500 Page 2 3)Taxes nonresidents based on all income from California sources. 4)Applies various sourcing rules to certain items of nonresident income for specified individuals, such as retirees, nonresident salespeople's commissions, performances by athletes and entertainers, professional services like attorneys and physicians, officers of corporations, and operators of trucks, trains, and ships. 5)Provides that these 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. 6)Requires employers who pay employees California-source 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). 7)Provides that whenever wages are paid to a nonresident employee performing services in California, the employer must withhold expected taxes, and deposit them quarterly with EDD. 8)Applies a penalty for failing to withhold of the greater of $500, or 10% of the amount withheld, which may be abated upon showing reasonable cause. SB 500 Page 3 This bill: 1)Excludes "De minimis income" from a nonresident taxpayer from sources within California, beginning in the 2016 taxable year, if the taxpayer: a) Has no other income from sources within the state, b) 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 c) Resides in a state that provides a similar exclusion, or doesn't impose an income tax. 2)Provides that its provisions do not apply to: a) Professional athletes or members of professional athletic teams, b) Professional entertainers who perform services in the performing arts, c) An individual of prominence who performs services for compensation on a per-event basis, and d) An individual defined as a "key employee" by the Internal Revenue Code. 3)Absolves employers of withholding requirements for its SB 500 Page 4 employees whose income is excluded by this bill. 4)Provides that employers who erroneously apply this provision may be subject to a penalty, unless the employer relied on a regularly maintained time and attendance system that: a) 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 b) Is used by the employer to allocate the employee's wages between all taxing jurisdictions. 5)Provides that 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. 6)Makes a conforming change to ensure that nonresident taxpayers whose only income is excluded by this bill need not file a return; however, the Franchise Tax Board may require this set of nonresident taxpayers to file informational returns. 7)Makes technical, clarifying, and conforming changes, and defines many of its terms. Comments 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 SB 500 Page 5 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. SB 500 enacts the MTC model statute in California. As noted above, 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 applied a 30-day standard. Secondly, federal legislation would apply to all states, while SB 500 only excludes 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 to implement MTC's model statute, the less likely that Congress will supersede California's tax law. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According to the Senate Appropriations Committee, SB 500 results in annual revenue losses of $200,000. SUPPORT: (Verified5/28/15) California Taxpayers' Association TechAmerica SB 500 Page 6 OPPOSITION: (Verified5/28/15) None received ARGUMENTS IN SUPPORT: According to the author, 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, this bill 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. Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119 5/29/15 9:02:07 **** END ****