Yesterday, AT noted Al Franken's problems as a tax deadbeat in several states. Franken blames his accountant, though he refuses to allow his accountant to speak to the press. Minnesota Democrats Exposed reports today that the largets newspaper in the state, the Star-Tribune, has sent a reporter to New York to interview Franken's accountant. When performers or athletes or others earn money in a state, they must file a state income tax report on the earnings, and this is what FRanken reportedly failed to do in a number of states.
As a CPA I find the Franken tax situation an amusing lesson. I suspect the accountant probably advised Franken of the obligations and Franken told him not to prepare returns for the non resident states. I had that happen more than once with people who owned pass through entities that operated in several states. Often the client made this decision after weighing the costs of being caught by the non resident state against the additional fees involved in preparing several state tax returns. I never had it happen with an athlete or an entertainer, however. That's because people in those industries tend to be aware they wear a target that screams TAX ME every time they enter another state or a foreign country. Large paychecks and high profiles make them all but irresistible to local revenue authorities.
Income from the performance of services is considered earned where the services are performed. Technically speaking, whenever I spent a day at a client in a neighboring state, I had an obligation to file an income tax return in that state for that day's salary unless an agreement existed between that state and my state of domicile that I need only pay tax where I live. States don't go after the tax on a few days pay from an employee based in another state because it isn't cost effective. The line starts to get hazy when that day every now and then stretches into an assignment of several weeks duration.
A huge exception exists for athletes and entertainers. For one thing few people except the desk clerks at the motel notice when a team of IT consultants from California spends several weeks in Asheville, NC. People in three states knew when George Clooney and Renee Zellweger were in nearby Anderson, SC filming Leatherheads. One day is all it takes in some cases.
Whenever the Seahawks play the Patriots in New England, everyone on the team has Massachusetts income tax withheld because of the 24 hours they spent in that state. Same thing when a Disney affiliate films a movie with scenes shot in multiple locations. If the director insists on spending five days in Central Park while the rest of the movie gets filmed in California, both New York state and New York City expect taxes to be withheld on everyone involved in establishing the story takes place in Manhattan. Ditto if a TV show goes on the road and films at a special location for a week. The local government offices that help arrange locations and permits also check that tax laws are being fully complied with. Thus networks, studios and sports teams are used to sometimes issuing Forms W-2 to a half a dozen different states or more on behalf of a single employee.
Given these industry practices, it's hard for me to believe that TV veteran Franken did not know his state income tax filing obligations.
Since both New York and Minnesota are high income tax states, it may be correct that Franken actually didn't pay less state tax in total because the state of domicile will credit income taxes paid to non resident states. It all depends on what the income was for and which states are involved. For example, with athletes is their contractual pay to be divided by the number of games played during a regular season, or by the total days spent in practice, preseason and any postseason personal appearance obligations as well? Each state may have its own rules, so some income can get taxed twice.
Franken's talk about the records being unavailable probably has to do with the statue of limitation (SOL), which is usually three years from the initial date the return was due or when it was filed if that date was later. Thus the SOL on 2003 returns ran out sometime in 2007, depending upon if he filed an extension that year. Every CPA firm I worked with kept the last 4 year's returns on premises. Prior years' returns were often kept in long term storage off site and could take time to locate and retrieve.
Where Franken may now be out of luck is that there is usually also a three year SOL for filing a refund claim ,while there is no SOL for assessing income tax when no return has ever been filed. Thus if the non resident states go after Franken for years before 2004, he will be double taxed because his state of domicile will no longer allow any claim for refund on the credit for taxes paid to the nonresident state(s).
When a client passes on filing nonresident state returns their CPA usually warns them of this risk as well as that of the assessment of interest and penalties than can amount to more than the income tax itself. When a state decides to go back eight or ten years and recreate returns that were never filed, the decision to save a couple hundred bucks in accounting fees up front quickly turns into a bad bargain.
Since Franken's has become a high profile case, some of the nonresident states involved may well look back further than 2003. It is a given among Directors of Revenue that nothing encourages compliance more than a news story about a famous non filer having to pay back taxes, interest and penalties. .