Still, perhaps the best enforcement mechanism may be requiring companies to withhold additional taxes from their employees’ paychecks. State auditors may not be able to monitor every border-crossing, but with corporate payroll managers as their enforcers, they don’t need to.
“Our employees call me the ‘Tax Nazi,’ ” says Dee Nelson, the corporate payroll manager at the Koniag Development Corporation, a government contractor that works on military projects. “They get really angry at me when we withhold their pay if they do a project in Utah or wherever. And I have to explain this is the law, not me just trying to be a bully.”
Ms. Nelson’s employer is based in Anchorage, but at any given time its employees are generally working in five states with five different withholding requirements. She estimates that the administrative work required for managing multistate employees adds about 10 percent to the cost of each project.
Many Fortune 500 companies contacted for this article privately acknowledged having been slightly less vigilant than Ms. Nelson about tracking the minute-by-minute movements of their thousands of employees in the past. But these companies also say that they have been subjected to payroll audits more frequently in the last few years and that tax officials have requested travel logs for highly paid employees during these audits.
In some cases auditors check to see if, say, an employee who was reimbursed for airfare to California also had California income taxes withheld from his paycheck. If not, the company can be fined.
Finding out that you owe income taxes across the border can raise your overall tax bill, if your home state has a low tax rate (or no income tax rate at all, as in a handful of states). But your tax bill may not rise by much, since most states allow you to deduct income taxes paid to another state.
The bigger burden associated with distributing your taxes to more state governments is the administrative effort it requires, for both employee and employer. Many states require filing a return for a single day’s work. For peripatetic workers like salesmen or consultants, filing a pile of additional state tax returns can become prohibitively expensive, not to mention frustrating.
“There’s 50 states out there and 50 different laws,” said Nola Wills, senior vice president and chief compliance officer at Harbor America, a financial services company near Houston. “It’s difficult for a small business to have all the information and resources to know that. In most cases their C.P.A. doesn’t know that, either.”
So long as there is still a great deal of ignorance about these laws, the states with the most aggressive tax compliance teams have the most to gain. They can siphon off more revenue from their neighboring states than the other way around, all without fear of retaliation from anyone who has the power to vote them out of office.
But as more states catch on and start investing in more payroll auditors and data mining tools to get money back, the end result may be an arms race until every state comes out more or less evenly.
“If everybody goes after everybody, nobody wins,” said Arthur R. Rosen, a New York tax lawyer and partner at McDermott Will & Emery. “In this interstate war of ‘you tax my rich guy and I tax your rich guy,’ it’s just a wash, a preposterous flurry of tax returns.”
In the meantime, states may have a new prominent target.
Last year President Obama visited at least 30 states. But, like other presidents before him, he plans to file in just one: his home state, Illinois, according to a White House official.
State tax auditors, start your engines.