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Legislation Passed to Simplify State Income Tax Law

20 Aug 2012

In an effort to establish some uniformity among the various states regarding the taxation of nonresidents, the Mobile Workforce State Income Tax Simplification Act of 2012 was passed by the House of Representatives in May. The Act essentially limits the authority of states to tax certain income of employees for duties performed in other states. Taxand USA clarifies the main problem areas experienced, and investigates what solutions the new Act will bring.

While states can generally create their own income tax laws and policies, Congress must ensure that such tax laws and policies do not impede or place a substantial burden on interstate commerce. Yet many employees and employers either fail to understand what their respective tax obligations are or fail to adhere to the rules governing nonresident taxation and state income tax withholding.

To complicate matters, some states hold an employee to one standard for personal income tax purposes and the employer to another standard for withholding tax purposes.There is also the issue of a modernised employment culture.The American workforce has become increasingly mobile, and as a result, the tax issues associated with a mobile workforce have become increasingly complex.

This new Act aims to solve these issues, as it:

  • Provides a uniform bright-line test for mobile employees and their employers
  • Should result in a reduced administrative burden for employers who have employees who travel and work in multiple states
  • Reduces the number of state income tax filings for employees who travel to multiple jurisdictions for work
  • May provide an opportunity for greater compliance by both employers and employees through a system of laws that might be easily administered
  • May allow employees and employers to forecast their tax liabilities with more accuracy and reduce potential state tax audits
  • Could result in lower state tax revenue for some jurisdictions, while providing a boost for others.

Taxand USA takes an in depth look into the new Act

Your Taxand contacts for further queries are:
Benjamin Diaz
T. +1 305 704 6650

Taxand's Take

On its face, the Act sounds great; a uniform system of taxation in an area that has plagued employees and employers alike for some time. However, like everything concerning taxes, there will be winners and losers. The resident states may benefit from an increase in revenue, whereas the "nonresident states" may suffer a noticeable loss of revenue at a time when state economies continue to reel from the effects of a sluggish economy. For mulitnationals, it is doubtful that the new legislation would have a large impact and therefore it could be something to note but not to highlight.

Taxand's Take Author