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Posted by Katie on December 7, 2006, 8:10 am
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Tony Cox wrote:
> Katie wrote:
>> It applies to the executive as much as to the athlete. If
>> your company sends you to work in the California office for
>> a couple of weeks, and your total gross income exceeds
>> California's filing requirements, you are subject to
>> California tax on your earnings from services performed in
>> the state. This is true of everybody. Of course, if you
>> work out of state only on rare occasions and for short
>> periods of time, it is unlikely that anybody is going to get
>> excited about it. Some states have de minimis rules; others
>> do not. EVERY state that imposes a comprehensive individual
>> income tax asserts jurisdiction to tax nonresidents on
>> income from sources in the state, which includes income from
>> services performed there.
>>
>> In the late 1980's the national accounting firm I was
>> working for at the time was "caught" by the State of
>> Colorado. They had sent consultants (installing ERP
>> systems, I think) into the state for extended periods of
>> time working on projects there, and had not withheld
>> Colorado taxes. There was talk of criminal prosecution.
>> You can imagine how quickly the firm got into compliance!
>> From that time on, we were all required to show on our time
>> sheets not only what client or project we worked on, but
>> where we did the work. And the firm withheld for every
>> state even if we spent only a day or two working there.
>>
>> I believe all the national and most of the regional
>> accounting and law firms are in compliance nowadays, and
>> most large corporations as well. A lot of smaller businesses
>> have not got the message. I talked to some folks recently
>> from a consulting firm in Atlanta that has been sending
>> people on contracts lasting 9 months or longer all over the
>> U.S., and withheld only Georgia taxes on everybody. I
>> referred them to a state and local tax consulting firm in
>> their area that will be able to help them get into
>> compliance.
> One has to wonder just how workable such a system is! After
> all, companies who send their employees out of state are
> committing them unknowingly to filing non-resident income
> taxes too -- a substantial administrative overhead and
> potentially expensive, for states like CA for example where
> total liability is assessed as a fraction of an individual's
> entire world-wide income.
>
> What about universities that send staff scientists to work
> at the various national laboratories? Typically, these
> scientists might work for weeks at a time (not de minimus)
> in several high-tax states -- when I was in that position,
> which wasn't that long ago (but outside the statute of
> limitations), the question never came up. Are there tax
> treaties between states that cover this sort of thing?
> Thinking of where I worked, it would have been a significant
> disincentive had my university "done the right thing".
There are reciprocal agreements among groups of contiguous
states whereby an individual who resides in one party state
and works in another pays tax only to the state of
residence. For example, Illinois has such agreements with
Michigan, Iowa, Wisconsin, and Kentucky. Several of the
Eastern seaboard states have reciprocal agreements. Neither
New York nor California has any reciprocal agreements with
other states.
> And exactly how is a small business (or large one for that
> matter) supposed to comply? I now run a small consulting
> firm out of Nevada and we're considering sending employees
> (including myself) into CA. How is one supposed to withhold
> and report? How much of the income would be attributable to
> CA? Pro-rate salary according to the number of days worked
> (say 5/7 th's of the base salary for each week)? Would it be
> considered acceptable to lower ones salary for the duration
> of a contract (unlikely to be longer than 3 months) to
> minimize CA taxes (as an owner, I do have that flexibility
> at least for myself)? What about liability for such add-ons
> as CASDI, for which the payee can never receive any benefit?
By sending your employees to perform services in California,
your business, however it is organized, becomes a California
taxpayer, subject to all applicable California tax laws.
Since you are an employee, I presume your business is a
corporation (S or C), since an LLC or partnership would not
compensate you as an employee. The corporation must
register with the California Secretary of State (qualify to
do business in the state) and will be subject to the
corporate franchise tax, including the $800 minimum. It
must also register as an employer with California and
withhold California individual income tax from its
employees' salaries to the extent they represent
compensation for services performed in California. In
addition, if the corporation is an S corporation, you will
also be subject to California personal income tax on your
distributive share of the corporation's income apportioned
and allocated to California, in addition to the portion of
your salary that relates to services performed in
California.
California is no different from any other state that imposes
comprehensive personal income taxes in this regard (apart
from the $800 minimum tax). If you are sending employees
into any other state to perform services, you must register
with that state as well.
For unemployment insurance purposes each employee is
reported to one, and only one, state, regardless of how many
states he or she works in during the year. If most of an
employee's services are performed in Nevada, the employee
should be reported to Nevada for unemployment insurance
purposes, not California.
As for reducing your own salary during the time you're
working in California ... does that smell right to you??
> The whole system seems designed to restrict the inter-state
> trade in services. I know it has been argued in this forum
> before that it somehow "levels the playing field", but were
> this to be the case, non-residents ought to get the same
> benefit as residents for their money (in CA, access to the
> UC system, for example). Since they do not, it all seems so
> very unfair.
You can think whatever you like about the justice of this
system, but it has been in place for a very, very long time
-- about as long as states have imposed individual income
taxes. The U.S. Supreme Court held many years ago that a
state may tax all of the income of a resident (Shaffer v.
Carter, 252 U.S. 37, 40 S. Ct. 221 (1920)) and may also tax
all property and business transactions within its borders
(Travis v. Yale & Towne Mfg. Co., 252 U.S. 650 (1920)). As
a result, any individual who has income from a source in
State A, while residing in State B, is subject to tax on
that income by both states. While the resulting multiple
taxation is generally mitigated by the allowance of credits
or reciprocal agreements between states, there does not
appear to be any constitutional requirement that such relief
be allowed. It is a matter of legislative grace. Of
course, since you are evidently a Nevada resident, the
decision to accept contracts requiring the presence of
yourself and your employees in any other state will result
in incremental tax liabilities for both your business
(assuming it is profitable) and the individuals involved.
You should be taking that into account in negotiating
contracts with out-of-state clients.
> Are states like CA likely to be happy to receive any income
> at all, or are they likely to dig their heels in when one
> pops up on their radar screens and go for the jugular.
> Having dealt with the CA state board of equalization before,
> I think I'm not likely to be thrilled with the answer.
If the returns come up for audit, they'll be audited.
As for SBE auditors, though, in my (admittedly limited)
experience they are easier to deal with than Nevada
auditors. Those guys are like junkyard dogs <G>!
Katie in San Diego
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