Multistate Tax Commission Develops Framework for Simplifying State Withholding Laws

The Executive Committee of the Multistate Tax Commission (MTC) has approved a model law that would establish a uniform standard for when states could tax compensation earned by nonresidents [MTC website, MTC Model Mobile Workforce Statute, Executive Committee Recommendation, 3/10/11].

The Multistate Tax Commission describes itself on its website as an intergovernmental state tax agency working on behalf of states and taxpayers to administer, equitably and efficiently, tax laws that apply to multistate and multinational enterprises.

Under the model law, compensation earned by a nonresident in a state would be exempt from taxation in that state if:

1. the nonresident has no other income from sources within the state for the tax year in which the compensation was received;

2. the nonresident is present in the state to perform employment duties for no more than 20 days during the tax year in which the compensation was received (presence in the state for any part of a day would be considered presence for that day, unless such presence is purely for purposes of transit through the state); and

3. the nonresident's state of residence provides a substantially similar exclusion or does not impose an individual income tax.

This law would not apply to professional athletes, professional entertainers, certain persons of prominence who perform services for compensation on a per-event basis, construction workers, and certain “key employees”.

Some members of the payroll tax community would like to see a uniform state withholding tax rule replace the many complex rules that currently apply in different states and localities. However, some state and local taxing authorities are concerned that they will lose revenue if a uniform state withholding tax rule is adopted.

There is no current legislation in Congress to simplify the state withholding tax laws. There was legislation introduced in April, 2009 (H.R. 2110, Mobile Workforce State Income Tax Fairness and Simplification Act), but the bill never came to a vote in the House or Senate. It is possible that the bill could be reintroduced at an upcoming session of Congress.