Many American workers cross state borders regularly as part of their job. Events like trade shows and client meetings, for example, may require an employee to travel from their home state. For those that do, chances are they probably owe income taxes in these other states. Such laws have been on the books for decades, however many states appear to have recently stepped up enforcement. The states claim better techniques for tracking taxes owed, not pressure to fill budget deficits, have prompted them to become more tenacious at enforcing the provision.
Originally, state tax officials relied on the sports pages and celebrity magazines to see when well-known higher-earners came to town for work. For everyone else, it was largely ignored because it was not cost-effective for states to monitor every worker crossing a border. Now states have greater access to data warehouses that help them better track taxes owed. Real estate transactions, federal data from the IRS, bids for government construction projects - all this information is generally available and can help states find additional revenue.
Still, perhaps the best enforcement mechanism may be requiring companies to withhold additional taxes from their employees' paychecks. State auditors may not be able to monitor every border-crossing, but with corporate payroll managers as their enforcers, they don't need to. Many Fortune 500 companies say that they have been subjected to payroll audits more frequently in the last few years and that tax officials have requested travel logs for highly compensated employees during these audits. If, for example, an employee was reimbursed for airfare to California, an auditor may also check to see if that employee had California income taxes withheld from his paycheck. If not, the company can be fined. Finding out that you owe income taxes across a state border can raise your overall tax bill if your home state has a lower tax rate, although it may not rise by much since most states allow you to deduct income taxes paid to another state.
The bigger burden associated with distributing your taxes to more state governments is the administrative effort it requires, for both employee and employer. Many states require filing a return for a single day's work. For traveling workers like sales people or consultants, filing a pile of additional state tax returns can become prohibitively expensive, not to mention frustrating. As long as there is a lack of understanding about these laws, the states with the most aggressive tax compliance teams have the most to gain from enforcement. As more states catch on and start investing in more payroll auditors and data mining tools to get money back, the end result may be an arms race until every state comes out more or less evenly. In the meantime, states may have a new prominent target. Last year President Obama visited at least 30 states. But, like most presidents before him, he filed in just one: his home state, Illinois.
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.