BILL ANALYSIS Ó
SB 500
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Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
500 (Hertzberg) - As Introduced February 26, 2015
Majority vote. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Personal income taxes: nonresident de minimis income.
SUMMARY: Excludes from the Personal Income Tax (PIT) the gross
income of a nonresident to the extent that the income is "de
minimis," as defined. Specifically, this bill:
1)Provides that, under the PIT law, the gross income of a
nonresident from California sources excludes "de minimis"
income received on or after January 1, 2016, for any part of
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the taxable year during which the taxpayer was not a resident
of California.
2)Defines "de minimis income" as compensation subject to
withholding under the Unemployment Insurance (UI) Code, that
is received by a nonresident, provided all of the following
conditions are satisfied:
a) The nonresident has no other income sourced to
California for the taxable year in which the compensation
was received;
b) The nonresident is present in California to perform
employment duties on behalf of an employer and any other
related person for not more than 20 calendar days during
the taxable year in which the compensation is received;
and,
c) The nonresident's state of residence either provides a
substantially similar exclusion or does not impose an
individual income tax.
3)Defines a "related person" as a person that, with respect to
the employer during all or any portion of the taxable year, is
one of the following:
a) A related entity;
b) A member of a commonly controlled group, within the
meaning of Revenue and Taxation Code (R&TC) Section 25105;
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c) A person to, or from, whom there is attribution of stock
ownership in accordance with R&TC Section 25105(e); or,
d) A person that, notwithstanding its form of organization,
bears the same relationship to the employer as a person
described in any of the abovementioned categories.
4)Defines a "related entity" as any of the following:
a) A stockholder who is an individual, or a member of the
stockholder's family, as defined, if the stockholder and
the members of the family own, directly, indirectly,
beneficially, or constructively, in the aggregate, at least
50% of the value of the employer's outstanding stock;
b) A stockholder or a stockholder's partnership, limited
liability company, estate, trust, or corporation, if the
stockholder or the stockholder's entity own directly,
indirectly, beneficially, or constructively, in the
aggregate, at least 50% of the value of the employer's
outstanding stock; or,
c) A corporation, or a party related to the corporation in
a manner that would require an attribution of stock from
the corporation to the party or from the party to the
corporation under the attribution rules of the Internal
Revenue Code (IRC) if the employer owns, directly or
indirectly, beneficially, or constructively, at least 50%
of the value of the corporation's outstanding stock.
5)Does not apply to any of the following individuals:
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a) A professional athlete or member of a professional
athletic team;
b) A professional entertainer who performs services in the
professional performing arts;
c) An individual of prominence who performs services for
compensation on a per-event basis; and,
d) An individual who is identified as a key employee,
within the meaning of IRC Section 416(i)(1)(A)(i), for the
taxable year immediately preceding the current taxable
year.
6)Exempts a nonresident from the obligation to file a state
income tax return if the nonresident's income from California
sources is only the "de minimis" income and he/she has no tax
liability, as specified.
7)Authorizes the Franchise Tax Board (FTB) to require a
nonresident to file an informational return.
8)Provides that this bill's provisions:
a) Are applicable only to the determination of an
individual income taxpayer's filing requirement;
b) Have no application to the imposition of, or
jurisdiction to impose, a tax under R&TC Part 10 or any
other tax on any taxpayer; and,
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c) Are not intended to have any bearing on the sourcing
rules for determining the taxability by California of
deferred compensation, as specified, earned by performing
services in California during any portion of the applicable
vesting period, as prescribed.
9)Establishes an exception from the PIT withholding requirement
for the compensation paid to a nonresident for employment
duties performed in California if that compensation is "de
minimis" income.
10)Specifies that an employer that has erroneously applied the
"de minimis income" exception solely as a result of
miscalculating the number of days a nonresident employee is
present in California shall not be subject to a penalty if one
of the following applies:
a) The employer relied on a regularly maintained time and
attendance system that satisfies specified conditions;
b) The employer does not maintain a time and attendance
system but relied on employee travel records required to be
maintained by the employee on a regular and contemporaneous
basis; or,
c) The employer does not maintain a time and attendance
system, does not require the maintenance of employee
records and relies on travel expense reimbursement records
required to be submitted by the employee on a regular and
contemporaneous basis.
EXISTING LAW:
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1)Imposes an income tax on all income of California residents,
including income from sources outside of California. A
part-year resident is taxed on all income received while a
resident, including income from sources outside California,
regardless of where the services resulting in the income were
performed.
2)Imposes an income tax on income of a nonresident if the income
is derived from California sources.
3)Provides that income from sources within California includes
income from all of the following:
a) Real or tangible personal property located in
California;
b) A business, trade, or profession carried on in
California;
c) Income from stocks, bonds, notes, bank deposits and
other intangible personal property having a business or
taxable situs in California;
d) Rentals or royalties for the use of, or for the
privilege of using in California, patents, copyrights,
secret processes and formulas, goodwill, trademarks, trade
brands, franchise and other like property having a taxable
or business situs in California; and,
e) Total compensation paid to employees employed in
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California or performing services in California.
4)Excludes from gross income qualified retirement income sourced
to California but received by a nonresident.
5)Specifies that, in the case of nonresident employees who work
in California as well as other states and are paid on a daily,
weekly, or monthly basis, the gross income from California
sources includes that portion of the total compensation for
personal services which the total number of working days
employed within California bears to the total number of
working days both within and without California.
6)Requires a nonresident to file a tax return if he/she has any
California source income and the income from all sources meets
or exceeds the filing requirement amounts for residents.
7)Provides that the wages paid to a nonresident employee while
performing services within California are subject to
California PIT withholding and requires an employer to
withhold payroll income tax from the employees' wages.
FISCAL EFFECT: The FTB estimates that this bill would result in
an annual General Fund (GF) revenue loss of about $200,000.
Both the FTB and the Employment Development Department (EDD)
indicate that the bill would have minor impact on administrative
costs.
COMMENTS:
1)The Author's Statement . The author has provided the following
statement in support of this bill:
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"Current law requires nonresident employees who provide any
level of service in California to file a tax return and report
income upon meeting a minimum income threshold, even for a
single day of work. Similarly, employers are required to
withhold certain amounts from wages paid to nonresident
employees who perform any service in California. This is
burdensome for employers, employees, and California's tax
agencies. According to the Federation of Tax Administrators,
"complying with the current system is? indeed difficult and
probably impractical.
"In today's economy, it is common for employees to travel from
state to state as part of their normal business activities,
such as for conferences and training. Some out-of-state
employers are choosing not to come to the state when informed
about the state's reporting requirements, thereby limiting the
potential growth of California's economy as a destination.
"In cases of employers and employees who are trying to do the
right thing with respect to their potential withholding,
filing, and income tax obligations, current law appears to be
harming the California economy as businesses choose to shift
their nonresident employee activities to states with no income
tax or less burdensome filing and reporting requirements."
2)Arguments in Support . The proponents state that this bill
would "simplify nonresident employee and employer requirements
to report and withhold state income taxes." The proponents
emphasize that this bill would "mitigate onerous reporting
requirements imposed on taxpayers, while allowing the
Franchise Tax Board to redirect its resources to functions
that have a greater cost-benefit ratio." This bill would also
promote economic activity. However, the proponents note that
while this bill moves "in the right direction," authorizing
this exemption "only for residents of states with reciprocal
agreements would necessarily complicate tax compliance and
administration for some taxpayers and employers." The FTB
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would need to inform taxpayers and employers of additions and
deletions of reciprocal agreements and would need to verify
and track time spent in eligible and ineligible states.
Deletion of the reciprocity requirements "would further the
purpose of a mobile workforce law, which is to simplify
multi-state tax filing and provide uniform tax guidelines for
all those traveling to California on business, regardless of
their resident state."
3)Mobile Workforce: Non-Resident Employees . As noted above,
California imposes a PIT on all income received by
nonresidents from California sources. Various sourcing rules
apply to certain items of nonresident income for 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. State law also
requires employers who pay employees California-sourced income
to withhold expected income taxes and register with 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 if withholding requirements
differ from state to state. Similarly, non-resident employees
perceive the California's income tax filing and payment
requirements as burdensome, considering that nonresident
employees spend only a few days of the year working in
California. Congress has considered legislation in recent
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years to limit a state's authority to apply income taxes to
mobile workforce. This year, Congress has introduced the
Federal Mobile Workforce State Income Tax Simplification Act
of 2015 (S. 386), which would preempt state tax authority by
limiting withholding requirements to 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. The Multistate Tax Commission (MTC) also drafted a
model statute attempting to address issues raised by federal
legislation, but without preempting state tax authority.
4)The Federal Act vis-à-vis the MTC Model Statute . Both the
Federal Act and the MTC statute would provide that all wages
and other remuneration paid to an employee are subject to the
income tax laws of the state of the employee's residence,
unless the employee performs duties in a nonresident state for
a certain number of days. Under the federal Act, the
threshold is set at 30 days per calendar year, whereas the MTC
model statute settles on a 20-day threshold. This uniform
threshold - a number of days spent in a nonresident state -
applies for assessing both the employer wage withholding
requirements and the employee income tax return filing
requirements. However, professional athletes, entertainers,
and some public figures are excluded from the protections
afforded by the federal Act as well as the MTC model statute.
While the federal legislation would apply to all states, the MTC
statute would only exclude income received by nonresidents in
the states that either do not 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 this bill,
patterned after the MTC model statute.
5)What is the Problem ? According to the author, employees who
travel outside of their states of residence to perform
services in other states are often subject to burdensome
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filing requirements in the states where they perform services.
These employees may potentially be required to file an income
tax return in every state to which they traveled, even if only
for one day. Furthermore, their employers are likely to be
subject to income tax withholding and reporting requirements.
Various states have different requirements, further
complicating compliance.
In California, for example, nonresident employees who are
continuously employed in the state for a definite portion of
the taxable year are subject to PIT on the total compensation
paid from California sources for the period employed in the
state. However, if nonresident employees are employed in
California at intervals throughout the year and are paid on a
daily, weekly, or monthly basis, the gross income from
California sources includes that portion of the total
compensation for personal services which the total number of
working days employed within California bears to the total
number of working days both within and without the state.
Nonresidents must file a return if they have any
California-source income and their income from all sources
meets or exceeds the filing requirement for residents.
Currently, there is no "de minimis" exception to the general
rule regarding the taxability of California source income of
nonresidents. In addition, an employer who pays wages to
nonresident employees for services performed in California
must deduct and withhold for each payroll period PIT from
those wages. Withholding, generally, is not required unless
income payments to each payee exceed $1,500 during the
calendar year. (18 Calif. Code of Regulations, Section
18662-2.) The author of this bill argues that many
businesses decide to shift their nonresident employee
activities to states with no income tax, or less burdensome
filing and reporting requirements, away from California and
its onerous filing, withholding and reporting obligations.
6)Proposed Solution . Patterned after the MTC model statute,
this bill proposes to simplify nonresident employee and
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employer requirements to report and withhold state income
taxes. Specifically, this bill provides an exemption from
income taxes for compensation paid to a nonresident employee
who is present in California for 20 or fewer days during a
calendar year and has no other California-source income. This
bill is intended to reduce the burden currently placed by the
state on traveling nonresident employees and their employers
and will eliminate a key barrier for out-of-state companies to
send employees to California for work. The author believes
that this bill strikes the correct balance between the
business needs of today's mobile workforce and California's
authority to determine its own tax law.
7)Absence of a Sunset Date : In its current form, this bill's
proposed tax exclusion lacks an automatic sunset provision.
This Committee has a longstanding policy favoring the
inclusion of sunset dates to allow the Legislature
periodically to review the efficacy and cost of such programs.
The Committee may wish to consider the addition of an
appropriate sunset provision.
REGISTERED SUPPORT / OPPOSITION:
Support
California Taxpayers Association (support if amended)
TechAmerica
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Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916)
319-2098