[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
MOBILE WORKFORCE STATE INCOME TAX FAIRNESS AND SIMPLIFICATION ACT OF
2007
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
H.R. 3359
__________
NOVEMBER 1, 2007
__________
Serial No. 110-143
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
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Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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NOVEMBER 1, 2007
Page
THE BILL
H.R. 3359, the ``Mobile Workforce State Income Tax Fairness and
Simplification Act of 2007''................................... 3
OPENING STATEMENTS
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 8
The Honorable Hank Johnson, a Representative in Congress from the
State of Georgia, and Member, Subcommittee on Commercial and
Administrative Law............................................. 9
WITNESSES
Mr. Douglas L. Lindholm, President and Executive Director,
Council on State Taxation, Washington, DC
Oral Testimony................................................. 12
Prepared Statement............................................. 14
Ms. Dee Nelson, Payroll Manager, Alutiiq, LLC and Subsidiaries,
Anchorage, AK, on behalf of the American Payroll Association
Oral Testimony................................................. 29
Prepared Statement............................................. 31
Mr. Harley T. Duncan, Executive Director, Federation of Tax
Administrators, Washington, DC
Oral Testimony................................................. 55
Prepared Statement............................................. 57
Mr. Walter Hellerstein, Francis Shackelford Distinguished
Professor of Taxation Law, University of Georgia School of Law,
Athens, GA
Oral Testimony................................................. 71
Prepared Statement............................................. 73
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 8
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 9
APPENDIX
Material Submitted for the Hearing Record
Answers to Post-Hearing Questions from Douglas L. Lindholm,
President and Executive Director, Council on State Taxation,
Washington, DC................................................. 92
Answers to Post-Hearing Questions from Dee Nelson, Payroll
Manager, Alutiiq, LLC and Subsidiaries, Anchorage, AK, on
behalf of the American Payroll Association..................... 99
Answers to Post-Hearing Questions from Harley T. Duncan,
Executive Director, Federation of Tax Administrators,
Washington, DC................................................. 105
Answers to Post-Hearing Questions from Walter Hellerstein,
Francis Shackelford Distinguished Professor of Taxation Law,
University of Georgia School of Law, Athens, GA................ 108
Prepared Statement of the American Institute of Certified Public
Accountants.................................................... 112
Prepared Statement of Edward A. Zelinsky, Morris and Annie
Trachman Professor of Law, Benjamin N. Cardozo School of Law,
Yeshiva University............................................. 113
Prepared Statement of Nicole Belson Goluboff, Esquire............ 116
Letter from various employers in support of H.R. 3359............ 127
Letter from Kristina Rasmussen, Director of Government Affairs,
Nation Taxpayers Union in support of H.R. 3359................. 129
MOBILE WORKFORCE STATE INCOME TAX FAIRNESS AND SIMPLIFICATION ACT OF
2007
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THURSDAY, NOVEMBER 1, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 12:12 p.m., in
room 2237, Rayburn House Office Building, the Honorable Linda
Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Johnson, Watt, Cannon and
Jordan.
Staff present: Michone Johnson, Majority Chief Counsel;
Norberto Salinas, Majority Counsel; Stewart Jefferies, Minority
Counsel; and Adam Russell, Majority Professional Staff Member.
Ms. Sanchez. I would bang the gavel, but I don't have one
with me this morning, or this afternoon, I should say. But I am
going to call the hearing of the Committee on the Judiciary,
Subcommittee on Commercial and Administrative Law to order. And
I am going to recognize myself for a short statement.
Our workforce has increasingly become mobile. Some
employees travel and work in several States throughout the
year, while others live in one State but work in another. When
it comes time to complete their income tax returns, many
employees must file several returns because each State has the
authority to tax all the income earned within its borders and
all the income of the residents wherever the income is earned.
While employees are responsible for filing State income tax
returns, their employers are duty bound to withhold State
income taxes for their employees. Therefore, both employees and
employers must know the different thresholds for each State in
which the company operates.
These varying thresholds have raised concerns of employee
tax liability and employer State income tax withholding
compliance during this period of improved corporate
transparency. To remedy this confusing system, my colleagues,
Congressman Johnson and Ranking Member Cannon introduced H.R.
3359, which aims to establish a uniform national threshold of
60 work days within a calendar year before a State may tax
certain nonresidents.
Today's hearing serves a dual purpose. First, this hearing
will provide us with an opportunity to learn more about State
taxation of nonresidents, specifically the differing thresholds
States maintain and how they affect employees, employers and
State and local revenues. And second, the testimony provided
today will help us determine what role Congress has in this
matter, and whether H.R. 3359 addresses the concerns of
employee liability and employer withholding requirements for
nonresidents, while protecting the interests of State and local
governments to tax the income earned within their boundaries.
Accordingly, I very much look forward to today's hearing
and the testimony of our witnesses. And at this time I would
like to recognize my colleague, Mr. Cannon, the distinguished
Ranking Member of the Subcommittee and co-author of the bill
that we are examining today for his opening remarks.
[The bill, H.R. 3359, follows]:
Mr. Cannon. Thank you, Madam Chair. And I apologize. I am
going to have to be leaving the hearing virtually immediately.
We have a bill on the floor that would save us from a 19th
century piece of legislation. I worry that somebody will want
to save us from an 18th century Constitution at some point in
time. So I need to go over and do an amendment there.
And I apologize in advance to our distinguished panel and
appreciate them being here. This, of course, is legislation
that I introduced last year. And I wanted to thank Mr. Johnson
for introducing it on behalf of the majority this time.
This is good legislation. It creates some bright lines and
significantly facilitates the nature of what we are doing, what
is actually happening in America, that some States just can't
keep their hands off.
And so, with that, Madam Chair, I would actually like to
submit my statement for the record.
Ms. Sanchez. Without objection, so ordered.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Ranking Member, Subcommittee on
Commercial and Administrative Law
In today's increasingly mobile workplace, employers and employees
face numerous challenges in determining tax liability, particularly in
instances when employers send their employees into another state to
work for a short period of time.
Of the 41 states that have a personal income tax, 24 have no
minimum threshold for employer withholding requirements. That is,
employers and employees are liable for that state's taxes the moment an
employee sets foot in the state to do work. Six states have exemptions
for employer filing requirements that are determined by the number of
days that an employee works in the state. Those thresholds range from a
minimum of 10 days in Maine to 60 days in Arizona and Hawaii.
Another 11 states have exemptions based on the amount of income
that an employee earns in a particular state. Those income thresholds
range from a minimum of $300 in any calendar quarter in Ohio to $7,000
in Virginia. According to the Council on State Taxation (COST),
represented here by Mr. Doug Lindholm, the point at which tax liability
attaches to an individual is usually, but not always, the same as when
a company's withholding requirement kicks in.
This patchwork of state laws creates significant administrative
headaches for both companies and their employees. Under Sarbanes-Oxley,
a company must certify that it is compliance with all state and local
laws, including tax laws. With so many variations on the state
withholding laws, employers argue that it is impossible to be fully in
compliance with Sarbanes-Oxley.
All four of the witnesses today recognize that there is a problem
here. That is a good start. Obviously the state taxing authorities, as
represented by Mr. Harley Duncan, have their concerns about this
legislation, which is to be expected. But I am heartened to see that
they are willing to talk about ways to fix the problem.
We are all concerned about federalism on this committee and on the
ability of states to control activities within the state's borders.
That said, this Subcommittee, this Committee, and this Congress have
also recognized that there are times when the country's needs outweigh
the needs of any individual state. Such was the case with the recently
enacted Internet Tax Freedom Act Amendments Act, which was signed by
the President yesterday.
In addition to Mr. Duncan and Mr. Lindholm, I want to thank our
other witnesses here today, particularly Ms. Nelson, who flew in from
Alaska to give us her perspective on the burdens that the current
situation places on employers and employees. I also want to thank
Professor Hellerstein for being here; he has testified before this
Subcommittee in previous Congresses and his knowledge of the Commerce
Clause as it relates to state taxation is invaluable.
Finally, I am thankful that Representative Johnson has introduced
H.R. 3359, the ``Mobile Workforce State Income Tax Fairness and
Simplification Act of 2007.'' I am a co-sponsor of that legislation and
was a sponsor of a similar bill, H.R. 6167, in the last Congress. H.R.
3359 is beginning to garner more co-sponsors, and I am hopeful that
this hearing will raise awareness of this issue and begin to get the
ball rolling towards a legislative solution.
American companies and American workers deserve no less.
I look forward to hearing from our witnesses.
Mr. Cannon. And in addition to that, I have a document, a
statement by the AICPA, the American Institute of Certified
Public Accountants. I would ask unanimous consent that we can
submit that to the record.
Ms. Sanchez. Without objection, so ordered.
[The information referred to is available in the Appendix.]
Mr. Cannon. Thank you, Madam Chair. And I yield back.
Ms. Sanchez. I thank the gentleman for his statement. I
also would like to enter into the record a statement from Mr.
Conyers who could not join us today. Without objection, it will
be entered into the record.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Today we hold a legislative hearing on H.R. 3359, a bill introduced
by two distinguished members of this Subcommittee, Congressman Hank
Johnson and Ranking Member Chris Cannon. This legislation attempts to
impose a uniform national standard for when employees are required to
pay state income taxes to those states in which they work but do not
reside. Some concerns have been raised that some employees who work in
several states throughout the year have difficulty knowing in which
states they must file an income tax return and that some employers also
experience the same challenges when withholding deductions for their
employees. These concerns apparently exist because the states have
different standards by which they begin to tax non-resident employees.
Although this legislation seems to address those concerns, I worry
about Congress treading upon state sovereignty. My state of Michigan
has already addressed some of the concerns some of you will discuss
this afternoon by entering into reciprocity agreements with surrounding
states. I would hope that the states can resolve these concerns first,
and if they cannot, we can determine whether Congress should step in
and strike a balanced piece of legislation.
I have concerns about how H.R. 3359 may impact Michigan and other
states. According to an attachment to Mr. Lindholm's testimony, this
legislation will result in an estimated revenue loss for Michigan, a
state which is experiencing severe budgetary problems. Other states,
especially California, Illinois, and New York, will stand to lose tens
of millions of dollars in revenues if H.R. 3359 passes without any
changes. We should be careful not to cause more revenue losses for
states. Remember that the power to tax is the power to govern, and if
states cannot tax the income earned within their states, how will they
afford to provide needed services to those within their states. I
understand that the Federation of Tax Administrators opposes H.R. 3359
as written, and I look forward to hearing their testimony this
afternoon on how this bill can be improved so that we can pass a
balanced bill.
Ms. Sanchez. And at this time, I would like to recognize
Mr. Johnson for his opening statement.
Mr. Johnson. Thank you, Madam Chairwoman, for holding this
important hearing that affects businesses large and small.
Today if an Atlanta-based employee of a Chicago company travels
to headquarters on business once a year, that employee would be
subject to Illinois tax, even if his annual visit only lasts 1
day.
But if he travels to Maine, his trip would be subject to
tax only if his trip lasts for 10 days. And if he traveled to a
weekend conference in Virginia, withholding would occur if his
wages were above his personal exemptions and standard
deduction, unless the employee elected his filing threshold.
These varying thresholds within the 41 States that have a
personal income tax have their own different set of standards
for liability and enforcement. This inconsistency between
statute and practice has the effect of placing tremendous
compliance burdens on businesses and employees.
With the passage of the Sarbanes-Oxley Act employers are
spending a tremendous amount of time and resources to fully
comply with tax laws and withholding regulations. Under section
404 of the act, auditors of public companies must attest under
penalty of perjury that they have reviewed the corporation's
systems and that the company is in full compliance with all of
its tax obligations.
With 41 different tax laws, however, and with various de
minimis rules, companies are facing difficulties complying with
these rules and are expending a significant amount of resources
to comply. That is why I, along with my colleague, Congressman
Chris Cannon, introduced H.R. 3359, the ``Mobile Workforce
State Income Tax Fairness and Simplification Act of 2007.''
This is an act that Congressman Cannon has been working on even
prior to the 110th Congress, which is my first session of
Congress, of course.
So I appreciate your work and effort in this regard in the
109th, Mr. Cannon.
H.R. 3359 would establish uniform and administratable
rules, including appropriate de minimis rules, which would
ensure that the appropriate amount of income tax is paid to
jurisdictions without placing undue burdens on employees and
their employers. This legislation was not designed to usurp
State rights to tax. Rather, this bill was introduced in order
to aid companies to fully comply with applicable laws and
regulations, including State tax laws.
We are all aware of the problem. It is my hope that this
bill can serve as the impetus to a solution that will minimally
impact State revenues while assisting businesses as they comply
with complex tax laws.
Thank you. And I yield back my time.
Ms. Sanchez. I thank the gentleman for his opening
statement.
And without objection, other Members' opening statements
will be included in the record. Without objection, the Chair
will be authorized to declare a recess of the hearing at any
time.
I am now pleased to introduce the witnesses for today's
hearing. Our first witness is Douglas Lindholm. Mr. Lindholm is
president and executive director of the Council on State
Taxation, an organization dedicated to preserving and promoting
equitable and nondiscriminatory State taxation of multi-
jurisdictional entities.
He also served for 3 years as legislative director for
COST. Prior to taking the helm at COST, Mr. Lindholm served as
counsel for State tax policy for the General Electric Company
in Washington, D.C., where he managed and coordinated State tax
policy initiatives before State legislators and State
administrative agencies.
We want to welcome you here.
He has written numerous articles on Federal, State, and
local tax issues in a wide variety of publications, testified
frequently before State legislatures and Congress on State tax
issues and is a frequent speaker at State tax and State
government affairs conferences and seminars.
Our second witness is Dee Nelson. Ms. Nelson has over 17
years of experience as a payroll professional, an active member
of the American Payroll Association since 1998. She chairs the
automated clearinghouse committee nominations and election
committee and the global affairs task force as well as the
hotline referral service. She also teaches courses for APA's
fundamental payroll certification and certified payroll
professional designations.
She received a meritorious service award in 2003 and the
special recognition award in 2007. At the State level, she has
served as president of both the northern life and, I know this
is going to be a tough one, Matanuska-Susitna Valley--is that
pretty close--chapters. Ms. Nelson currently works as payroll
manager for Alutiiq LLC, a company that provides government
contracting service.
Welcome to you.
Our third witness is Harley Duncan. Mr. Duncan is the
executive director of the Federation of Tax Administrators and
the chief executive officer of the National Association of
State Tax Administration Agencies. FTA represents the revenue
departments of each of the 50 States plus D.C. and New York
City and carries out a program of research, information
sharing, training, inter-governmental coordination, and Federal
representation.
Prior to joining the FTA, Mr. Duncan served as secretary of
the Kansas Department of Revenue and was responsible for
administration of major State taxes as well as motor vehicle
registration, drivers licensing, alcoholic beverage control,
and property tax oversight. He is a frequent lecturer and
speaker at national and regional tax conferences and meetings
and has written several tax articles. Mr. Duncan regularly
testifies before congressional Committees on matters affecting
State and local taxation.
We want to welcome you this afternoon as well.
Our final witness is Walter Hellerstein. Professor
Hellerstein joined the University of Georgia's School of Law
faculty in 1978 and was named Francis Shackelford distinguished
professor of taxation law in 1999. He teaches in the area of
State and local taxation, international taxation, and Federal
income taxation.
Professor Hellerstein is co-author with his late father of
both the leading treaties on State taxation, State Taxation
Volumes I and II, which probably gave me nightmares as a law
student, and the leading casebook on State and local taxation,
State and Local Taxation. In 1992 Hellerstein received the
multi-state tax commission's 25th anniversary award for
outstanding contributions to multi-state taxation.
I want to thank all of you for your willingness to
participate in today's hearing. Without objection, your written
statements will be placed into the record. And we are going to
ask that you limit your oral testimony to 5 minutes.
You will note that we have a lighting system that we try to
keep on top of, let us be honest, but don't always. When you
begin your testimony, you will get a green light. After 4
minutes, the light will turn yellow.
It serves as a warning that you have one minute left to
give your testimony. When it turns red, that means your time
has expired, and we would appreciate it if you could just
conclude your final thoughts so that we can move on to the next
witness.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
And so, at this time, I would invite Mr. Lindholm to please
proceed with his testimony.
TESTIMONY OF DOUGLAS L. LINDHOLM, PRESIDENT AND EXECUTIVE
DIRECTOR, COUNCIL ON STATE TAXATION, WASHINGTON, DC
Mr. Lindholm. Thank you, Madam Chairwoman and Ranking
Member Cannon and Congressman Johnson. I very much appreciate
the opportunity to be here and the fact that you are holding
this hearing. As indicated, my name is Doug Lindholm. I am
president and executive director of the Council on State
Taxation. Our membership consists of almost 600 multi-state
businesses engaged in both interstate and international
commerce.
I realize that time is somewhat short today, so let me just
make three points regarding the bill before us today, House
bill 3359. First of all, as opening statements attest, this is
indeed a widespread problem that we feel Congress is best
suited to resolve. Secondly, the bill contains a simple and
practical solution to that problem. Third, we feel that
solution very effectively balances State sovereignty issues
with Congress' interest in resolving burdens on interstate
commerce.
Now, let me elaborate briefly on some of those. First of
all, with regard to how widespread the problem is, one of the
greatest strengths of our economy is that we have an
increasingly nimble and mobile workforce, national workforce.
Those of you that have spent any time in an airport recently
realize that thousands of employees are sent by their employers
on an almost daily basis to nonresident States to work in those
States. Most of those trips are temporary in nature.
Typically they will travel out, conduct some business, and
then fly back to their State of residence. Unfortunately, the
41 States that impose a personal income tax have widely
diverging rules for determining two things: one, when the
liability for that employee attaches and two, when the
withholding obligation for that employee's employer attaches.
Some States attach a liability the moment you set foot in
the State. Some States have a days threshold. Arizona and
Hawaii, to name two, have a 60-day threshold similar to what we
are proposing. Others have a dollar threshold, an earnings
threshold. And still others have a combination of a days and a
dollar threshold. And there is an attachment to my testimony
that does a pretty good job of laying this out in a map.
A key point I would like to make is that this is not just
an issue for large corporations. It impacts small businesses,
nonprofits, State and local governments, hospitals, churches,
universities, anyone who has employees that travel regularly
for work.
Point two, we think this is a simple and practical
solution. And essentially what it does is it creates a Federal
threshold of 60 days for temporary work assignments in
nonresident States. And another point is that for anything up
to 60 days the employee would remain taxable in their State of
residence.
Now, I am sure we will get the question, why 60 days? We
conducted a fairly extensive survey of our membership, our
member companies. And 60 days came back as the figure that our
employers felt resolved most of the problems.
First of all, that time period covers the vast majority of
employee travel. Secondly, if you start shortening that time
period, there is a--it becomes more and more likely that
employees will inadvertently or unwittingly back into the State
rules.
Secondly, if you start to shorten that time period, it
increases the possibility that there will be arguments over
what constitutes a day or what are the duties that they are
performing for employment in a day. The 60 days allows that
company to focus on that small set of employees that actually
travel for long-term work assignments.
The second question I would like to address is that why no
dollar threshold. I would like to point out that we have been
working with the State administrators on this issue for 2
years, or discussing it with them for 2 years. And we know that
this is a concern for States. But after considering this dollar
threshold, we ultimately rejected it because it would actually
make the compliance burden greater in many cases than it is
now.
Employers would be forced to track every employee on a
daily basis, compare that with sensitive payroll data, and then
make allocations to the States where they travel. And all this
before the employee has filed a single tax return. So although
we are sympathetic to State concerns, we feel that that really
would create a greater compliance burden.
A third point, we really do think that this solution
strikes the proper balance between individual State concerns
over sovereignty and revenue and national concerns of Congress
over reducing burdens on interstate commerce. We have got a
fiscal note attached, and we feel that the impact on States is
negligible. For all 50 States, the net reduction in personal
income tax revenues is estimated to be 100 of 1 percent, .01
percent.
And again, I want to point out that we had been working on
this issue with tax administrators for several years. We very
much appreciate their constructive engagement. But this is an
issue that if left unresolved will only grow in scope and
complexity. Accordingly, we very much urge your support, thank
you for your support. And I would be happy to answer any
questions.
[The prepared statement of Mr. Lindholm follows:]
Prepared Statement of Douglas L. Lindholm
Ms. Sanchez. Thank you. We appreciate your testimony.
Ms. Nelson, you may begin your testimony.
TESTIMONY OF DEE NELSON, PAYROLL MANAGER, ALUTIIQ, LLC AND
SUBSIDIARIES, ANCHORAGE, AK, ON BEHALF OF THE AMERICAN PAYROLL
ASSOCIATION
Ms. Nelson. My name is Dee Nelson. And I am speaking today
on behalf of the American Payroll Association in favor of H.R.
3359. The American Payroll Association is a nonprofit payroll
association with more than 23,000 members. Most of our members
are the payroll managers for their employers. And some of our
members work for payroll service providers who in turn process
the payrolls of another 1.5 million employers.
I have been a payroll professional for 17 years, of which
10 of the last have been with a multi-state company. I have
been in this environment, so I know firsthand the problems that
employers and employees face in trying to manage their way
through multi-state tax requirements.
Even in the case of an employee who resides in one State
and works throughout the year in another State, State and local
tax withholding and reporting can be very complicated. The
employer has to verify the employee's State of residence, check
whether the two States have a reciprocity agreement, analyze
the tax laws of both States, and likely withhold tax for both
States and prepare a form W-2 for both States.
Of the 41 States with income tax withhold, most tax all
wages earned within their borders by residents of other States.
States have widely varying de minimis amounts, but need to be
exceeded before withholding is required.
Just as the United States taxes its citizens and residents
on their worldwide income, so do the States impose a tax on
their residents who earn income outside their borders. If the
employer has a business connection within the employee's State
of residence, it generally must withhold tax for the State of
residence in addition to the State in which the services are
performed. Besides the withholding requirement, each State also
has its own wage reporting requirement.
I offer this as background on how much more complicated it
becomes when an employee has a temporary assignment to another
State. Whenever an employer sends an employee to a worksite
outside of the State in which the employee normally performs
services, the requirements that are then imposed on the
employer, such as to register for the withholding account and
to withhold tax, creates a very burdensome process.
As a payroll professional it is my duty to ensure that
taxation is happening properly for the State in which the
employee is working, as well as the State in which the employee
claims residency. What I do for an employee who is a California
resident who temporarily goes to work in New York is completely
different from what I do for the same employee if he or she
goes to work in New Jersey or Georgia.
If I send an employee who is an Oregon resident to
temporarily work in New York, New Jersey, or Georgia, I will be
required to handle it entirely differently than I did for the
California resident. The current process is not only
burdensome, but it is costly to both employees and employers.
As a multi-state employer for the company I work for, not
only are we required to withhold taxes for each of the States
in which our employees may temporarily work, but we also have
the responsibility to register our business in each of the
States in which we are required to pay the tax. The
registration process for businesses can be just as burdensome
as trying to manage the tax itself.
This process is very time consuming and utilizes many of my
payroll department staff resources for a small group of our
employees. Our employees are also burdened. Each employee has
to file a State personal income tax return for each State for
which tax was taken from their pay. For some of our employees,
this can mean up to eight State tax returns in addition to the
one for their home State.
Most of the States have thresholds of income below which no
income tax is due. Payroll systems have no way of detecting the
length in which an employee will be in any State, so State
withholding is taken even for someone who spends only 1 week in
that State out of the entire year. In such a situation, the
employee, of course, has to file a State personal income tax
return and will likely get a refund on all of that withholding.
So, because there is no standard time period before
withholding is required, employers have to withhold tax, report
wages, employees must file income tax returns, and in cases
like these, States have to process wage reports and income tax
returns of individuals for whom they will refund all the taxes
withheld. That is a lot of time, effort, and burden with no
positive return for the employer, the employee, or the State.
At my company, to assist our employees and to ensure we can
keep their positions filled, we pay for preparation of their
additional tax returns. This costs our company approximately
$50,000 annually.
I have told you about the processes and burdens at my
company. However, it certainly can be said that due to the
extreme complexity of the varying current State tax
regulations, there are many companies that are not withholding
properly due to ignorance or due to lack of systems, personnel,
time, money, or other resources to uphold the complex rules.
More employers will comply with a law that is uniform
across all States and localities and that is federally
supported, versus the current patchwork of laws of which an
employer might not even be aware. The American Payroll
Association and its 23,000 members strongly recommend that this
legislation be considered and enacted.
And I thank you for your time you have allowed me today.
And I hope to see this legislation passed.
[The prepared statement of Ms. Nelson follows:]
Prepared Statement of Dee Nelson
Ms. Sanchez. Thank you, Ms. Nelson. We appreciate your
testimony.
At this time, I would invite Mr. Duncan to give his
testimony.
TESTIMONY OF HARLEY T. DUNCAN, EXECUTIVE DIRECTOR, FEDERATION
OF TAX ADMINISTRATORS, WASHINGTON, DC
Mr. Duncan. Madam Chairwoman, Members of the Committee, my
name is Harley Duncan. I am the executive director of the
Federation of Tax Administrators. I appreciate the opportunity
to appear before you on H.R. 3359 to present the views of State
tax administrators.
The federation is an association of the principal tax
administration agencies in each of the 50 States, D.C., New
York City, and Puerto Rico. Our policy on this matter is
attached to my testimony. It was adopted by our membership in
Chicago, and amplified last week by our board of trustees.
As a preliminary matter, while I will be speaking to States
because that is who I represent is States, the issues involved
in this bill and I think the comments I make also apply to a
fair number of local governments that apply and impose income
taxes, particularly cities of St. Louis, Kansas City,
Philadelphia, and a number in Ohio and Kentucky as well.
The federation is opposed to H.R. 3359 as that bill has
been introduced. We have three major policy objections to the
issue.
The first is that it represents a substantial intrusion
into State tax sovereignty and authority, the authority of
States to design a tax system that meets their needs within the
contours of the Constitution and to impose tax on economic
activity that occurs within its borders. If enacted as
introduced, it would leave States exposed to a situation in
which an individuals could make extensive use of the
marketplace in the State without making a contribution in terms
of income tax paid.
Second, it represents a very substantial and radical
departure from current State tax policy with respect to income
taxes. Namely, States employ the source tax principle as does
the Federal Government. And income is generally taxed where the
services giving rise to the income are performed. This bill
with the 60-day threshold will substantially turn that on its
head for any number of employees and individual and convert the
country to essentially a residency-based system.
There are States that use the residency-based. There are
States that have reciprocal agreements with one another. But
they have chosen to do so voluntarily, generally, where the
economies of those States match up and the tax systems of those
match up. This would be a mandated reciprocal arrangement by
the Congress.
And finally, we believe that H.R. 3359 goes well beyond
where the Congress has been in the area of regulating
individual income taxation in the past. If you look across the
various enactments, they are generally of two types. The first
is where there is a substantial Federal interest involving
either Federal employees, members of the military service,
employees on Federal installations.
The second is where the workers are regularly engaged in
interstate commerce: the railway workers, the airline workers,
the motor carriers where it is their job to travel from State
to State. Those are really the only two areas where the
Congress has enacted bills in the individual income tax area.
To step in to the extent that this one does, we think, is a
radical departure.
This is not to say that we have our head in the sand or are
unmindful of the burdens that are imposed by the current
system. Complying with the current system where there is no de
minimis threshold on either liability or withholding is indeed
difficult and probably impractical. That is why a number of
States, several States have moved to address the issue on their
own. That is why we have worked with the Council on State
Taxation to try to fashion legislation that could be workable.
If you desire to move forward in this, we have raised a
number of issues in my written remarks that we would ask that
you address and we would be willing to work with you. Two most
important ones are first, the 60-day rule.
The 60-day rule, we believe, goes well beyond what is
necessary to deal with the burden issue. If in 60 days you
can't figure out where you are going to be, then I think we
have some more issues than just withholding.
You can deal with it in far less than 60. Sixty days gives
a person a quarter of a year of operating within a State
without owing a tax liability. And we think it goes well beyond
what is necessary.
The second issue that we have raised for you is that our
policy provides that if a threshold in a bill such as this is
enacted that it should have a dollar component as well. And we
would suggest that the withholding can be triggered off of
days, but there needs to be a backstop on if the employee's
income exceeds some threshold in a State, he or she has a
liability to that State.
Otherwise, State revenue systems are exposed. And we
believe that the days only threshold leaves the systems too
exposed. We believe a days and a dollar can be done in a
fashion that substantially alleviates the burden and doesn't
expose State systems to the risk that they would under the bill
that is introduced.
Thanks very much. We look forward to working with you in
the future.
[The prepared statement of Mr. Duncan follows:]
Prepared Statement of Harley T. Duncan
Ms. Sanchez. Thank you, Mr. Duncan. I appreciate your
testimony.
And finally, I would invite our final witness, Mr.
Hellerstein, to please begin his testimony.
TESTIMONY OF WALTER HELLERSTEIN, FRANCIS SHACKELFORD
DISTINGUISHED PROFESSOR OF TAXATION LAW, UNIVERSITY OF GEORGIA
SCHOOL OF LAW, ATHENS, GA
Mr. Hellerstein. Thank you very much, Madam Chairwoman. I
am very grateful for the opportunity to testify before this
Subcommittee and to have the special privilege of testifying
before a fellow Georgian, Congressman Johnson.
My testimony addresses three specific questions, the first
two of which I think should not be controversial at all. First,
does Congress have the constitutional authority to enact H.R.
3359? Second, is there historical precedent for Congress
enacting legislation analogous to H.R. 3359? And finally, the
more controversial question, is this an appropriate exercise of
congressional power?
Question one, I think it is clear the Congress has the
authority under the commerce clause to enact H.R. 3359. The
case law in this area is clear that Congress has extremely
broad powers to enact legislation that affects interstate
commerce. Indeed, when the court has dealt with or addressed
issues involving State taxation in particular, it has stated in
very broad terms that Congress essentially can do what it wants
in this area.
Just to read you one quote, ``It is clear that the
legislative power granted by Congress--to Congress by the
commerce clause would amply justify the enactment of
legislation requiring all States to adhere to uniform rules for
the division of income.'' So presumably they can also create
uniform rules for the withholding of income or when tax
liability occurs. I think that really should be a
noncontroversial issue.
The second question is whether there is precedent for this
kind of legislation. Congress has never enacted really broad-
based legislation regulating State taxation. There is no
uniform apportionment formula. There are no broad-based rules
that limit the States in what they can do.
But there is a lot of precedent, really, I think, quite
analogous to H.R. 3359, for Congress enacting specific
legislation targeted at specific problems. Indeed, Harley
Duncan just referred to one type of legislation, taxes on
employees engaged in interstate transportation. They are quite
analogous, I think, although certainly a narrower target, to
dealing with the problems of income taxation of employees
engaged in water transportation, air transportation, motor
carrier transportation.
Congress has also acted to restrict the power of States to
tax nonresidents, retirement income. And I have this whole
litany in my testimony, and I don't want to use all my time up
on this list. But just to go through some of the areas,
Congress has limited States in their power to tax interstate
businesses when they sell tangible property and do no more than
solicit in the State. Congress has limited power, limited the
States' power to tax--to impose discriminatory taxes on
railroads, on motor carriers, and on air carriers.
Congress has limited the States' power to impose taxes that
affect a pension plan under the Employees Retirement Income
Security Act. So it seems to me this is something for which
there is really quite substantial precedent. Just 2 days ago by
voice vote, Congress unanimously re-extended the Internet Tax
Freedom Act, another example of targeted legislation.
Finally, and this is a more--probably the only
controversial question here is--is this an appropriate exercise
of congressional power. And in my opinion, I think it is.
First, I really do wish to make it clear that I believe the
States have a legitimate interest in assuring that workers who
earn income in the State pay their fair share of the State tax
burdens for the benefits and protections that the State
provides to them. But this legitimate interest has to be
balanced against the burdens that are imposed on multi-state
enterprises and on the conduct of interstate commerce by
uncertain, inconsistent, and unreasonable withholding
obligations imposed by the State.
Yes, I think it is telling that the States themselves
recognizing this problem have to some extent tried to alleviate
it through their own voluntary reciprocal exemption agreements.
As Bill Gates would say, a known problem.
In the end, although there may well be room for additional
fine tuning of the statutory language to assure that the right
balance is struck between the States' legitimate interest in
revenue raising and the Nation's interest in preserving our
national common market, I believe that a targeted response to
the specific problem reflected in H.R. 3359 is an appropriate
exercise of congressional commerce power. Thank you.
[The prepared statement of Mr. Hellerstein follows:]
Prepared Statement of Walter Hellerstein
Ms. Sanchez. Thank you very much for your testimony.
We are now going to begin our questioning. And I will begin
by recognizing myself for 5 minutes.
Mr. Lindholm, in your written testimony for today's hearing
you argue that a dollar amount threshold as opposed to a days
worked threshold like the one in H.R. 3359 would be more
burdensome because each employee would have to be tracked on a
daily basis. And it seems that in either a days worked or a
dollar amount threshold the employer is going to need to be
tracking the employee anyway. So I am interested in knowing why
you think that one is a superior method than the other.
Mr. Lindholm. Well, two points, Madam Chairwoman. Let me
address first with respect to the 60 days. Most travel is
temporary in nature. And most employees don't travel anywhere
close to the 60 days. So they automatically would not be within
that pool of employees that an employer would track.
Secondly, with respect to the dollar threshold itself, it
really does require not just a tracking of their whereabouts,
but a tracking of very sensitive payroll data within the
company. And it increases the exposure of that payroll data
among employees of the company, which obviously is a very
sensitive thing.
And, you know, I think the FTA has proposed a combination
dollar-day with a dollar backstop. The other issue there is
that it would, in effect, separate the liability question,
could make that rule distinct from the withholding obligation.
And when you have got those two operating under separate rules,
it increases the complexity greatly.
Ms. Sanchez. But how would you respond to Mr. Duncan's
concern that 60 days is quite a long time before triggering the
liability?
Mr. Lindholm. You know, Congress has enacted several, as
Professor Hellerstein pointed out, several protective or
analogous pieces of legislation. Airline employees--it is their
resident State or the State where they earn 50 percent or more
of their pay. For motor carrier employees, rail carrier
employees, Members of Congress, they, in effect--Congress has,
in effect, enacted a 365-day threshold.
And, you know, the--from our standpoint, a number of States
also have enacted reciprocal agreements, which are, in effect,
a 365-day threshold. So in our sense, the 60-day pretty much
draws a very effective line in the sand for those traveling
employees.
Ms. Sanchez. Mr. Duncan, I want to give you an opportunity
to respond to some of these complexities. Now, you are
advocating a clarification of the definition of what a day
worked is. Can you talk about that?
Mr. Duncan. Yes, that is right. In our testimony, we have
suggested that the definition of day needs to be changed. As it
is contained in the bill--and I apologize I don't have a copy
in front of me. But it says a day is defined as a day in which
the employee performs more than 50 percent of the work duties
in a State.
To me, I don't know what that means. I don't know what
performing more than 50 percent of the work duties are. Is it
by time? Is it by value? Is it--I don't want to be flip, but
how hard it was? So we have suggested that it should be--a day
should be a day or any part of a day.
And remember we say that because that is the easiest thing
to count. That is the least controversial thing. And we are
only using it to determine whether the threshold is met. And
for that reason, we think the day or any part of a day is
workable.
That is the way a number of States are now. That is the way
Federal law with respect to the taxation of nonresident aliens
that are working in the State operates as well.
Ms. Sanchez. Thank you, Mr. Duncan.
Ms. Nelson, I am interested, since you are the expert on
payroll, under the 60-day threshold, if an employee hits the
60-day threshold late in the year, the employee's paycheck
would reflect withholding for the 60 days. For some employees
that could be a huge dent in their paycheck.
Although a lower threshold is a possibility and would seem
like less of a hardship on an employee once they hit that, what
are some of the things that a payroll department or company
could do to perhaps lessen the hardship of a 60-day trigger?
You know, could they spread those out, those withholdings out
over several paychecks? Do you have any thoughts on that?
Ms. Nelson. Well, I think just addressing some kind of
threshold across all States would first just ease my burden as
a payroll professional.
Ms. Sanchez. I understand.
Ms. Nelson. Yes, and so----
Ms. Sanchez. Maybe you could look at it from the
perspective it also keeps you employed.
Ms. Nelson. Yes, there is that. But because of DOL I have
plenty of those job securities.
So to answer your question, yes, we could find a way to,
you know, pass those payments off during, you know, each check
retrospectively for however many pay periods. I mean, there
would be ways to manage it.
Ms. Sanchez. You mean there are ways to help minimize that?
Okay.
Ms. Nelson. Yes.
Ms. Sanchez. My time has expired.
And at this time, I would invite Mr. Johnson for his 5
minutes of questions.
Mr. Johnson. Madam Chair, my friend from North Carolina has
an important engagement that he needs to attend to, so I would
yield my position and allow him to move in front of me, if that
is okay with the Chair.
Ms. Sanchez. Excellent. I think that is fine.
Mr. Watt, you are recognized for 5 minutes.
Mr. Watt. I thank the wonderful Chairperson of this
Subcommittee. And I thank my colleague from Georgia for
allowing me to go in front of him.
I think maybe before I ask a question I will confess that
our Chairperson who Chairs this Subcommittee may be now
understanding why I opted not to become the Chair of the
Subcommittee. It was the combination of Internet taxation. This
individual issue that we are having the hearing about today,
remote sales taxation, and collection of those remote sales,
and physical presence--those are about the four most difficult
taxation issues that are really out there. And so, I decided
that Chairing a Subcommittee on financial services and dealing
with predatory lending was actually easier than dealing with
this.
But I am delighted that the Chair is taking on these issues
because there needs to be more discussion about it. And she has
done a masterful job of passing the Internet taxation
moratorium. And I saw the Senate and everybody is now onboard
with that. So if she can pull that rabbit out of that hat for
Internet taxation, maybe she has got three more rabbits in the
hat. And if anybody can do it, I have confidence that my
Chair----
Ms. Sanchez. But no pressure, right, Mr. Watt?
Mr. Watt. No pressure, no pressure. But I am confident that
she can do it.
These are difficult issues. And as Ranking Member of the
Subcommittee for two or three or however many--it seemed like
forever, I got an appreciation of how difficult the issues are.
Let me ask Mr. Duncan first. One of the things that always
was told to me in the context of both this issue and the remote
sales issue was that there was a series of negotiations going
on and there might be some possibility that all the
stakeholders would find common ground and make this easier for
us. I think in the remote sales area, we even passed some kind
of threshold that said if a certain number of States passed a
model statute then the Federal Government would act.
Talk to me, Mr. Lindholm and Mr. Duncan, about the
impediments to you all getting together and working something
out that is mutually satisfactory. Because the States obviously
have a very serious interest in this issue, as do businesses
and employees. What is the status of those discussions? And are
you all just deluding us when you say these discussions are
going on and we are going to work this out at some point?
Mr. Duncan. I don't think we are trying to fool you. I
don't know anything about financial services, but maybe I could
learn so I could leave these issues sometime, too.
Mr. Watt. If you want to go over and tackle the massive
foreclosures that are going on, we will welcome you over there.
Mr. Duncan. No, thank you. As I indicated in our testimony,
we have been in conversations and discussions with the business
community about this. We have had a working group of State
people to make sure that we understand the bill and that we try
to get some real world experience from them.
In addition, I can guarantee you that our people understand
the burden issues and the difficulties of compliance. We have
not at this point had a board action from our organization that
says we are prepared to begin negotiating or at least, you
know, enter into something to resolve this issue with the
Council of State Taxation. I am to report back based on this
hearing and we will, I am certain, have further conversations
because our people do understand the burden issue and that it
needs to be addressed.
Mr. Watt. I know you want to respond. But let me just say I
applaud the Chair for taking on the issue. It seems to me that
the ramping up of this as an issue and the movement of
employees as much as they move kind of ramped up at the same
time that technology was ramping up. And one would hope that
there would be some technological answer to this that would
allow the movement.
I don't know that technology or the system--as you say in
one place in your testimony, Ms. Nelson, there is no system to
take care of this, the way it is being done now. But I don't
see any system, any payroll system to take care of it under the
60-day threshold, either. And that is not a knock on the 60-day
threshold.
I just think there are some real technical problems. And I
hope technology will make some advances at the same time that
movement makes advances to make this easier. I mean, it is just
a very, very difficult issue.
I don't envy you, Madam Chair. But I am going to yield back
my time to you and rely on you to pull those other three
rabbits out of the hat.
Ms. Sanchez. Thank you, Mr. Watt. And we appreciate your
participation in today's hearing.
Now I think it is appropriate that we hear from one of the
bill's authors and allow him to ask questions that he may have.
So, Mr. Johnson, you are recognized.
Mr. Johnson. Thank you, Madam Chair.
Mr. Duncan, you have indicated in your testimony or you
stated that complying with the current system is burdensome and
impractical for businesses. Is that a fair assessment?
Mr. Duncan. I think the way I framed it was that where
there is no de minimis standard in a State, where there isn't a
15-day or 20-day de minimis threshold and where liability and
withholding presumably would trigger on day one, I think we
would all say that is impractical.
Mr. Johnson. And we just have a multiplicity of rules now
among the States that make the entire effort to collect income
taxes from nonresidents, temporary workers impractical and
burdensome at this point, even for the tax administrators. Is
it not?
Mr. Duncan. There are certainly issues in terms of
collecting tax from nonresidents. First of all, you have to
have the information flows and reports so that you know who has
performed services, the income earned from the State. Then
there is the collection issues as well.
Mr. Johnson. Pretty much voluntary information and
collections that have to be forwarded to you by the businesses.
And it definitely can impact the amount of money that States
collect for income taxes due. Is that correct?
Mr. Duncan. Yes. I mean, there is--you know, what we would
like to have is the withholding, the voluntary remittances
withholding following up with the information reports. I think
it is not----
Mr. Johnson. It is difficult for businesses to comply, say
a small business, a number of small businesses. It is difficult
for them to understand what the rules are and then perhaps they
will not forward those payments in, if you will.
Mr. Duncan. Just two quick points. I think you are right,
that if we can make the rules clear and administerable,
compliance can improve, particularly in the small business
community. Second, there are a number of States with
significant enforcement programs in the nonresident area. But I
wouldn't argue your central point that if it is simpler and
clearer, compliance will improve. The question, of course, is
one of balance as to how to construct the threshold and where
that threshold ought to be.
Mr. Johnson. Let me ask this question. Has there been a
collective effort by the States to come up with uniform and
simple method for the collection for nonresidents?
Mr. Duncan. There has not been an effort that has gathered
the 41 States together to do it. We have areas where the States
share borders, share economies, have similar tax systems where
they have had reciprocity agreements. I think what----
Mr. Johnson. It would be ideal, would it not, that there
would be some national uniform standard that everyone could
stand easily and comply with?
Mr. Duncan. That would certainly make the task of
withholding knowing when one has an obligation simpler.
Mr. Johnson. But you have no objection to a Federal
solution to this problem? You just have a problem with the
substance of the solution that has been proposed. Is that a
fair assessment?
Mr. Duncan. The position of our group is that the bill as
introduced goes too far and that we are in a position to have
to oppose the bill as it has been introduced. We have tried to
lay out the issues as clearly as we can.
Mr. Johnson. Okay. I understand. So you really would like
to see a dollar threshold along with a threshold as far as
number of days?
Mr. Duncan. We believe that that can bring all the benefits
of the burden reduction and at the same time, minimize the risk
and exposure of States, yes, sir.
Mr. Johnson. Do you have any specifics on both of those
points? How many days would be suitable to tax administrators
and what dollar amount would be suitable?
Mr. Duncan. I am not in a position to be able to give those
to you today. We don't have those at this point. In part there
is a couple of moving parts here. There is a seesaw function to
it that if the days threshold is relatively high, then perhaps
the dollar threshold needs to be relatively lower or vice versa
because we are trying to achieve a balance and reduce risk and
exposure. And so, I think--I don't have a ready-made solution
to provide you today on that.
Mr. Johnson. Mr. Lindholm, would you care to weigh in on
that?
Mr. Lindholm. Yes, thank you, Congressman Johnson. First of
all to address the issue of our efforts to resolve some of our
differences, I very much appreciate the--you know, we have met
with Harley and his group several times to talk about this
issue. And I think we have a fundamental difference in
perspective in that I think the States' viewpoint is a
collective viewpoint of how this issue affects each
administrator of a specific State.
And that is rightly so. That is the job that they are hired
to do. That is the job that they are appointed to do in some
cases.
But I would submit that we should view this from the
perspective of how many more people would be in compliance. I
think there is a tendency to say from a State administrator's
perspective to look at this bill and say how many people are
paying now that would not be paying in our State because of
this change in the law. But if you look at this from a national
perspective, then you can point a finger to how many more
people would be able to comply with this law.
Secondly, if I could address Mr. Watt's question about the
technology, can we come up with technology to do this. Yes, it
is possible, but at great expense. And I think the question
that this Committee ought to address is although it is possible
whether it is sensible to force companies to do so when a
simple and practical solution is at hand that would prevent
that.
Ms. Sanchez. Mr. Johnson, your time has expired. But if you
have further questions, I don't think there would be objection
to some additional time.
Mr. Johnson. Thank you, Madam Chair.
Ms. Sanchez. I will recognize you for an additional 3
minutes of questions.
Mr. Johnson. Mr. Lindholm, would the Council on State
Taxation be opposed to the threshold requirement that--a
dollars feature as well as days? Is that something that you
oppose in principle, and why?
Mr. Lindholm. I think we would, Congressman. And I think
the difficulty there is that any time you have a dollar
threshold, you are forced to track, as I said, every employee
that conceivably could spend time there and not just for
those--for the day period, but for the--you know, everybody's
dollar amount if they exceed that threshold.
The second issue is that under their proposed solution,
there is a tendency to look at--it bifurcates the tax liability
with the--from the withholding obligation. And anytime you do
that, you have got employees that are potentially under-
withheld or over-withheld. And it complicates things
tremendously for employers trying to withhold for the proper
allocation of proper States.
Mr. Johnson. Isn't it a fact, by the way, that most
employees who have been--whose wages have been withheld to do
their work in other States--isn't it a fact that most of them
end up getting credits from that State because the amount of
tax and the amount of wages earned is below the amount
necessary for taxation?
Mr. Lindholm. That is precisely correct. And let us say I,
for example, travel to 10 States and happen to trigger whatever
the--either the wage threshold or the day threshold in those
States, I am then required to file a return in each of those
States and then file a credit against my return in the state of
Virginia. And again, all those 10 returns where I entered that
threshold would not be necessary, since I am getting a lot of
credit for that anyway.
It ends up being a wash between State-to-State, unless, of
course, there is a differentiation between the rates. But
effectively the 60-day threshold would allow the resident State
to continue withholding regardless of where they traveled,
unless it was clear that that employee was on a long-term
assignment and expected to be on a long-term assignment within
that State, within the nonresident State.
Mr. Johnson. Thank you.
Ms. Sanchez. Thank you, Mr. Johnson. And I think this has
been a very enlightening hearing trying to figure out how we
can balance the interests of State and local governments'
concerns about loss of revenue while eliminating some of the
complexities and not having a uniform national standard.
And it is an ongoing battle. While obviously there is not a
complete agreement among everyone, my hope is that they will be
able to incorporate some of the information that you have
shared with us today and try to bring about a solution that is
acceptable.
I want to thank all of the witnesses for their testimony
today. Without objection, Members will have 5 legislative days
to submit any additional written questions which we will
forward to the witnesses and ask that you answer as promptly as
you can so that they can be made a part of the record. And
without objection, the record will remain open for 5
legislative days for the submission of any additional
materials.
Again, I thank everybody for their time and their patience.
And this hearing on the Subcommittee of Commercial and
Administrative Law is adjourned.
[Whereupon, at 1:09 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Answers to Post-Hearing Questions from Douglas Lindholm, President and
Executive Director, Council on State Taxation, Washington, DC
Answers to Post-Hearing Questions from Dee Nelson, Payroll Manager,
Alutiiq, LLC and Subsidiaries, Anchorage, AK, on behalf of the American
Payroll Association
Answers to Post-Hearing Questions from Harley Duncan, Executive
Director, Federation of Tax Administrators, Washington, DC
Answers to Post-Hearing Questions from Walter Hellerstein, Francis
Shackelford Distinguished Professor of Taxation Law, University of
Georgia School of Law, Athens, GA
Prepared Statement of the American Institute of
Certified Public Accountants
The American Institute of Certified Public Accountants (AICPA)
appreciates the opportunity to submit this statement for the record to
the Committee on the Judiciary, Subcommittee on Commercial and
Administrative Law for the hearing on H.R. 3359, the ``Mobile Workforce
State Income Tax Fairness and Simplification Act of 2007.''
The AICPA is the national, professional association of CPAs, with
more than 350,000 members, including CPAs in business and industry,
public practice, government, and education; student affiliates; and
international associates. It sets ethical standards for the profession
and U.S. auditing standards for audits of private companies; federal,
state and local governments; and non-profit organizations. It also
develops and grades the Uniform CPA Examination.
Approximately 42% of our membership is made up of members in public
practice. Of our members in public practice, approximately 75% are in
firms of 10 people or less. This numbers 46,500 firms.
The AICPA supports H.R. 3359, the Mobile Workforce State Income Tax
Fairness Act of 2007. Businesses, including small businesses and family
businesses that operate interstate, are subject to a significant
regulatory burden with regard to compliance with nonresident state
income tax withholding laws. These burdens translate into an
administrative burden on these entities that takes resources from
operating their business. Also, the cost must be passed on to the
entity's customers and clients. Having a uniform national standard for
state nonresident income tax withholding would significantly ameliorate
these burdens. And concomitant with this is the need for a de minimis
exemption from the multi-state assessment of state nonresident income
tax.
Accounting firms, including small firms, do a great deal of
business across state lines. Many clients have facilities in nearby
states that require an on-site inspection during the conduct of an
audit. Additionally, consulting, tax or other non audit services that
CPAs deliver may be provided to clients in other states, or to
facilities of local clients that are located in other states. Many
small business clients of CPAs also have multi-state activities. All of
these small businesses, accounting firms and their clients are affected
by nonresident income tax withholding laws.
There are 41 states that impose a personal income tax on wages and
partnership income, and there are many differing tax requirements
regarding the withholding for income tax of nonresidents among those 41
states. A number of states have a de minimis threshold, or exemption
for nonresidents working in the state before taxes must be withheld and
paid. Others have a de minimis exemption based on the amount of the
wages earned, either in dollars or as a percent of total income, while
in the state. The rest of the states that impose personal income taxes
on nonresident income earned in the state require only a work
appearance in the state. Further complicating the issue is that a
number of these states have reciprocity agreements with other, usually
adjoining, states that specify that they will not require state income
tax withholding for residents of the other states that have signed the
reciprocity pact.
It is not difficult to understand that the recordkeeping,
especially if business travel to multiple states occurs, can be
voluminous. And the recordkeeping and withholding a state requires can
be for as little as one day's work in another state. Additionally, the
amount of research that goes into determining what each state law
requires is expensive and time consuming, especially for a small firm
or small business that does not have a great amount of resources. A
small firm or business will often be required to engage outside counsel
to research the laws of the other states. And this research needs to be
updated yearly to make sure that the state law has not changed. Having
a uniform national standard would eliminate the burden of having to
research state law for each state where work is performed.
In addition to uniformity, there needs to be a de minimis
exemption. AICPA believes that the 60 day limit contained in H.R. 3359
is fair and workable. The economic changes that have occurred as our
country has gone from local economies to a national economy are huge.
Where businesses once tended to be local, they now have a national
reach. This has caused the operations of even small businesses to move
to an interstate basis. Because of the interstate operations of these
companies, many providers of services to these companies, such as CPAs,
find that they are also operating, to some extent, on an interstate
basis. And with the ease of communication through the internet, and the
ease of travel, the ability to provide some services far from home is
not an issue, as it once was. What once were local taxation issues have
now become national in scope, and burdens must be eased in order to
promote this interstate commerce and insure it runs efficiently.
Many smaller firms and businesses use third party payroll services
instead of performing that function in house. A number of third party
payroll service providers are unable to handle multi-state reporting.
They often limit, for example, reporting to two states, the state of
residence and the state of employment. Additionally, third party
payroll service providers generally report on a pay period basis (e.g.,
twice per month, bi-weekly, etc.) as opposed to daily, which can be a
necessity when interstate work is performed. These reporting issues
require employers to track and manually adjust the reporting and
withholding to comply with various state requirements. The alternative
is to pay for a much more expensive payroll service. H.R. 3359 would
provide significant relief from these burdens.
The 60 day limit in the bill ensures that the interstate work for
which an exemption from withholding is granted does not become a means
of avoiding being taxed or shifting income tax liability to a state
with a lower rate. Instead, it insures that the primary place(s) of
business for an employee are where that employee pays state income
taxes.
There is one amendment to the bill that the AICPA would recommend.
Once the 60 day threshold is reached, the employee should pay
withholding and state income taxes in the host state for all wages
earned going forward. The withholding should not be made retroactive
for the first 60 days. To do so would be unfair to the employee. If the
reach is retroactive, then on the 61st day of working in the other
state, the employee would owe withholding to that state for the 60 day
period. This could be a substantial amount, which could even cause the
employee to immediately be in an underpayment penalty situation. It
would be unfair to require the employee to pay this much money,
especially where the employee is a resident of one of the other 40
states that imposes a state income tax. In that situation, the employee
would have double paid withholding and would not receive a refund from
the home state until tax returns are filed and refunds paid. Even
should a state allow for current withholding and filing in the open
payroll period, this could cause cash flow challenges for employees
should they find themselves in a high tax rate jurisdiction.
The AICPA appreciates the opportunity to submit this statement in
support of H.R. 3359.
Prepared Statement of Edward A. Zelinsky, Morris and Annie Trachman
Professor of Law,\1\ Benjamin N. Cardozo School of Law, Yeshiva
University
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\1\ For purposes of identification only. This statement expresses
my personal views, not the views of any institution or group with which
I am affiliated, professionally or otherwise.
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I strongly support H.R. 3359, the Mobile Workforce State Income Tax
Fairness and Simplification Act of 2007. H.R. 3359 is a useful, indeed
a long overdue, effort by Congress, using its authority under the
Commerce Clause, to begin to rationalize the states' income taxation of
nonresidents. The core concept of H.R. 3359 is compelling: In any
calendar year, a state may tax the income of a nonresident employee
only if such employee is ``physically present performing duties'' in
the taxing state ``for more than 60 days.'' \2\
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\2\ H.R. 3359, Section 2(a)(2).
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However, H.R. 3359 in its current form is not enough and may
unintentionally prove counterproductive. To be fully effective, H.R.
3359 must be conjoined with H.R. 1360, the Telecommuter Tax Fairness
Act of 2007. H.R. 3359 lacks any definition of physical presence and
fails to forbid states from adopting doctrines like New York's
``convenience of the employer'' rule, doctrines which pretend that
taxpayers are present in-state when in fact they are not.
Consequently, H.R. 3359, if enacted into law without H.R. 1360 and
its definition of physical presence, will likely be flouted by New
York, deploying its employer convenience doctrine to push nonresident
taxpayers over H.R. 3359's sixty (60) day minimum by treating out-of-
state work days as days spent in New York. Moreover, H.R. 3359, if
adopted without the safeguards of H.R. 1360, may encourage other states
to emulate New York's employer convenience doctrine and thereby
eviscerate the requirement that nonresident employees be physically
present in the taxing state.
background
In 2005, I was privileged to testify before this subcommittee on
the subject of nonresident income taxation and New York's employer
convenience doctrine.\3\ I am something of a poster boy on this
subject, having been the unsuccessful litigant in Zelinsky v. Tax
Appeals Tribunal.\4\ In that case, New York took its standard position
that the days I worked at my home in New Haven, Connecticut were, for
tax purposes, to be deemed days I was present in New York, even though
I was not. At its most basic, New York's notion of employer convenience
decimates the concept of physical presence by treating nonresident
employees, particularly those who work at home, as being in New York
even when they are not.
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\3\ A joint hearing of this subcommittee and the Subcomittee on the
Constitution was held on May 24, 2005. My testimony is on page 32 of
the printed transcript of this May 24, 2005 hearing (Serial No. 109-27)
and at 36 STATE TAX NOTES 713 (2005), 2005 STT 101-2.
\4\ 1 N.Y.3d 85 (2003), cert. denied 541 U.S. 1009 (2004).
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New York's practices in this respect have been widely and correctly
condemned as unsound as a matter of policy and unconstitutional as a
matter of law.\5\ Most recently, three dissenting judges of New York's
highest court condemned in the strongest terms New York's use of the
employer convenience doctrine to impose New York's nonresident income
taxes on Mr. Thomas Huckaby for working at his home in Nashville,
Tennessee by pretending that, on those Tennessee days, Mr. Huckaby was
in New York.\6\
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\5\ See, e.g., Nicole Belson Goluboff, New York Makes It Official:
Double Taxing of Telecommuters Will Continue, 40 STATE TAX NOTES 877
(2006); Walter Hellerstein, 1 STATE TAXATION (3rd ed. 2007)at para.
20.05[4][e][i] (the Zelinsky decision ``does not withstand analysis'');
William V. Vetter, New York's Convenience of the Employer Rule
Conveniently Collects Cash From Nonresidents, Part 1, 42 STATE TAX
NOTES 173 (2006); William V. Vetter, New York's Convenience of the
Employer Rule Conveniently Collects Cash From Nonresidents, Part 2, 42
STATE TAX NOTES 229 (2006).
\6\ 4 N.Y.3d 427, 440 (2005), cert. denied 126 S.Ct. 546 (2005).
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Nevertheless, the New York Department of Taxation and Finance,
supported by a majority of New York's highest court, persists in
pretending that, for income tax purposes, nonresidents are present in
New York on days when they are not. New York will not let logic stand
in the way of revenue--particularly when the payors of that revenue are
nonvoting nonresidents.
defining physical presence
Consider against this background the definition of ``day'' embodied
in H.R. 3359. Under that definition, a nonresident employee is deemed
to have performed a day of services in the taxing state only ``if the
employee performs more than 50 percent of the employee's employment
duties in such State or locality for such day.'' \7\ This is a
reasonable definition,\8\ perfectly appropriate for a sensible world.
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\7\ H.R. 3359, Section 2(d)(1).
\8\ Though not an ideal definition, as it leaves unclear the metric
for measuring whether the ``more than 50 percent'' test is satisfied.
Is this a test of time spent on the job during the day in question? Or
of the value of the employee's services? Or the relative importance of
the tasks the employee performs during the day? H.R. 3359 does not say.
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But, in this context, we do not live in a sensible world. If the
past is any indication (and I think it is), New York will respond to
H.R. 3359 and its current definition of ``day'' by flouting that
definition, declaring that a nonresident employee, under the employer
convenience doctrine, is deemed to perform services in New York on days
when such employee works at his out-of-state home or at any other out-
of-state location which New York characterizes as having been chosen
for the employee's convenience. New York will thereby propel
nonresidents over the sixty day in-state minimum of H.R. 3359 by
declaring (as New York does now) that out-of-state days should be
treated for tax purposes as days spent in New York.
When a nonresident employee seeks to enforce H.R. 3359 against this
illogical approach, he will be required by federal law to challenge New
York's taxes in New York's courts.\9\ And, as we saw in my case and in
Mr. Huckaby's case, New York's courts, despite all of the U.S. Supreme
Court case law to the contrary, uphold the New York tax commissioner
when he declares, under the rubric of employer convenience, that
employees who aren't in New York should be treated for tax purposes as
though they are. Nothing in the current language of H.R. 3359 will
compel New York's courts or its tax commissioner to reach a different
conclusion. It is thus likely that New York, continuing current
practice, will annually declare nonresidents to be in New York more
than sixty (60) days based on work these nonresidents perform at their
out-of-state homes and other out-of-state locations.
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\9\ Tax Injunction Act, 28 U.S.C. Section 1341.
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Perhaps some hardy soul will emulate Mr. Huckaby and me and will
fight New York's irrationality through the New York courts. Perhaps
that intrepid taxpayer will also achieve what Mr. Huckaby and I could
not, namely, U.S. Supreme Court review of New York's employer
convenience fiction.
It would, however, be better to deal with this problem now as does
H.R. 1360. H.R. 1360 addresses this problem with such clarity that even
New York's courts and tax department will be compelled to acknowledge
the inconvenient truth that a physical day outside New York is a
physical day outside New York.
Specifically, H.R. 1360 does three important things. First, it
forbids a state for any income tax purpose from deeming a taxpayer to
be physically present in the state when he is not.\10\ Second, H.R.
1360 specifically forbids ``any convenience of the employer test or any
similar test'' which could otherwise eviscerate the physical presence
requirement.\11\ Third, H.R. 1360 precludes a variety of interpretive
techniques which New York and its courts have used to avoid the obvious
reality that, when nonresident taxpayers work at their out-of-state
homes, they are not working in New York.\12\
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\10\ H.R. 1360, Section 2(a), adding to title 4 of the United
States Code section 127(a).
\11\ H.R. 1360, Section 2(a), adding to title 4 of the United
States Code section 127(b).
\12\ H.R. 1360, Section 2(a), adding to title 4 of the United
States Code section 127(c).
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Thus, together, H.R. 3359 and H.R. 1360 can help achieve the goal
of rational income taxation of nonresidents.
potential counterproductive effects
My concern is not just that H.R. 3359 could prove ineffective
because it lacks a strong definition of physical presence. I also fear
that H.R. 3359, adopted without H.R. 1360, will inadvertently prove
counterproductive and will cause other states to emulate New York and
its employer convenience doctrine. If New York is able to avoid the
more than sixty (60) day rule of H.R. 3359 by pretending that
nonresidents work in state on days when they do not, other states will
be tempted to take the same course to continue taxing nonresidents.
The U.S. Supreme Court's refusal to hear either my case or Mr.
Huckaby's case, in practical terms, gives a green light to other states
desiring to raise income tax revenue by pretending that nonvoting,
nonresidents work in-state on days when they do not. If New York's
courts are prepared to countenance this behavior, why should not other
states' courts similarly condone such behavior as well?
Among the reasons why no other state has so far followed New York's
aggressive lead in taxing nonresidents on days when they work out-of-
state is that the states are watching Congress to see if it will
legislate in this area. If H.R. 3359 is enacted unaccompanied by H.R.
1360, at least some tax commissioners will inform their respective
governors and legislators that there is a way around H.R. 3359 and its
more than sixty (60) day rule: adopt New York's employer convenience
doctrine to declare that out-of-state days shall be deemed in-state
days to get nonresidents above the sixty day minimum. Some revenue-
starved officials will undoubtedly approve of this approach. If so,
H.R. 3359 will have accidentally spread the irrationality of New York's
employer convenience doctrine throughout the nation.
This scenario is avoidable by coupling H.R. 3359 with H.R. 1360
which forbids the adoption of the employer convenience doctrine and
similar tests for taxing nonresidents on days they are outside the
taxing state.
conclusion
H.R. 3359 and its more than sixty (60) day rule represent a
commendable effort to begin to rationalize the states' income taxation
of nonresidents. However, H.R. 3359 in its current form is not enough
and may unintentionally prove counterproductive. To be fully effective,
H.R. 3359 must be conjoined with H.R. 1360 which would forbid states
from adopting doctrines like New York's ``convenience of the employer''
rule, doctrines which pretend that taxpayers are present in-state when
in fact they are not. Together, these two pieces of legislation would
make more sensible our system of nonresident income taxation.
Prepared Statement of Nicole Belson Goluboff, Esquire
Letter from various employers in support of H.R. 3359
Letter from Kristina Rasmussen, Director of Government Affairs, Nation
Taxpayers Union in support of H.R. 3359