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State taxation of former residents' pension - the source tax.

Concerns over the source tax have been with us for several years. In the October, 1991, Washington Comment column, we discussed at some length the source tax. That column was subsequently reproduced in the February 3, 1992, Congressional Record. Although 12 states have authority to levy a source tax, it appears that California, New York and Vermont are making an aggressive effort to collect on pension income of non-residents. Four bills have been introduced in the 103rd Congress to prohibit a state from imposing an income tax on pension income of individuals who are non-residents of the taxing state. Those bills are: * S.235, sponsored by Senator

Reid of Nevada and co-sponsored

by nine Democrat and 12

Republican Senators. S.235 has

been referred to the Senate Committee

on Finance. * H.R. 411, sponsored by Rep.

Stump of Arizona and co-sponsored

by seven Democrats and

one Republican Representative.

H.R. 546 sponsored by Rep.

Unsoeld of Washington and co-sponsored

39 Democrats and

13 Republicans. * H.R. 702, sponsored by Rep.

Vucanovich of Nevada, with 81

co-sponsors--18 Democrats and

63 Republicans. This bill is similar

to the bill introduced by Rep.

Vucanovich in the 102nd Congress.

H.R. 411, H.R. 546 and H.R. 702 were referred to the Committee on the Judiciary.

Considering the amount of interest shown in the source tax bills and the number of co-sponsors on those bills, it would appear that at least one of the bills to limit or prohibit state taxation of a non-resident's pension income would have a favorable chance of being enacted.

Co-sponsorship of a bill is important. If you are interested in knowing whether your Senator or Representative is a co-sponsor of one of the source tax bills, give his or her Congressional office a call. If your Congressional representatives are not cosponsors, encourage their co-sponsorship as well as their active support for a hearing on any of the source tax bills cited above. A hearing would allow NSPA's affiliated state organizations, which possess considerable political clout on the state level, to show their political muscle on the Federal level.

No one is more familiar with the state's tax structure than the independent practicing accountant, who recognizes problems of tax avoidance, tax compliance and tax fairness and equity. The issue of the source tax is a window of opportunity for the independent practicing accountant to express concerns to the Federal Congress.

State and City Taxes on Non-Resident Taxpayers

States that levy an income tax (and some cities, too) are becoming much more aggressive in collecting their taxes on non-residents who enter the state (or city) for one or several occasions to participate in an athletic contest or even to deliver a lecture. These so-called "rich itinerants" are a fairly easy target for the state (or city) tax collector because they are well known and receive wide publicity as a result of their athletic or academic activities. Moreover, if these individuals fall to comply with the state or city tax bill, they may find themselves faced with a bench warrant for their arrest the next time the make an appearance in that state or city. As farfetched as it sounds, the service of bench warrants on visiting athletes to collect delinquent city income taxes is becoming a fairly common occurrence. According to an article in the Wall Street Journal (Thursday, April 15, 1993), California collected $5.4 million in 1992 by applying its state income tax to non-resident entertainers, speakers, musicians, actors and actresses and individual sports performers. Other states that are aggressive in collecting non-resident income taxes are Wisconsin, Massachusetts, New York and Minnesota. Cities such as Philadelphia (one of the most aggressive, with a flat 4.3% non-resident income tax, expected to collect $7 million annually), Detroit, Cleveland, New York City and Minneapolis are well known by "rich itinerants" who have been hit with the city's non-resident income tax. Las Vegas and Reno are popular with entertainers because there is no city or state income tax in Nevada.

The question is not that the "rich itinerants" cannot afford to pay. Athletes, entertainers and people on the speaking circuits are paid quite well for their skills. The problem is the compliance burden (and the costs of compliance), which is enough to frustrate the most well-intentioned tax manager. Where the state or city has withholding on non-residents, the tax collection is immediate, but the taxpayer is still faced with whether he or she is due a year-end refund and the appropriate amount of state taxes to deduct on the Federal return. With regard to circuit speakers who make a one-time appearance in a state or city (unlike the professional baseball player who appears in a city a dozen times during the season's schedule), the compliance burden is simplified by the sponsor's withholding at the source.

What would iron-man Lou Gehrig or the great Babe Ruth have thought about paying state or city non-resident income taxes because they played a ball game "on the road"? Knowing the Babe's propensity for profanity, one can only imagine!
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Author:Sager, William H.
Publication:The National Public Accountant
Date:Oct 1, 1993
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