Ohio Tax
Workshop L
Dealing with a Mobile
Workforce and
Employment Tax
Developments
Tuesday, January 28, 2014
3:00 p.m. to 4:00 p.m.
Biographical Information
Sara Goldhardt, State & Local Tax Senior Manager, GBQ Partners LLC
230 West Street, Suite 700, Columbus, Ohio 43215
[email protected]
614-947-5243
Fax: 614-947-5443
Sara has over 14 years of experience in federal and state and local tax, servicing both public and private
companies in the manufacturing, construction, healthcare, professional services and retail industries.
Sara is GBQ’s State Income/Franchise Tax Service Line Leader. In this role, Sara coordinates the
successful completion of all multistate income/franchise tax engagements. Sara focuses her expertise on
managing state income tax compliance, nexus studies, allocation/apportionment reviews, filing
methodology reviews and transactional planning. She also has experience assisting clients with municipal
income taxes, employment taxes and business property tax returns.
Prior to joining GBQ, Sara worked in the Federal Tax Practice of the Columbus, Ohio office of Deloitte,
where she worked mainly on middle-market clients in the manufacturing and construction industries. Sara
was also employed as a Senior Tax Accountant at Greif in Delaware, Ohio. While at Greif, she worked
extensively in the areas of federal tax compliance, FAS 109, multistate income and franchise tax
compliance, and state income tax audits.
Sara graduated from The Ohio State University with a B.S. in Accounting. Sara is a member of the
American Institute of Certified Public Accountants, the Ohio Society of Certified Public Accountants and
Women for Economic and Leadership Development (WELD).
Alexander Thomas, Senior Associate, PricewaterhouseCoopers LLP
1201 Louisiana Suite 2900 Houston, TX 77002
[email protected]
713-375-5772
Fax: 813-375-5733
Alexander “Alex” Thomas is a senior associate in PwC’s State and Local Tax Practice in Houston, Texas.
Alex has four years of experience with PwC in various state and local tax matters, with a focus in state
and federal unemployment taxes and state corporate income and franchise tax. Alex’s experience at
PwC has included favorable representation of clients before various state Departments of Revenue in
refund claims and audit defenses, with a focus on state tax controversy matters in Texas and Louisiana.
Alex has also pursued successful appeals of state unemployment tax rate determinations as well as
preparation and achievement of federal and state employment tax refunds as the result of acquisitions
and reorganizations. Alex has also provided consulting advice in numerous state income and payroll tax
matters related to corporate reorganizations, acquisitions, and legal entity simplification.
Alex holds a Bachelor of Arts-University Scholar, in History and Business, from Xavier University in
Cincinnati, Ohio. Alex earned his Juris Doctor degree with concentrations in Taxation and Business
Transaction law from Saint Louis University School of Law in St. Louis, Missouri. During law school, Alex
served as a Lead Editor of the Saint Louis University Journal of Health Law and Policy and as a Legal
Research and Writing Teaching Assistant to Professor Marcia Goldsmith.
Workshop L ‐ Dealing With a Mobile Workforce & Employment Tax Developments
Sara L. Goldhardt
GBQ Partners, LLC
[email protected]
Eleanor Palmer
Nationwide Insurance
[email protected]
Alexander Thomas
PwC
[email protected]
Ohio Tax Conference January 28, 2014
Note:
1. This presentation is intended to make participants aware of state and
local tax issues.
2. Information presented herein is not intended to be tax advice.
3. Please consult with a qualified practitioner for tax advice related to
specific transactions.
1
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Mobile or Telecommuting Employees
•
With the advancement of technology, the use of the Internet to reach more
customers, and the increase of business travel, a greater number of
companies have employees who:
•
Work remotely from home;
•
Travel to new states for short periods of time on a project-by-project
basis.
•
All of this multistate activity creates a multitude of tax questions.
•
Registering for one tax type will put a company on a state’s radar for other
taxes.
2
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Income Tax Withholding
•
States will generally tax an employee based on where the employee works.
•
States will also tax an employee based on where an employee lives.
•
Some states allow for work site withholding exceptions based on number of
days in state or dollars earned from a state.
•
3
Examples:
•
Arizona & Hawaii:
60-Day Threshold
•
New Mexico:
15 or fewer days
•
Wisconsin:
In-state wages less than $1,500
•
New Jersey:
Not specifically based on days or dollar amount
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Income Tax Withholding - Continued
•
Majority of states do not have a “de minimis” threshold, and state withholding
on nonresident wages may be required from the first day wages are earned.
•
•
Examples: IN, KY, MI, OH, PA
If state does allow a “de minimis” threshold, it may only preclude the employer
from withholding tax on wages. However, the employer may still be required to
file an informational report.
•
Nonresident employee may also be required to file nonresident income tax
return on “pre-threshold” wages.
4
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Income Tax Withholding - Continued
•
Employers must have business nexus with a state before residency-based
withholding is required.
•
Employers without business nexus with a state may do residency-based
withholding on a voluntary basis.
•
States that have been aggressive in regards to employer withholding include
New York and California.
5
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Reciprocity
•
When a reciprocal agreement has been reached between two or more
states, agreeing states are precluded from taxing the earned income of
employees who are residents of reciprocal states.
•
Ohio: Reciprocal agreements with all border states: Indiana, Kentucky,
Michigan, Pennsylvania, and West Virginia.
•
District of Columbia: Reciprocal agreements with Maryland and Virginia.
However, by law, the District of Columbia currently only taxes its own
residents.
•
Pennsylvania: Reciprocal agreements with Indiana, Maryland, New Jersey,
Ohio, Virginia and West Virginia.
•
No reciprocity exists within the New York tri-state area (New York, New
Jersey and Connecticut).
6
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Common Industries with Nonresident Payroll Withholding Exposure:
•
•
Certification / Seminar / Exam Providers
•
Construction Companies
•
Equipment Installers
•
Sales and Marketing
•
Software Development and Implementation
In addition, out-of-state companies registered for other state taxes (Sales Tax,
Corporate Income Tax, etc.) could face questions from such states regarding possible
nonresident payroll withholding tax.
7
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Income/Franchise Tax and Sales/Use Tax Nexus
•
What types of business activities does the employee perform? With whom
does the employee interact?
•
In the recently released Bloomberg BNA 2013 Survey of State Tax
Departments, 36 states and the District of Columbia say income tax nexus
would result for an out-of-state corporation with employees who telecommute
from homes within their jurisdiction.
•
33 jurisdictions report nexus would arise from a single telecommuter who
performed back-office administrative business functions.
•
Is the employee an in-state salesperson? The employee’s activity may still be
protected by P.L. 86-272.
•
Each employee’s activities must be analyzed and each state is
different.
8
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Nexus and Home-Based Employees
•
Missouri – Mo. Private Letter Ruling 7072, Mo. Dep’t of Revenue (March 29,
2012) - Taxpayer had corporate income tax nexus because Missouri salesperson
delivered medical risk test kits to in-state physicians and maintained an inventory
of test kits in Missouri.
•
California - Appeal of Warwick McKinley Inc., SBE, Case No. 489090,
01/11/2012 , released 05/03/2012 - A Massachusetts corporation that did not
maintain an office in California in 2006 was doing business in-state and liable for
the state corporate franchise tax because it had an employee that did consulting
and recruiting work from her home in-state.
9
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Nexus and Home-Based Employees
•
New Jersey - Telebright Corp. v. Director, N.J. Super. Ct., App. Div., Dkt. No. A-509609T2, 03/02/2012 - The New Jersey Superior Court, Appellate Division, has upheld a Tax
Court ruling that a foreign corporation that regularly and consistently permitted one of
its employees to telecommute full-time from her New Jersey residence was doing
business in New Jersey, was subject to the corporate income tax in New Jersey, and was
required to file corporate income tax returns in the state.
•
Virginia – VA Public Document Ruling No. 13-203, 11/01/2013 – The Virginia Tax
Commissioner ruled that a foreign corporation with one employee in Virginia who
performed legal services from her home was required to pay withholding taxes and file a
Virginia corporate income tax return. The Commissioner determined that the
employee’s activities created nexus for the foreign corporation because the services
were performed in Virginia, and legal services generally exceed any protection afforded
under P.L. 86-272 unless considered de minimis.
10
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Federal Legislation
•
Legislation has been introduced to both the House of Representatives and
the Senate in order to simplify state income tax issues for mobile
workforces.
•
Mobile Workforce and State Income Tax Simplification Act of 2011
(H.R. 1864)
•
Introduced on May 12, 2011 to 112th Congress
•
Passed House of Representatives on May 15, 2012, but failed to pass Senate
•
Introduced 30-day rule, prohibiting the taxation of employee wages in a state
other than the state of residence, unless employee performs duties within the
state for more than 30 days during the calendar year.
11
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Federal Legislation - Continued
•
Mobile Workforce and State Income Tax Simplification Act of 2013
(H.R. 1129)
•
Introduced on March 13, 2013 to current Congress (113th) by Rep. Howard Coble
(R-NC) and Hank Johnson (D-GA).
•
Re-introduced 30-day rule to House of Representatives in essentially the same
language as H.R. 1864 as passed by the 112th Congress.
•
Current Status: Referred to Subcommittee on Regulatory Reform, Commercial And
Antitrust Law (4/15/2013).
•
Mobile Workforce and State Income Tax Simplification Act of 2013
(S. 1645)
•
Introduced on November 5, 2013 to current Congress (113th) by Senator Sherrod
Brown (D-OH) as a companion bill to H.R. 1129 (Also includes 30-day rule).
12
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Ohio Municipal Tax – House Bill 5
•
Passed by Ohio House of Representatives on November 13, 2013 with a
vote of 56-39.
•
Current Status: Referred to Senate Finance Committee (11/19/2013)
•
Casual Entrant Rule (20 Day Rule):
•
Bill prohibits Ohio municipalities from taxing or requiring employers to withhold tax
on the compensation paid to a nonresident individual who worked in a municipality
for 20 days or fewer. Currently, cities use a “12 Day Rule”.
•
Employer may elect to withhold taxes from the individual’s compensation for every
day the employee worked in the municipality (from day 1-20).
•
Small Employer Exclusion: Prohibits a municipality from taxing compensation paid
to a nonresident employee of an employer with less than $500,000 in annual gross
receipts if the employer’s only fixed location is not located in the municipality.
13
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Ohio Municipal Tax – House Bill 5 - Continued
•
The bill introduces a test for determining when an employee has spent a
"day" within a municipal corporation. Current law does not provide guidance
for making this determination.
•
Under H.B. 5, an employee spends a day in a municipality only if, on that
day, the employee spent more time working in that municipality than in any
other municipality.
•
As a result, for purposes of the casual entrant rule, an employee may work
a "day" in only one municipality.
•
14
Be aware that the law differs for athletes, entertainers, and public figures.
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
Worker Classification
•
Distinctions between exempt and non-exempt employees.
•
•
15
Does Salaried = Exempt?
Distinctions between employees and independent contractors?
•
IRS 20 3 Factor Test – Behavioral, Financial, Relationship
•
IRS Publication 15-A http://www.irs.gov/pub/irs-pdf/p15a.pdf
•
What happens if you get it wrong?
•
Ways to reduce future exposure.
January 28, 2014
DOMA
Background
On June 26, 2013, the US Supreme Court held in U.S . v. Windsor that Section
3 of the Defense of Marriage Act (“DOMA) is unconstitutional

o
Under DOMA, married same-sex couples and their families were not eligible
for certain tax benefits and protections (collectively, qualified benefits) that
were available to married couples of the opposite sex


Section 3 of DOMA defined marriage as a legal union between one man and
one woman for purposes of federal law
o
Examples of Imputed Items: employer-paid health care coverage, certain
tuition benefits, group-term life insurance premiums
o
Subject to federal individual income taxes, social security and Medicare
taxes
Supreme Court’s decision - qualified benefits provided to legally married samesex spouses may now be excluded from taxable wages and no longer subjected
to federal income, Social Security and Medicare taxes if the marriage is legally
recognized by state law
Hot Topics-Payroll Tax
PwC
January 28, 2014
16
DOMA
Refund Opportunities
•
The claim for refund is for FICA taxes paid on qualified benefits provided
during any years that are still open under the statute of limitations
•
Employers that took steps to protect the statute on prior periods by filing
protective claims may now perfect those claims as part of this process
•
Income tax withholding refunds, by contrast, are limited to withholding made
during the current calendar year
•
Employer must provide employees an opportunity to participate in the FICA
refund claims.
•
Applies to employers who previously filed protective claims or those filing
original claims
•
Employer secure the employee’s written statement confirming employee
has not made any previous claims and will not make any future claims for
refund
Hot Topics-Payroll Tax
PwC
January 28, 2014
17
DOMA
The Takeaway
•
IRS released guidance related to treatment of refund claims in September, 2013
•
Employers should conduct in-depth reviews of their benefits plans to
determine to what extent benefit plans are affected
•
Many Questions Remain:
•
State by state analysis regarding federal guidance
•
Are qualified benefits paid in a prior year to lawfully married same-sex
couples who currently live in states that do not recognize same-sex
marriages excluded from income
•
Employees entitled to tax refunds need to move quickly to secure them
•
Employers that originally included the value of qualified benefits for eligible
same-sex spouses in gross income and wages and withheld the applicable
federal income and employment taxes should now be entitled to claim refunds
or credits, for themselves and their affected employees
Hot Topics-Payroll Tax
PwC
January 28, 2014
18
Affordable Care Act-Employment Tax
Considerations
Background
Excise Tax
•
•
Imposed on applicable large employers whose health insurance does not meet
certain standards under IRC §4980H
•
Imposition of tax postponed until 2015
Information Reporting
•
•
All applicable large employers under 4980H required to report information
regarding health care benefits of full time employees
•
Penalties for failure to comply with reporting requirement postponed until tax
year 2015 (reports due January 31, 2016)
•
Voluntary compliance encouraged in 2014
Hot Topics-Payroll Tax
PwC
January 28, 2014
19
Affordable Care Act-Employment Tax
Considerations
The Takeaway
Consider applicability of 4980H provisions
•
•
Definition of “full time employee”
•
Coverage Requirements
•
Postponement of requirement provides additional time to determine best practices
regarding 4980H and 6056
•
Additional monitoring of ACA laws and IRS policy is also advised
Hot Topics-Payroll Tax
PwC
January 28, 2014
20
Quality Stores
Background
United States v. Quality Stores, Inc.
•
The Sixth Circuit Court of Appeals held that supplemental unemployment
compensation benefits (“SUB Pay”) paid to former employees were not “wages”
subject to FICA taxes
•
Holding in Quality Stores runs counter to Federal Circuit’s holding in CSX Corp.
v. United States
•
U.S. Supreme Court granted certiorari in October, 2013
•
Oral argument held January 14, 2014
Hot Topics-Payroll Tax
PwC
January 28, 2014
21
Quality Stores
What’s Next
•
If Supreme Court AGREES with IRS: SUB Pay is considered “wages” subject to
FICA taxes and all refund petitions/protective claims filed on this issue will be
denied
•
If Supreme Court DISAGREES with IRS: SUB Pay is not considered “wages”
subject to FICA taxes and all refund petitions/protective claims filed on this issue
must be processed
•
Applicability of ruling if Supreme Court disagrees with IRS
•
Potential for Legislative Action
Hot Topics-Payroll Tax
PwC
January 28, 2014
22
Quality Stores
The Takeaway
•
Employers in all federal circuits should consider filing refund claims as soon as
possible for all tax years within the statute of limitations
•
If a taxpayer files a claim for a FICA tax refund and the IRS disallows the
claim, the taxpayer has two years to file a refund suit in a United States district
court or the Court of Federal Claims
•
Employers that have previously filed protective refund claims should begin the
planning process for any previously filed protective claims. Steps to consider:
•
Gather the appropriate employee-level data to support the amount of the
refund
•
Send correspondence to affected employees
•
Determine whether severance payments satisfy definition of SUB Pay
Hot Topics-Payroll tax
PwC
January 28, 2014
23
Dealing With a Mobile Workforce & Employment Tax
Developments
State Unemployment Tax
•
For a telecommuting or mobile employee, where is state unemployment tax
due?
•
Generally, the employer must look at four tests in determining where to pay
unemployment tax:
1. Localization – where the services are performed
2. Base of Operations – where an employee reports to work
3. Direction and Control – where the employer exercises control over the employee’s
services
4. Residence – If none of the above apply
24
January 28, 2014
Dealing With a Mobile Workforce & Employment Tax
Developments
State Unemployment Tax
•
If a determination cannot be made (no services performed in states in
which tests 2-4 apply), then most states allow the employer to elect a state
based on the Interstate Reciprocal Coverage Arrangement. The elected
state must meet one of the qualifying criteria:
a. State in which some services are performed by employee;
b. Employee’s resident state; or
c. State in which the employer maintains a place of business.
25
January 28, 2014
State UI Integrity Laws
Background
•
Recession of 2007-2008 resulted in numerous erroneous state unemployment
insurance (“UI”) payments
•
As a result, Congress passed Trade Adjustment Assistance Extension Act (“TAAEA”)
of 2011, requiring all states to pass laws prohibiting the relief of benefit charges
from an employer’s account when:
•
The erroneous payment results from an employer’s failure to timely and
adequately respond to a state’s request for information AND
•
The employer has established a pattern of failure to respond to such requests
•
States who failed to implement a mandate by October 21, 2013 were subject to loss of
FUTA credit
•
States are free to determine their own definitions of timely and adequate response,
pattern of failure
•
States are free to impose penalties in addition to benefit charges
Hot Topics-Payroll Tax
PwC
January 28, 2014
26
State UI Integrity Laws
The Takeaway
•
Federal mandate under the TAAEA is designed to increase employer accountability
in administration of UI claims
•
Employers should take steps to ensure best practices in unemployment claims
management (“UCM”) in light of the federal mandate
•
For employers who handle UCM in-house, ensure that lines of communication
are open between key players in the UCM process
•
For employers who outsource UCM, ensure that third party provider has the
means to comply with the federal mandate
Hot Topics-Payroll Tax
PwC
January 28, 2014
27
Dealing With a Mobile Workforce & Employment Tax
Developments
What else do you need to look at?
•
Worker’s compensation requirements
•
Local taxes
•
Business license and permit requirements
•
Company’s employee-tracking system – do you know where all of your
employees are going and for how long?
28
January 28, 2014