The Senate Ways and Means Committee approved S.B. 604 by a 4-2 vote. Under the bill, the state would require a city's earnings taxes for "work done or services performed or rendered" in the city to exclude work or services performed through telecommuting unless the telecommuting occurs within the city.
The bill that passed the committee was amended to make it apply to all tax returns filed on or after Jan. 1, 2021.
S.B. 604, which comes when telecommuting is in the spotlight due to the coronavirus pandemic, would also provide that taxpayers who telecommute and are denied refunds of tax paid on that work can sue for the disputed amount and that they can recover attorney fees from the taxing jurisdiction.
The bill was introduced by Ways and Means Chairman Andrew Koenig, R-Manchester, in response to guidance by the collector of revenue for the city of St. Louis, Gregory F.X. Daly. The collector said the city would continue to impose the earnings tax on employees whose employers allow them to telecommute from outside the city due to the pandemic if their employers continue to operate within the city.
St. Louis Deputy Collector of Revenue Tom Vollmer previously told the Senate committee that St. Louis is within its rights to tax teleworkers if their companies still operate within the city because those workers are still generating revenue for a company in the city. The St. Louis collector of revenue's office did not respond to requests for comment on the committee approval of the bill.
Besides St. Louis, Kansas City also imposes an earnings tax; both cities' taxes are imposed at a 1% rate. Kansas City Commissioner of Revenue Mari Ruck told Law360 the city's current practice is to refund taxes to teleworkers. While the requested refunds would reduce city revenues, Ruck said the city had a reserve built into the budget that would offset the refunds in a given year.
The St. Louis earnings tax represents about 36% of the city's budget. It brought in about $186 million in fiscal year 2019 and is estimated to bring in about $176 million for fiscal year 2021, according to a 2020 revenue estimate by the city's budget division.
Both the St. Louis and Kansas City taxes will be on the ballot in April, when voters will be asked to decide whether to renew the taxes for another five years.
Besides S.B. 604, St. Louis' position on its earnings tax has been met with a lawsuit. Three individuals have told a Missouri federal court in a proposed class action that the city's limiting of tax refunds to nonresidents traveling for work and exclusion of individuals teleworking outside the city, including those teleworking due to the COVID-19 pandemic, was unlawful. Distinguishing between nonresidents working outside the city and those traveling outside the city for business purposes was an arbitrary distinction without rational basis, the individuals said.
The individuals seek to represent a class of nonresidents of St. Louis whose employers withheld the tax and paid it from Jan. 1, 2020, onward and who have been denied similar refund requests.
The taxation of remote workers has become a hotly debated topic as the pandemic compelled droves of businesses, employers and employees to adapt to long-term telework.
Most notably, New Hampshire has sued Massachusetts in the U.S. Supreme Court over its rule that sources compensation of nonresidents who work for Massachusetts companies to the state for personal income and withholding taxes. The justices have asked the U.S. solicitor general to weigh in on the case before deciding whether to take it up.
Koenig did not respond to requests for comment.
--Additional reporting by Abraham Gross. Editing by Vincent Sherry.
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