Nuances of State Reporting Series, No. 1: Electronic Reporting Requirements

State reporting can be an arduous task. Each state has an ‘Employer Withholding Guide’ (or a similar framework for instructions) that provides information regarding payment and reporting of the withholding tax which is unique to that state. The challenges of state reporting can be boiled down to the following premise: the information detailed in state employer withholding tax guides derives from statutory law, administrative rules or general guidance established by the state department that is charged with oversight of taxation. Even issues seemingly as pragmatic as the requirement of electronic reporting for certain payers may stem from legislation or administrative rules. During the 2014 legislative session, the Missouri and New Mexico legislatures passed bills relating to electronic filing while Louisiana considered a bill requiring all state departments to accept methods of electronic payment. Ohio is in the process of establishing an administrative rule requiring all taxes to be reported and paid electronically and Hawaii announced a Request for Proposal (RFP) in an effort to completely overhaul its computer system for better management of the collection and payment of taxes. While the majority of states have infrastructure in place to permit electronic filing and payment, the systems vary in each state and do not always encompass all types of returns. The Missouri Department of Revenue permits electronic filing for Forms 941 and 941P, but 1099s and W-2s must be submitted by magnetic media or by paper. The legislation, HB1081, requires the Department to develop and implement a system that allows electronic submission of records, returns, reports and other documents to the Department. Dubbed the “Paperless Documents and Forms Act,” the bill requires development to begin by January 1, 2015 and be completed by January 1, 2021. The legislation passed on May 30 and is pending a signature by Governor Jay Nixon.[1] Similarly, the New Mexico Taxation and Revenue Department currently allows electronic filing of Form CRS-1, but 1099 and W-2 submissions are sent via magnetic media, paper or the Combined Federal/State Filing Program (CFS). The legislation, SB9, requires development of a centralized website, the “One-Stop Business Portal,” to provide authorized representatives of businesses the capability to conduct business transactions electronically. The Portal will provide a streamlined process for filing and payment of taxes, accessing filing and deadline information and submitting applications for business licenses and registrations. The bill requires availability of the Portal for public use by January 1, 2017 and was signed on March 6 by Governor Susana Martinez. The Louisiana Department of Revenue permits electronic filing and payment for Form L-1 as well as the filing of Form L-3, 1099s and W-2s. Thus, the legislation offered this year, HB724, requiring all state departments to accept credit cards, debit cards and other forms of electronic payment for taxes, fees, charges, licenses, fines, penalties and interest, did not significantly impact payers of the withholding tax. Regardless, the legislature adjourned on June 2 without passing the bill. Rather than relying on the legislative process to change electronic filing requirements in Ohio, state law grants the Tax Commissioner the authority to adopt rules regarding electronic filing of returns. The Ohio Department of Taxation is considering Proposed Rule 5703-7-19, which requires all employer withholding taxpayers to file and pay electronically. Electronic returns may be filed using the Ohio Business Gateway, but 1099s and W-2s must be filed using magnetic media or paper. Until the rule is adopted, it is tricky to speculate how it will be implemented as some states deem magnetic media submissions to be a form of electronic filing. Accordingly, it is possible for the threshold of electronic filing to change, but not the actual method. Rather than turning to legislation or administrative rule, the Hawaii Department of Taxation submitted a Request for Proposal (RFP) for Tax System Modernization, seeking to completely overhaul electronic reporting in the state. Currently, payers can electronically file and pay the HW-14, but 1099s and W-2s must be filed by paper. The new electronic system will completely replace the current system and will focus on facilitating and accelerating tax reporting. If the overhaul includes a means of filing 1099s and W-2s electronically, it will leave Rhode Island as the only state that requires paper filing for 1099s. State reporting is complex because of the variances in each state, from the definition of “electronic” to how states assemble the information for withholding guides to the due dates for reporting. The “Nuances in State Reporting” series will highlight many of the challenges associated with the reporting of the withholding tax to state departments and will provide guidance for overcoming the hurdles of ensuring accuracy in state reporting.