State Solutions to a Mobile Workforce
A mobile workforce has countless benefits. However, there are many tax consequences that accompany it. While many taxpayers hoped for a federal solution to some of the tax issues created by a mobile workforce, some states have resolved (or at least partially resolved) those issues on their own. For example, in 2019, Illinois enacted legislation effective January 1, 2020, whereby nonresidents are not subject to personal income tax in Illinois if they work for 30 days or less in the state and employers are not required to withhold on the employee’s wages in that situation. Ill. S.B. 1515 (2019). As always, there are some caveats to the general rule, such as income earned by professional athletes. See. Ill. Dep’t of Rev. Pub. 130 (Aug, 1, 2022).
In 2022, West Virginia enacted similar legislation, which provides a 30-day safe harbor for nonresidents working in the state. W. Vir. H.B. 2026 (2022). Louisiana also enacted mobile workforce legislation effective January 1, 2023, which provides a 25-day safe harbor. LA Act No. 383. The Louisiana Department of Revenue recently enacted a regulation related to the new law. LAC 61:I.1923 (eff. Feb. 20, 2023).
Under the Louisiana provisions, there are a series of requirements for the nonresident’s income to be exempt from Louisiana taxation and for the employer to be relieved of withholding responsibilities. R.S. 47:248(B); LAC 61:I.1923(A)(2). Most of those requirements are relatively benign—such as requiring the employee to have worked 25 days or less in the state or that the nonresident must have performed work in more than one state during the calendar year. Id. However, there is one requirement that may create compliance issues.
Specifically, one of the following must apply to the nonresident: (1) the nonresident’s income must be exempt from taxation under the U.S. Constitution or federal statute; (2) the nonresident’s state of residence does not impose a personal income tax; or (3) the nonresident’s state of residence provides a substantially similar exemption. Id. The first option is redundant—if a nonresident’s income is exempt from tax, then withholding is not required and the nonresident is not subject to tax on that income in Louisiana.
For the second option, there are currently only nine states, including Florida, Texas, and Wyoming, which do not impose a personal income tax. Thus, if the employee resides in one of those states, then the exemption may apply.
For the third option, neither the statute nor the regulation defines “substantially similar.” Id. For example, would Illinois’ provisions be substantially similar even though its safe harbor is 30 days? What if the resident state’s provision does not require other states to enact similar provisions? The answer is unclear. Arguably, such provisions are still substantially similar. Currently, only a handful of states have provisions that could be classified as similar, including Illinois, North Dakota, and West Virginia. Thus, an employee would need to reside in one of those states for this portion of the exemption to apply.
Those states that have enacted mobile workforce legislation should be commended for their attempts to alleviate some of the tax burdens. However, with provisions such as Louisiana’s, the exemption applies to residents from less than half of the states. Both employees and employers need to use caution and confirm that all elements of the exemption apply.
This update is one in a series of updates written for the April 2023 edition of The BR State + Local Tax Spotlight.