Existing law, the Personal Income Tax Law, imposes a tax on the entire taxable income of a resident taxpayer subject to that law, and provides for a specified treatment of the income of nonresidents. For purposes of computing the taxable income, the gross income of a nonresident includes only the gross income from sources within this state. Existing law requires every taxpayer subject to tax under the law to file a return with the Franchise Tax Board, stating specifically the items of the gross income from all sources and the deductions and credits allowable, as provided.

This bill would provide, for purposes of computing the taxable income of a nonresident, that the gross income of a nonresident from sources within this state does not include de minimis income, defined as compensation subject to specified withholding if the nonresident has no other income from sources within this state, is present in this state to perform employment duties on behalf of an employer and any other related person for not more than 20 9 calendar days during the taxable year in which the compensation is received, if the compensation is received on or after January 1, 2016, 2017, for any part of the taxable year during which the taxpayer was not a resident of this state, and the nonresidents state of residence provides a substantially similar exclusion or does not impose an individual income tax. Except as specified, the bill would provide that a nonresident whose only income from sources in this state is compensation excluded pursuant to these provisions has no personal income tax liability and is not required to file a return. The bill would repeal these provisions on January 1, 2021.

Existing law requires every employer who pays wages to a nonresident employee for services performed in this state to deduct and withhold from those wages, except as provided, the amount of specified income taxes. taxes reasonably estimated to be due from the inclusion of those wages in the employees gross income.

This bill bill, until January 1, 2021, would provide that no amount is required to be deducted or withheld from compensation paid to a nonresident for employment duties performed in this state if that compensation is excluded from provide, for those tax withholding purposes, that gross income excludes de minimis income excluded from a nonresidents income subject to tax pursuant to the aforementioned provisions. The bill would repeal these provisions on January 1, 2021.

Existing law, the Personal Income Tax Law, imposes a tax on the entire taxable income of a resident taxpayer subject to that law, but and provides for a specified treatment of the income of nonresidents. For purposes of computing the taxable income of a nonresident, the gross income of a nonresident includes only the gross income from sources within this state. Existing law requires every taxpayer subject to tax under the Personal Income Tax Law law to file a return with the Franchise Tax Board, stating specifically the items of the gross income from all sources and the deductions and credits allowable, as provided.

This bill would provide, for purposes of computing the taxable income of a nonresident, that the gross income of a nonresident from sources within this state does not include de minimis income, defined as compensation subject to specified withholding if the nonresident has no other income from sources within this state, is present in this state 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, if the compensation is received on or after January 1, 2016, for any part of the taxable year during which the taxpayer was not a resident of this state, and the nonresidents state of residence provides a substantially similar exclusion or does not impose an individual income tax. Except as specified, the bill would provide that a nonresident whose only income from sources in this state is compensation excluded pursuant to these provisions has no personal income tax liability and is not required to file a return. The bill would repeal these provisions on January 1, 2021.

Existing law requires every employer who pays wages to a nonresident employee for services performed in this state to deduct and withhold from those wages, except as provided, specified income taxes.

This bill would provide that no amount is required to be deducted or withheld from compensation paid to a nonresident for employment duties performed in this state if that compensation is excluded from income subject to tax pursuant to the aforementioned provisions. The bill would repeal these provisions on January 1, 2021.

Existing law, the Personal Income Tax Law, imposes a tax on the entire taxable income of a taxpayer subject to that law, but provides for a specified treatment of the income of nonresidents. For purposes of computing the taxable income of a nonresident, the gross income of a nonresident includes only the gross income from sources within this state. Existing law requires every taxpayer subject to tax under the Personal Income Tax Law to file a return with the Franchise Tax Board, stating specifically the items of the gross income from all sources and the deductions and credits allowable, as provided.

This bill would provide, for purposes of computing the taxable income of a nonresident that the gross income of a nonresident from sources within this state does not include de minimis income, defined as compensation subject to specified withholding if the nonresident has no other income from sources within this state, is present in this state 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, compensation is received on or after January 1, 2016, for any part of the taxable year during which the taxpayer was not a resident of this state, and the nonresidents state of residence provides a substantially similar exclusion or does not impose an individual income tax. Except as specified, the bill would provide that a nonresident whose only income from sources in this state is compensation excluded pursuant to these provisions has no tax liability and is not required to file a return.

Existing law requires every employer who pays wages to a nonresident employee for services performed in this state to deduct and withhold from those wages, except as provided, specified income taxes.

This bill would provide that no amount is required to be deducted or withheld from compensation paid to a nonresident for employment duties performed in this state if that compensation is excluded from income subject to tax pursuant to the aforementioned provisions.

Date of Hearing: August 3, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 500

Author:(Hertzberg) – As Amended Ver:August 1, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill excludes from the Personal Income Tax (PIT) the gross income of a nonresident to the extent that the income is "de minimis," as defined, and received on or after January 1, 2017, or before January 1, 2021. Specifically, this bill:

1. Defines “de minimis income” as compensation subject to withholding under the Unemployment Insurance (UI) Code that is received by a nonresident under the following conditions:
   1. The nonresident has no other income sourced to California for the taxable year in which the compensation was received;
   2. The nonresident is present in California to perform employment duties on behalf of an employer and any other related person for not more than 9 calendar days during the taxable year in which the compensation is received; and,
   3. The nonresident's state of residence either provides a substantially similar exclusion or does not impose an individual income tax.
2. 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 that person has no other tax liability, as specified.
3. Prohibits the provisions of this bill from applying to any individual who is a professional athlete or member of a professional athletic team, a professional entertainer who performs services in the professional performing arts, an individual of prominence who performs services for compensation on a per-event basis, or an individual who is identified as a key employee.
4. Excludes de minimis income of a nonresident from the definition of gross income for the purposes of withholding taxes on wages.

FISCAL EFFECT:

1. Annual GF revenue loss of $150,000.
2. Minor administrative costs to FTB and EDD.

COMMENTS:

1. Background. California imposes PIT on all income from California sources received by nonresidents. 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.
2. The Federal Mobile Workforce State Income Tax Simplification Act of 2015. Congress has considered legislation in recent years to limit a state's authority to apply income taxes to mobile workforce. The Federal Mobile Workforce State Income Tax Simplification Act of 2015, which is currently pending in Congress, 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.
3. Arguments for and against California’s current policy. Businesses argue 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, nonresident 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.

Opponents to SB 500 such as the Department of Finance (DOF) argue that the current system is adequate in collecting revenue and that nonresidents still file despite the perceived burden of doing so. DOF notes that nonresidents enjoy public services while working in California and this bill shifts the burden of paying for public services and infrastructure further to California taxpayers even though these mobile workers benefit from them.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: July 13, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

SBPCA Bill Id:SB 500

Author:(Hertzberg) – As Introduced Ver: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 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:

   1. The nonresident has no other income sourced to California for the taxable year in which the compensation was received;

   2. 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,

   3. 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:

   1. A related entity;

   2. A member of a commonly controlled group, within the meaning of Revenue and Taxation Code (R&TC) Section 25105;

   3. A person to, or from, whom there is attribution of stock ownership in accordance with R&TC Section 25105(e); or,

   4. 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:

   1. 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;

   2. 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,

   3. 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:

   1. A professional athlete or member of a professional athletic team;

   2. A professional entertainer who performs services in the professional performing arts;

   3. An individual of prominence who performs services for compensation on a per-event basis; and,

   4. 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:

   1. Are applicable only to the determination of an individual income taxpayer's filing requirement;

   2. 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,

   3. 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:

    1. The employer relied on a regularly maintained time and attendance system that satisfies specified conditions;

    2. 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,

    3. 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:

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:

   1. Real or tangible personal property located in California;

   2. A business, trade, or profession carried on in California;

   3. Income from stocks, bonds, notes, bank deposits and other intangible personal property having a business or taxable situs in California;

   4. 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,

   5. Total compensation paid to employees employed in 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:
   
   "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 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 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 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 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

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098

 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.

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.

This bill:

1. Excludes “De minimis income” from a nonresident taxpayer from sources within California, beginning in the 2016 taxable year, if the taxpayer:

   1. Has no other income from sources within the state,

   2. 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

   3. 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:

   1. Professional athletes or members of professional athletic teams,

   2. Professional entertainers who perform services in the performing arts,

   3. An individual of prominence who performs services for compensation on a per-event basis, and

   4. An individual defined as a “key employee” by the Internal Revenue Code.

3. Absolves employers of withholding requirements for its 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:

1. 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

2. Is used by the employer to allocate the employee’s wages between all taxing jurisdictions.

1. 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.

2. 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.

3. 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 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.: Yes Local: No

According to the Senate Appropriations Committee, SB 500 results in annual revenue losses of $200,000.

SUPPORT: (Verified 5/28/15)

California Taxpayers’ Association

TechAmerica

OPPOSITION: (Verified 5/28/15)

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 ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 500 (Hertzberg) - Personal income taxes: nonresident de minimis income

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 500 would create a “de minimus income” exclusion for nonresident taxpayers.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates the bill would result in annual revenue losses of about $200,000 (General Fund). Both FTB and the Employment Development Department (EDD) indicate that the bill would have minor administration costs.

Background:

Generally, employees performing employment duties outside of their state of residency may incur an income tax liability and consequently be subject to withholding in the state where those employment duties are being performed. In California, specifically, nonresidents pay tax based on all income from California sources. California applies various sourcing rules to certain items of nonresident income for various groups of taxpayers (retirees, performances by athletes and entertainers, professional services like attorneys and physicians, etc.)

To compute California tax liability, nonresidents must compare the total amount of days employed in California to their total days worked, and multiply that proportion by their total compensation. The employee must file a return, and pay the computed tax liability, as specified in current law.

Furthermore, current state law requires employers who pay employees California-sourced 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 EDD, which then collects withheld taxes. The general penalty for failing to withhold is generally the greater of $500, or ten percent of the amount withheld.

Withholding can be an excessive burden for businesses simply sending an employee into a state for a few days, especially when withholding requirements can often differ across states. Additionally, out-of-state employees can find complying with California’s income tax filing and payment requirements burdensome when spending a few days of the year working in California. In response, Congress has considered legislation (such as S. 386, the Federal Mobile Workforce State Income Tax Simplification Act of 2015 that would (1) preempt 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, and (2) 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. This bill would enact the MTC model statute in California.

Proposed Law:

This bill would exclude “De minimis income” from a nonresident taxpayer from sources within California, beginning in 2016, if the taxpayer (1) has no other income from sources within the state, (2) is present in the state to perform employment duties for less than 20 days per taxable year, as specified, and (3) the nonresident’s state of residence provides a similar exclusion, or doesn’t impose an income tax.

The bill would specifically not apply to (1) professional athletes or members of professional athletic teams, (2) professional entertainers who perform services in the performing arts, (3) an individual of prominence who performs services for compensation on a per-event basis, and (4) an individual defined as a “key employee” by the Internal Revenue Code.

The bill would make a conforming change to ensure that nonresident taxpayers whose only income is excluded by the bill need not file a return; however, FTB may require this set of nonresident taxpayers to file informational returns.

Similarly, the bill would remove withholding requirements for employees whose income is excluded by the bill. Employers who erroneously apply this provision may be subject to a penalty, as specified.

Staff Comments:

FTB data indicate that, in 2012, about $4 million was paid to nonresidents meeting the exclusion provisions as defined in the bill. The Department’s estimated loss assumes an average tax rate of five percent.

With respect to both FTB and EDD, administrative impacts to EDD would be minor and absorbable, consisting of updating publications, manuals, and training of staff with the new income tax withholding requirement, as well as any outreach and marketing efforts.

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

PERSONAL INCOME TAXES: NONRESIDENTIAL DE MINIMUS INCOME

Excludes “De minimis income” of a nonresident taxpayer.

Background and Existing Law

The United States Constitution grants the power to Congress to “regulate Commerce with foreign nations, and among the several states, and with the Indian Tribes;” a provision widely known as the Commerce Clause (Article I, Section 8). The United States Supreme Court established a doctrine, known as the “dormant” or “negative” Commerce Clause, which bars states from regulating or taxing interstate commerce. States generally determine their own standards for taxing its resident, nonresidents entering the state and generating income, as well as multistate or multinational corporations’ activity consistent with this doctrine.

I. Income Taxes. California taxes its residents on all income regardless of source, including income from residents performing services outside California. Part-year residents pay tax on all income generated while they are a resident, again including from sources outside the state. Nonresidents pay tax based on all income from California sources. California applies various sourcing rules 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.

Specific sourcing 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.

II. Withholding. State law requires employers who pay employees California-sourced 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). 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 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 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. The author wants to enact the MTC model statute in California.

Proposed Law

Senate Bill 500 excludes “De minimis income” from a nonresident taxpayer from sources within California, beginning in the 2016 taxable year, if the taxpayer:

• Has no other income from sources within the state,

• The nonresident 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

• The nonresident’s state of residence provides a similar exclusion, or doesn’t impose an income tax.

The measure does not apply to:

• Professional athletes or members of professional athletic teams,

• Professional entertainers who perform services in the performing arts,

• An individual of prominence who performs services for compensation on a per-event basis,

• An individual defined as a “key employee” by the Internal Revenue Code.

The bill makes a conforming change to ensure that nonresident taxpayers whose only income is excluded by the bill need not file a return; however, the Franchise Tax Board (FTB) may require this set of nonresident taxpayers to file informational returns. SB 500 also makes technical, clarifying, and conforming changes, and defines many of its terms.

The measure similarly absolves employers of withholding requirements for its employees whose income is excluded by the bill. 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:

• 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

• Is used by the employer to allocate the employee’s wages between all taxing jurisdictions.

Additionally, 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. \

State Revenue Impact

According to FTB, SB 500 results in revenue losses of $200,000 annually.

Comments

1. Purpose of the bill. 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, the measure 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.

2. Paying Dues. When dissenting in Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927), Justice Oliver Wendell Holmes famously stated that “taxes are what we pay for civilized society,” a variation of which hangs above the entrance to Internal Revenue Service headquarters today. Reasonable disagreements will always exist regarding the level and cost of public services, but taxes are necessary to ensure that government can deliver on its side of the social contract. While SB 500 relieves a particularly acute burden on mobile employees and their employers, in so doing, it shifts the costs of public services off of nonresident employees who travel to California. These individuals benefit from transportation infrastructure, as well as an educated and healthy populace, among others, but SB 500 absolves these individuals from paying the costs of public services. The Committee may wish to consider the particular burden current law places on mobile employees and employers, and whether it’s sufficiently disproportionate to merit removing requirements to file returns and pay taxes placed upon other consumers of public services.

3. Ground up. 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 uses 30 days. Secondly, federal legislation would apply to all states, while SB 500 would only exclude 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 which implement MTC’s model ordinance, the less likely that Congress will supersede California’s tax law.

4. Wynning all the time. The United States Constitution, federal law enacted by Congress pursuant to the Commerce Clause, and case law, determine the limits on state taxing authority. While these limits haven’t changed significantly in recent years, the United States Supreme Court recently heard oral arguments in November, 2014, regarding a case that may cause a metaphorical earthquake in the tax world in Maryland Comptroller of the Treasury v. Wynne. A decision on the case is expected in June. In 2006, Brian and Karen Wynne held a stake in a multistate business headquartered in Maryland, and about half of the Wynnes’ income that year came from out-of-state earnings. While Maryland allows a credit for taxes paid to other states, it doesn’t allow a similar credit against the part of its income tax that’s allocated to local agencies. The Wynnes claimed a credit against their Maryland income tax for taxes paid to other states, but the Comptroller disallowed the credit against the local share. The Wynnes filed suit, claiming that not allowing the credit was double taxation, and that the dormant commerce clause prevents states from taxing its residents on their non-state income, an unfair burden on interstate commerce. Maryland counters that states can tax its residents on all income regardless of source to pay for public services. While the Court’s decision may only apply to this specific case, experts have cautioned that the Court could use the case to apply the dormant commerce clause to limit all states from taxing its residents on income from outside the state, which would result in significant revenue losses to California.

5. Related legislation. Last year, the Committee approved SB 560 (Anderson), which enacted sales tax exemptions and income tax exclusions for firms that lack taxable nexus in California, but gain it when providing disaster relief in the state. The Senate Committee on Appropriations held the measure on its suspense file.

Support and Opposition

(4/9/15)

Support: California Taxpayers Association.

Opposition: Unknown.

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