Executive summary
Montana may join several other states easing income tax filing and withholding burdens on remote employees and businesses through a state-version of the once popular federal remote workforce legislation. House Bill 447 would exclude compensation from withholding, and eliminate any filing requirement, on nonresidents when the individual is in the state for 30 or fewer days. The bill also requires the nonresident’s home state to provide a similar exclusion or not impose an individual income tax. Much like other remote workforce legislation, the threshold safe-harbor would not apply to selected professions including professional athletes, certain performing arts, per-event services, Montana lottery winners, construction services, certain highly compensated employees and certain production employees.
Does Montana’s mobile workforce bill pick-up where Congress has yet to act?
Federal mobile workforce proposals have been introduced in a decade’s worth of congressional sessions with little legislative progress. The proposals are intended to create a federal solution to the continuing question of whether there should be a national standard for the minimum amount of time an employee must work in a nonresident state before incurring a state income tax liability requiring the employee to file an income tax return, and the employer to withhold and remit payroll taxes.
In the last few years, several bills have passed the U.S. House of Representatives before stalling in the Senate. The pandemic re-invigorated those efforts with a slew of proposals, all of which received much attention from the business community but could not gain traction in Congress. Federal mobile workforce proposals almost always receive bipartisan support and have attracted the attention of the AICPA.
RSM’s state tax policy experts weigh in on the Montana proposal to adopt mobile workforce legislation as part of an effort to address remote and traveling employees through state action.
Mo Bell-Jacobs
Let’s be honest. Congress has not been able to help mobile and remote taxpayers navigate 40-ish state individual income tax laws. They have the authority to do so. They have had some great ideas receive a lot of votes from both parties. But come on, if a once-in-a-lifetime pandemic resulting in a large percentage of employees working remotely is not enough to pass a mobile workforce solution, then I think the states need to do it themselves. I am not the only one to think so. The good people at the Council of State Taxation (COST) were way ahead of me. If the states can begin to adopt their own mobile workforce legislation, over time, a critical mass of states may form and ultimately push the stragglers over the finish line. Or perhaps a handful of states may signal to Congress that this is their time to shine and pass a uniform and consistent policy for all the states. Either way, COST has supported the state-by-state approach by drafting a model bill with a minimum 30-day safe-harbor for nonresident mobile workers and routinely testifies in support of good state mobile workforce bills. They also help fix some versions that could use a little work.
What makes a good mobile workforce bill? First, a 30-day threshold appears to be a reasonable compromise – it’s a month. Dollar thresholds are sometimes proposed but are logistically more difficult to administer. Do employees know how much they make per day and are they able to track that in any individual state? Do employers have that capability? It’s much easier to determine whether the employee was in the state or not – a clean binary result. Second, good definitions are required for clarity. For example, defining a ‘day’ as anytime worked in the state on any one specific day. I should note that, and with no personal quarrel, the Multistate Tax Commission’s (MTC) uniform mobile workforce proposal suggests a lower threshold of 20 days. Regardless, mobile workers need a win, and if any state mobile workforce legislation can be enacted then it ultimately helps the mobile workforce community.
State nonresident income and withholding standards vary greatly – some states impose an income tax liability on the first day worked in the non-resident state, while many others offer safe harbors or minimum thresholds. Multistate businesses must increasingly navigate complex administrative and regulatory landscapes due to the growing number of employees that conduct business travel to non-resident states. As travel among the states increases, so does the cost to comply with each state’s separate requirements. State mobile workforce legislation is a key component in solving the increasing burden on employers and taxpayers alike.
David Brunori
I could not agree more with my colleague Mo Bell-Jacobs. The Montana proposal is solid tax policy for a number of reasons. A 30-day threshold is fair. People travel for business and sometimes those travels are a day or two. How many folks have gone to a state for a conference or a single meeting? In many states that single visit triggers not only tax liability for the traveler but withholding requirements for their employer. Large businesses, such as ours, have the ability to track such travel. Small businesses do not. But even for larger national companies the administrative and compliance costs are burdensome. I suspect that the amount of revenue collected by the states as a result is relatively small. There is a small bang for the compliance buck.
As Mo notes, Congress has been attempting to fix this problem for years. States have generally opposed those efforts mainly because they do not like the federal government interfering with their taxing authority. COST realized this a while back and to its credit turned to the states themselves to address the issue. To date, Arizona, Hawaii, Illinois and West Virginia have adopted 30-day thresholds. Montana will likely join them. Five other states (Connecticut, Georgia, Louisiana, New Mexico and North Dakota) have enacted shorter thresholds that are between 15 and 29 days. These are not as good as a 30-day period, of course. And a uniform 30-day period would be easier for everyone. The rest of the states imposing income taxes have no or very low thresholds that are traps for unwary.
I note that the MTC has recognized the need for such legislation – although historically it recommended shorter time limits. Very few people I know would say that such thresholds are unnecessary. And in the post-pandemic world there will be more remote workers and those workers will travel. We should be rooting for this bill to pass.
