BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 500|
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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.
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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.
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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
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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
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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
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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
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