House Passes Bill Unifying State Withholding Tax Rules

On September 22, the House of Representatives passed, by a voice vote, the latest version of the “Mobile Workforce Tax Simplification Act” (H.R. 2315). Many stakeholders in the tax community, including the American Institute of Certified Professional Accountants (AICPA), have lauded this bill, which would provide a nationwide system of withholding and income tax requirements for non-residents of states. It’s been delivered into the hands of the Senate Finance Committee, the tax-writing arm of the other chamber.

Rep. Mike Bishop (R-MI) and Rep. Hank Johnson (D-GA) introduced H.R. 2315 on May 14. On June 17, it passed out of the Ways & Means committee by a 23-4 vote. A companion bill was introduced in the Senate on February 5 by Sen. John Thune (R-SD) and Sen. Sherrod Brown (D-OH) in 2015. Currently, it has 45 bipartisan co-sponsors.

But the chances of enacting such a law remain dim. Although each new Congress has introduced comparable legislation over the last decade, the proposals have previously failed to gain any significant traction.

The bill addresses long-time problems that have been plaguing both employees and employers. Employees who travel to other states temporarily on business are required to file personal income tax returns for those states. Likewise, employers must deal with the withholding requirements for their employees traveling out-of-state. The burdens on both, not to mention the complexity, can be overwhelming.

Worst of all, employees are legally required to file income tax returns for each state in which they travel to on business even if they were there for only one day!

To ease the strain, H.R. 2315 provides uniform standards to ensure that the correct amount of tax is withheld and paid to the states without the current hardships experienced by employees and employers. Notably, the bill imposes a uniform 30-day threshold before liability attaches and withholding is required. After 30 days, existing state laws kick in. But certain high-profile taxpayers, including athletes and entertainers, would not be protected under the law.

Some other items of note:

Consistent with current law, an employee’s earnings would remain fully subject to tax in his or her state of residence.
An employee’s earnings would be taxable in a state where he or she is present and performing employment duties for more than 30 days during the calendar year.
Non-resident employees who visit a state for longer than 30 days will still be able to take a credit for taxes paid to another state on their resident state tax return.

The new proposed law would not have any impact on reciprocity agreements that currently exist between individual states. For example, a Virginia resident who works in Maryland is subject to tax only in Virginia, and vice versa.

Certainly, tax practitioners would welcome a simplification of the rules. “The AICPA strongly supports H.R. 2315 and congratulates the House on passing the mobile workforce bill,” said Barry C. Melancon, president and CEO of the AICPA, in a prepared statement. “It is a vital step toward providing relief to taxpayers and their employers from the current maze of inconsistent and confusing state income tax and withholding rules that apply to employees who travel across state lines to temporarily work in another state. The bill strikes a reasonable balance that ensures states can collect the taxes due to them.” He added, “We believe House passage sends a strong message to the Senate that this legislation needs to pass before year’s end.”

Despite the growing bipartisan support in the Senate, most tax commentators still don’t expect the bill to work its way all the way through a lame-duck Congress. But maybe this year’s the charm.