State Withholding Forms - PowerPoint

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					                State Taxation
          of Executive Compensation
           “Touching All the Bases”
                               Presented by:

Christopher J. Sullivan                        Paul Buchman
Rath, Young and Pignatelli, P.C.               Tyco International (U.S.), Inc.
One Capital Plaza                              301 Yamato Road
Concord, N.H. 03302                            Boca Raton, Fl. 33431

(603) 410-4324                                 (561) 322-7840                      
             Play Ball!!!
• Fundamentally, this breakout is about the
  Personal Income Tax Obligations of
• However, this is also an Employer Issue due
  to Employer Withholding Requirements
• Increasingly, corporate tax departments are
  being asked to deal with these issues to
  design pro-active solutions and to manage
  withholding audits and personal audits
 Executive Comp Baseball
                 Our Schedule
• America’s Game is Growing
• Spring Training Issues—The Basics
  – Resident Versus Non-Resident Taxation
• Regular Season Issues—The Long Season
  – Income Sourcing Challenges
  – Income Forms Challenges (Wages versus Other Compensation)
• Issues for the Manager—All Season Long
• Appeals to the Umpires
• Appeals to the Commissioner

         America’s Game is
• Increased State Revenue Needs
• Increased Political Attractiveness of Exporting Tax to
• Increased Multi-State Nature of Business
• Increased Employee Travel
• Increased Service Economy
• Increased Technology (e.g. telecommuting)
• Increased Forms of Executive Compensation
• Increased Executive Income
• Increased Corporate Regulatory Requirements (SOX)

       Spring Training
     The Basic Takeaway
• Residents of a state generally taxed on
  entire income
  – Generally, there are two types of residents
     • Domiciled in the state
     • Statutory Resident of the state
• Non-residents of a state are generally only
  taxed on income properly sourced to state
     • Usually defined as anyone other than a resident

      Spring Training
    The First Ground Ball
Like Paul Buchman, is Derek Jeter a Florida

Spring Training Grounders
• Specifics of Derek Jeter Case in New York
  – 2001 through 2003 Tax Years at Issue
  – Jeter--Claims Florida residency since 1994
  – (Note: Jeter’s Yankees Debut—May 29, 1995)
  – Jeter--Filed New York Non-Resident Tax Returns for
    the Tax Years
  – Largely no dispute over baseball salary because it is
    New York source income
  – Dispute over other income—e.g. endorsement income,
    personal appearance income, signing bonus.

Spring Training Grounders
• Specifics of Derek Jeter Case in New York
   – Burden on NYS to demonstrate New York residency
     because it concedes Jeter was a Florida resident prior to
     2001. Burden on party asserting change.
   – NY claims Jeter is a NY Resident for Tax Years
      •   Ownership of an Apartment at Trump Towers (10/01)
      •   Personal Items Near and Dear Kept in NY
      •   Community Involvement in non-Florida jurisdictions
      •   Business Ties
      •   Public Statements Regarding Love for New York
   – KEY POINT: NYS attempting to show Jeter is
     domiciled in NY, because likely much tougher case
     under statutory resident criteria (183 day rule).
Spring Training Grounders
• Virtually Every State With an Income Tax Taxes Entire
  Income of Those ―Domiciled‖ in State
   – Note: No broad based income tax in AK, FL, NH, NV, SD, TN,
     TX, WA, WY
• Basic Agreement Among States—Domicile is the place
  where a person has his true fixed and permanent home or
  principal establishment to which, whenever he is absent, he
  has the intention of returning
   – Domicile is generally fact and intent driven
   – Union of act and intent, actions speak louder than words
   – Domicile, once attained, is generally not lost by absence since
     intent to return is critical.
   – Generally only one domicile (but can be statutory resident in more
     than one state).

Spring Training Grounders
Common Domicile Factors
•   Property ownership and residence
•   Location of Bank Accounts
•   Qualification for unemployment insurance
•   State of previously filed tax returns
•   State of Voting
•   State of Driver’s License
•   State of Vehicle Registration
•   Professional License Registration
•   Location of Memberships and Affiliations
•   State of Will Execution
 Spring Training Fly Balls
   Statutory Resident
• Much more variation among statutory definition of resident
• Common Principles
   – Permanent Place of Abode
   – Time Spent in State—183 days/6 months is most common
       • Hawaii—200
       • Idaho—270
       • New Mexico--185
   – ―Other than a temporary or transitory purpose‖
   – Importance of and/or in statutory tests
• Risk of Double Taxation—taxpayers may meet definition
  of resident in more than one state
• American Payroll Association Testimony Helpful
 Spring Training Fly Balls
   Statutory Resident
• California--Resident includes: (i) every individual in the state for other
  than a temporary or transitory purpose and; (ii) every individual
  domiciled in the state who is outside the state for temporary or
  transitory purposes. Cal. Rev. & Tax Code 17014(a). Residence is
  presumed for those who spend more than 9 months in the state. Cal.
  Rev. & Tax Code 17016.
• New York--Resident includes generally individuals: (i) domiciled in
  the state and (ii) not domiciled in the state but who maintain a
  permanent place of abode in the state and spend more than 183 days
  out of the year in the state. N.Y. Tax Law sec. 605(b)(1).

      Regular Season Issues
      Non-Resident Taxation
• States may generally tax the income of non-
  residents when income is earned in that state
• California—Tax on income of individual non-
  residents ―derived from sources in [California]‖
• New York—―derived from or connected with New
  York sources‖
• Risk of double taxation—all income taxed in state
  of residence and sourced income taxed in state of

          Regular Season Issues
• Credits alleviate some double taxation issues but likely not
  constitutionally required and are matter of legislative grace
• Credits don’t help Buchman (FL and NJ)
• All States with an income tax generally permit residents to
  take credit for taxes paid to other states
• Selected states that provide credits for non-residents for
  taxes paid to other states
   – California, Indiana, Michigan, Minnesota, Oregon, Virginia, West
• Selected states that do not provide credits for non-residents
   – Connecticut, Illinois, Maryland, Massachusetts, Missouri, New
     Jersey, New York, Ohio, Pennsylvania

                 Regular Season Issues
                 Non-Resident Taxation
                          (How the Game is Played)
• Typical Fact Pattern: Individual lives in NJ, and regularly works in
  the company’s NY office and travels / works at the company’s
  offices in various states – CT, CA, IL & GA
    –   The individual is subject to personal income tax in NY as a nonresident
    –   The individual is also subject to tax in NJ – his/her state of domicile
    –   The individual may also be subject to PIT in the other states

• Generally, the individual allocates income to the nonresident state
  based on services performed within and without that state
• Many states employ ―days in/days out‖ test to allocate
• Telecommuting and ―Convenience of the Employer‖
    – Note: Current appeal to the Commissioner on these issues
          • H.R. 1360—Telecommuter Tax Fairness Act of 2007
          Regular Season Issues
          Non-Resident Taxation
• Typical Executive Income
  –   Wages / Bonus
  –   Stock options
  –   Restricted Stock
  –   Deferred Income
• Consistent Issue Among Each Category of Income
  – When was the income recognized for federal purposes?
  – When did the income vest?
  – How is the income allocated?

          Regular Season Issues
          Non-Resident Taxation
             Wages / Bonus
• Income earned wholly in the work state
   – All wage income fully reportable to work state as non-resident
   – Income reportable to domicile state – with credit for taxes paid
     to other jurisdictions if applicable
• Income earned partly within and without the state
   – Allocation of wages based on days worked within and without
   – Record keeping
       • Calendar
       • Transportation receipts
       • Credit card receipts
   – Withholding tax requirements

                Regular Season Issues
                Non-Resident Taxation
                   Stock Options
•   Consistent issues among states
     –   What portion of the income / gain can the nonresident state tax as compensation?
     –   How is the income allocated?
     –   When does the recognition event occur – income for federal purposes?
•   New York Guidance
     –   Michealson, 67 NY 2d 579 (1986) – Established the rule for determining the portion of the
         option income that is NY based compensation.
     –   TSB-M-95(3)I (1995) – Explains allocation method for NY option compensation
     –   Stuckless, 819319, NY Tax Appeals Tribunal, (8/17/2006) – Allows alternative allocation
     –   TSB-M-06(7)I (2006) – Applies to tax year 2005 and prior
     –   NYS Regulation: NYCRR 132.24 (Revised 12-27-06)
     –   TSB-M-07(7)I (2007) – Interprets NYCRR 132.4
•   Significant Option Events:
                            Grant → Vest /Exercise → Sale

                   Regular Season Issues
                   Non-Resident Taxation
                 Nonstatutory Stock Options
•   Example: Nonresident employee lives in CT and works in NY - also performs services
    outside NY for employer
     –   Option Granted in 2006 at $15 / share and vests in 3 years
     –   Option Vests in 2009 and employee exercises NSO - the FMV of stock at the date of exercise is $25 / share
     –   Sale in 2010 employee sells the stock for $50 / share
     –   Nonresident Employee’s ―workday fraction‖ – the percentage of time worked in NY is 60% from 2006
         through 2009
     –   Employee’s workday fraction for tax year 2010 is 75%.
•   NY Compensation from the nonstatutory stock option:
     –   $10 / share is ordinary compensatory income subject to allocation – (difference between the grant price of $15
         and FMV of $25 at exercise date)
     –   The remaining $25 /share of gain / further appreciation after the exercise is not subject to tax in NY
•   Allocation Period
     –   Percentage of time worked in NY beginning with the date the option was granted and ending with date the
         option vested – can span multiple tax years
     –   Amount subject to NY Tax: $6 / share is ($10 of compensation X workday fraction of 60% for 2006–09)
     –   Services performed after the shares are exercisable are not taken into account for allocating option income

                Regular Season Issues
                Non-Resident Taxation
                  Restricted Stock
•   Restricted Stock: A grant of company stock in which the recipient's rights in the stock
    are restricted until the shares vest
     –   In general, the value of a restricted stock award is taxable as compensation for federal income
         tax purposes in the year the rights of the beneficial interest in the stock are substantially vested
•   If the IRC Sec. 83(b) election is made:
     –   The amount of Compensation is the amount recognized for federal purposes
     –   The allocation period is the same that applies to wages
•   If no 83(b) election is made:
     –   The amount of compensation is the FMV of the stock at the time it vests and is recognized for
         federal purposes
     –   The allocation period is the period of time beginning with the date the stock was received and
         ending with the earliest of: (1) the date the stock was substantially vested (transferable or not
         subject to substantial risk of forfeiture); (2) the date the individual's services terminated; or (3)
         the date the stock was sold
     –   Similar to statutory stock options the allocation period may span multiple years

        Regular Season Issues
        Non-Resident Taxation
          Deferred Income
• Generally under a deferred compensation plan
  such as a supplemental executive retirement plan–
  payments are made in a lump-sum upon retirement
  or are paid as an annuity
• NY state has ruled that non-residents are not
  subject to tax on payments from such a plan–
  TSB-A-00(6)I (9/6/2000)

     Issues for the Manager
       Big Picture Strategy
• Risks to Companies—Sarbanes-Oxley 404
  – Certification that procedures in place to comply with
    applicable laws and regulations, including state tax
• Risks to Companies—Withholding Audits
• Risks to Companies—Employee Satisfaction
• Pro-Active Solutions
  – Approach bigger states—NY, IL, CA

      Issues for the Manager
       Who’s in the Lineup?
• Employer Withholding Requirements on Non-Resident
   – Some States Employ First Dollar Approach
   – Some States Require Withholding After Certain Days Threshold
     Az. (60), Ha. (60), Me. (10), NM. (15)
   – Earnings Threshold—Offers very little relief (often $5000 or less)
• Generally, employee and employer obligations same
   – But NY, employer withholding only triggered after 14 days in-state
     even though employee is obligated immediately for NY tax

       Issues for the Manager
      The Nonresident Income
              Tax Audit
• Audit will focus on three key items
   – Income
   – Allocation of income to nonresident state
   – Withholding
• Individual must document allocation
   – Travel log
   – Credit card receipts
   – Calendar

       Issues for the Manager
      The Nonresident Income
              Tax Audit
• Company Issues
  – Did the company properly withhold?
  – Company may rely on withholding information provided by
• Proactive Withholding Tax Policy
  – Avoid penalties
  – Develop company-wide withholding policy
  – Enter into voluntary withholding agreements with states
      • Threshold to initiate withholding based on days worked in the state or
        based upon dollar amount

    Appeals to the Umpires
   Ball Four--Take Your Base!
• Some states have established cooperative agreements to
  simplify non-resident taxation and withholding
• Frequently, employee must file certificate declaring non-
  resident status in reciprocal state.
 State            Some Form of Reciprocal Agreement With
 Illinois         IA, KY, MI, W I
 Indiana          KY, MI, OH, PA, W I
 Iowa             IL
 Kentucky         IL, IN, MI, OH VA, W V, W I
 Maryland         DC, PA, VA, W V
 Michigan         IL, IN, KY, MN, OH, W I
 Minnesota        MI, ND, W I
 Montana          ND
 New Jersey       PA
 North Dakota     MN, MT
 Ohio             IN, KY, MI, PA, W V
 Pennsylvania     IN, MD, NH, OH, VA, W V
 Virginia         DC, KY, MD, PA, W V
 W est Virginia   KY, MD, OH, PA, VA
 W isconsin       IL, IN, KY, MI, MN

     Appeals to the Umpires
        Strike Three!!!
• Major states with no reciprocal agreements despite
  personal income tax
   – California
   – New York
   – Connecticut
   – Missouri
   – Massachusetts
   – Oregon

Appeals to the Commissioner
• Patchwork of state laws and practices,
  increased liabilities and enforcement, and
  administrative headaches regularly leads to
  calls for Congress to use its commerce-
  regulating power to create more uniform

Appeals to the Commissioner
      Congressional Intervention
• Relief for Certain Employees
  – Members of Congress—Taxed only in state of
    residence. Surprising???
  – Interstate Transportation Employees—Railroad
    employees (49 U.S.C. § 11502), motor carrier
    employees (49 U.S.C. § 14503), and merchant
    mariner employees (46 U.S.C. § 11108 (b)) can
    generally only be taxed in their states of

Appeals to the Commissioner
      Congressional Intervention
• Relief on Forms of Income
  – Retirement Income--No state taxation of retirement
    income of an individual who is not a resident or
    domiciliary of the state. 4 U.S.C. § 114. (P.L. 104-95)
  – Retirement Income--Includes a prohibition on taxing
    retirement income paid by a partnership to a
    nonresident retired partner under any written plan,
    program, or arrangement in effect immediately before
    retirement begins. 4 U.S.C. § 114 (P.L. 109-264)
     • Clarifies employee versus partner position advanced by NY.
     • Sullivan colleague Stan Arnold (former NH DRA
       Commissioner and FTA President testifies in favor of this
Appeals to the Commissioner
   A Whole New Game?
• H.R. 3359—The Mobile Workforce State Income Tax
  Fairness and Simplification Act of 2007
   – Purpose—To limit the authority of States and localities to tax
     certain income of employees for employment duties performed in
     other States and localities
   – Introduced in August of 2007
   – House Hearing held in November 2007
       • COST—Supports as Introduced
       • American Payroll Association—Supports as Introduced
       • FTA—Opposed as Introduced
   – Prospects for Passage in 2008??

Appeals to the Commissioner
   A Whole New Game?
• H.R. 3359 creates rule to limit taxation of wages or other
  remuneration to state or locality of the employee’s
  residence unless the employee is physically present
  performing duties in another state for more than 60 days
  during the calendar year in which income is taxed
   – Day is defined as more than 50 percent of the
      employee’s duties for such day
   – Wages or other remuneration defined by state law
   – Professional Athletes, Professional Entertainers, and
      Certain Public Figures not protected
       • Buchman helped but Jeter is not


Description: State Withholding Forms document sample