The NASPP Blog

Today we continue our series of blog entries guest authored by speakers for the 18th Annual NASPP Conference. For this installment of the series, we feature Carol Rutlen of Rutlen Associates on State-to-State Mobility: What State Are Your Employees In?

State-to-State Mobility: What State Are Your Employees In?
By Carol Rutlen, Rutlen Associates

What happens when an employee moves to another state while holding an equity award (e.g., stock option, restricted stock, restricted stock unit, etc.)? In many cases both states, (the state the employee moved from and the state the employee moved to) will tax all or part of the income related to the award.

Historically companies have not tracked employees moving from state to state. Companies have merely reported the equity compensation in the state of residency when the taxable event occurs (e.g., exercise of an option or vest of a restricted stock/restricted stock unit). Rutlen Associates recently conducted a survey of how companies track employee movement and report equity awards for employees that move from state to state. (Approximately 150 companies participated in the survey.) The survey results indicated about 20% of survey respondents meet the withholding and reporting requirements for reporting equity awards for mobile employees. Compliance varies depending on the type of mobile employee. Compliance is higher for employees on temporary assignment and employees permanently transferring to a new state. Compliance for business travelers is significantly lower.

In the Rutlen Associates’ survey the reasons for noncompliance vary:

• 50% could not allocate the income to more than one state because of limited system functionality and/or manual resources.
• 38% determined the amounts were insignificant.
• 35% didn’t know the compliance requirements for each state.
• 27% didn’t have information about employee movement.

Information about employee location/movement is more readily available for permanent transfers than temporary assignments and business travelers. Frequently the change of address when an employee permanently moves to a new state provides better documentation of employee movement.

Despite the challenges associated with compliance, more companies are reassessing the way they track and report state-to-state moves. Increased attention from the tax authorities in various states is encouraging companies to reevaluate their processes. Many states, especially New York and California, are focusing on enforcement of the withholding and reporting requirements for individuals moving into and out of the state. For example, New York is targeting high-level executives. During a recent audit New York State revenue agents reviewed payroll and expense reports for all executives–even executives with no ties to New York. Any company doing business in New York may be selected for this additional scrutiny. For many companies the potential tax assessment may not be significant, but the administrative cost of complying with the requested documents may be onerous.

Many software vendors are adding functionality in the stock plan database to track the historic location of the employee and employee mobility. Of course, adding functionality to track employee movement is a double-edged sword. The improved functionality makes compliance easier–knowing which employees are moving and the move date is the first step to complying with the reporting and withholding requirements. Once you have information on employee movement, however, the tax authorities are less likely to tolerate noncompliance and more likely to assess penalties for ignoring the compliance requirements.

The moral of this story is that it is an excellent time to reevaluate your handling of the issues surrounding state mobility.

With many states facing tight budgets, expect enforcement activity on multi-state taxation of stock compensation to increase.  Make sure you’re prepared by attending Carol’s session, State-to-State Mobility: What State Are Your Employees In?,” at the 18th Annual NASPP Conference.  The Conference will be held from September 20-23 in Chicago. Register today!