On May 6, the Alabama state legislature sent H.B. 379 to Governor Kay Ivey. H.B. 379 would make some important strides towards easing the tax paperwork burdens on nonresidents unfortunate enough to do short-term work in Alabama, but major changes still need to be made.
Under current law, any nonresident working in Alabama for a single day, for whatever reason, must file an income tax return to the state of Alabama, and their employer must withhold income taxes on their behalf. That means that many taxpayers are technically legally required to file a tax return to Alabama, even when it costs them more to pay the $40 fee to add a new state to their TurboTax return than to pay their Alabama tax liability.
H.B. 379 creates a safe harbor whereby individuals do not need to file income tax returns and employers do not need to withhold on their behalf until the employee spends more than 30 days working in the state. If an employee exceeds that 30-day threshold, they are responsible for taxes on the entirety of the income they earned while in Alabama, including the first 30 days they spent there.
That would be in line with NTUF’s gold standard, but unfortunately, this safe harbor is diluted with a key caveat. It only applies to nonresidents from states with a “substantially similar exclusion” to this 30-day threshold or states that have no income tax, a caveat that we call a “mutuality requirement.” These mutuality requirements add confusion to provisions intended to provide simplicity and undermine the purpose of mobile workforce legislation.
One reason is that “substantially similar” is not easy to define. For instance, Louisiana has a 25-day filing and withholding requirement, while Georgia exempts taxpayers from obligations until they reach the lesser of 23 days, $5,000, or 5 percent of their total income earned in Georgia. Legislation was recently introduced in Arkansas that would establish a $2,500 filing threshold and a 14-day withholding threshold. Which of these, if any, would qualify as “substantially similar” enough to afford residents of those states the benefits of Alabama’s new mobile workforce law? The only real way to find out is to file a return and see if you technically had to — which defeats the purpose of a safe harbor.
The good news is that Alabama borders two states that unquestionably qualify for the new exclusion: both Florida and Tennessee have no income tax. Together with Texas, which is close enough to have a small number of commuters, commutes from these three states make up more than 40 percent of Alabama’s commuters.
H.B. 379 also includes language that could possibly be used to challenge the state’s “convenience of the employer” rule, a rule that requires individuals who switch from working in Alabama to working remotely for the same Alabama employer while physically out of the state. Not only is this rule illogical, assessing tax obligations on an individual while they are not physically located in the state nor benefiting from the services taxes ostensibly pay for, it also exposes affected taxpayers to double taxation. However, since eliminating the state’s convenience rule was not a stated purpose of the bill nor an acknowledged impact throughout the legislative process, H.B. 379 alone is not likely to overturn the state’s convenience rule absent litigation.
Currently, Alabama ranks 49th on our ROAM Index. H.B. 379 will raise Alabama’s ranking out of the basement, but not as much as it could have. The fact that H.B. 379 contains a mutuality requirement, as well as the failure to explicitly repeal the state’s convenience of the employer rule, mean that Alabama’s rank will only rise to 35th. Had H.B. 379’s 30-day filing and withholding thresholds not included this unfortunate asterisk and succeeded in eliminating the convenience of the employer rule, it could have risen all the way to 12th (or 3rd-best among states with an individual income tax).
Nevertheless, H.B. 379 represents a clear step in the right direction for a state that had previously done nothing at all to eliminate unnecessary burdens for remote and mobile workers. There is more work left to do, but it is much-needed progress for a state that had been going in the wrong direction.