California Payroll Conference

Multistate EmploymentCynthia Vance415-593-0580California Payroll Conference

September 11 and 12, 2014

AgendaThe IssueState Unemployment vs. State Income Tax WithholdingReciprocal AgreementsLocal TaxesMulti-Jurisdictional IncomeWithholding ComplicationsTelecommutersAudits

The Issue

Who works in more than one taxing jurisdiction?Business travelers Telecommuters Corporate officersBoard membersExpatriatesForeign nationalsShort-term assigneesPermanent transfers

SUI Taxation vs. SIT WithholdingState Unemployment Insurance (UI) taxability is governed by a four-part test that all states adhere to:Are services localized? Are services performed outside the state incidental to those performed within the state? If so, employer is subject to state in which the services are localized.Where is the base of operations? If in a particular state, that is the UI state.Is there a place of direction and control? Where is immediate control exercised?What is the employees state of residence? If all other tests have not been met, the default is to the state of residence.

State Reciprocity AgreementsStates with Reciprocity Agreements:

Local Tax IssuesStates with Local TaxesAlabama, Colorado, Delaware, Indiana, Kentucky, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, West VirginiaMobile Workforce ExamplesColumbus, Ohio Nonresidents working in the city are taxed at 2.5%New York Metropolitan Commuter Transportation Mobility Tax (MCTMT) Based upon four-part test (akin to SUTA ) Earned Income Tax (EIT) Pennsylvania Required to withhold at the nonresident rate Aurora Colorado Occupational Privilege Tax (OPT) Head tax on both employers and employees on individuals who work within the cityGrand Rapids, Michigan Withhold from nonresidents for services rendered/performed when Grand Rapids is the predominant place of work

Multi-Jurisdictional IncomeEarnedPaidBase SalaryDailyBi-weekly or semi-monthly or monthlyBonusOver bonus performance period or related to the goal of achievementQuarterly or annually or achievement of targetCommissionRelated to a saleAfter sale closePensionDailyPost RetirementStock OptionsFrom grant to vest/exerciseUpon exerciseWhat happens when an employee works in more than one taxing jurisdiction during the earning period?US EmployeesMobile employees traveling outside their primary work location may trigger income tax withholding requirements in multiple states.Issues to consider:Income taxes currently not withheld in nonresident work state for traveling/mobile workforceLimited system capabilities and overall lack of resources to track and calculate domestic mobilityWithholding tax calculation is complicated for deferred and equity-based compensation (e.g., bonus paid in current year for prior year performance, deferred compensation and stock vesting/exercise)

Multistate Withholding Employers should monitor closelyImpacts employers employment tax filings and employees personal income tax liabilitySome states require an apportionment of stock compensation based on where vesting took placeCompliance issues if not managed properly, can lead to significant employer liability, tax, penalties, and interestFAS 5 FIN 48 accrual/disclosureMay lead to greater individual audit exposure for executivesMay affect state payroll apportionment factorsCity/Local tax withholding and reporting may apply

De Minimis ExceptionsIn general most states do not have a de minimis threshold relating to the payment of wages for services. However:Seven states have a time based de minimis thresholde.g., New York does not require withholding unless an individual is present in the state for more than 14 daysNine states have an income based de minimis thresholde.g., Oregon does not require withholding unless an individual earns more than the Oregon Standard Deduction amountGeorgia has both a time based as well as income based de minimis threshold

Exposure AreasOfficers and highly paid employees traveling to nonresident states (including board meetings and meetings with investors) Companies utilizing stocks as a form of compensationStates actively conducting employment tax audits Subsidiary entity operates in another state Unemployment paid to state but no income tax withholding Expense reports show frequent travel to nonresident state(s)Corporate jet log shows travel to nonresident state(s)Global operations necessitating foreign employees providing services in various states

Issues with TelecommutersThe Bloomberg BNA 2013 Survey of State Tax Departments revealed that 36 states, plus the District of Columbia and New York City, take the position that income tax nexus would result for an out-of-state corporation with employees that telecommute from homes within their jurisdiction. As in prior years, most of these states said that their position would remain the same even if the corporation had made no sales in the state or the employees telecommuted for only part of their total work time.

Issues with Telecommuters contd33 states said that nexus would arise from a single telecommuter who performed back office administrative business functions, such as payroll, as opposed to direct customer service or other activities directly related to the employers commercial business activities. 34 states said that nexus would be triggered by a single telecommuting employee who performs product development functions, such as computer coding.

Issues with Telecommuters-CaseTelebright Software, a Maryland based company, in 2004, allowed an employee to relocate to New Jersey and telecommute by writing software code from home. Telebright withheld New Jersey income taxes from the employees wages, rather than withholding Maryland income taxes like they do for the rest of their employees. With only one employee in the state of New Jersey, Telebright is obligated by the New Jersey Division of Taxation to file a New Jersey corporation business tax return. For Telebright, this obligation seemed outrageous because it did not maintain an office or financial accounts in New Jersey, nor did it solicit sales in the state; besides the single employee, Telebright has no significant ties to New Jersey.

Telecommuter CasesThe California State Board of Equalization held in 2012 that a recruiter working from her home in California for a Massachusetts business created Nexus for California franchise tax purposes (even though she was classified as an independent contractor).The New York Department of Taxation and Finance is imposing automatic income tax withholding audit assessments on employers that made wage reporting adjustments as the result of an IRS employment tax audit. The Department asserts that these income tax withholding audit assessments are not subject to the normal three-year statute of limitations.

State Withholding AuditsReview of company expense reimbursement and travel policy Review of payroll manual for company policy on taxation of mobile workforceReview of payroll manual for company policy on taxation and reporting of stock and equity compensationReview of employee expense recordsspecifically hotel and flight reimbursementsReview of any publicly available information as to major projects/events taking place in the stateReview of executive calendarsReview of corporate jet logs/itinerariesReview of stock grant, vest, and exercise data relating to mobile workforceForm W-4 ComplianceStates that require the use of specific state withholding certificates.AlabamaKentuckyNew JerseyArizonaLouisianaNew YorkArkansasMaineNorth CarolinaConnecticutMarylandOhioGeorgiaMassachusett (if claiming exempt)VirginiaHawaiiMichiganD.C.IllinoisMississippiWest VirginiaIndianaMissouriWisconsinIowaThe Mobile Workforce State Income Tax Simplification Act of 2013-Senate Bill 1645Previous version of this bill H.R. 2110 and H.R. 1864 did not passStates currently have varying and inconsistent requirements for:Employees to file personal income tax returns when working in a nonresident state; andEmployers to withhold income tax on employees who travel outside their residence state (or primary work state)This bill provides that wages and other remuneration earned by an employee who works in more than one state in a year are subject to income tax in the:Employees resident state; andState within which the employee is present and performing duties for more than 30 days during the calendar year

Best PracticesIdentify/quantify the problemMake appropriate risk management decisionsDevelop short-term and long-term solutionsIdentification of mobile employeeCapture the transactionAllocate the incomeWithhold and report-gross up or equalize?Develop appropriate policiesCompanys responsibility for tax compliancePolicy for double taxed income

Multistate Employment

Thank you for your attentionCynthia Vance 415.593.0580