The Committee appointed by and representing the National Conference of Commissioners on Uniform State Laws in preparing this Uniform Withholdings and Unemployment Tax Wage Base Act consists of the following individuals:

DRAFTING COMMITTEE 1

I. PRELIMINARY REPORTER'S NOTES FOR THE COMMITTEE 2

Report Approach 2

Project Background 3

Conflicting Policies 5

Compliance costs are high 7

The Targeted Harmonized Wage Code 8

Reporting and Payment Schedule 12

II. SHORT TITLE 13

III. WAGES DEFINED. 13

A. Level One Wages 13

1. Level One Wages shall include 14

a. Cash 14

b. Fair Market Value of property 14

c. Vacation Pay 14

2. Level One Wages shall not include 14

a. Cafeteria Plan 14

b. Certain Meals and Lodging: 15

c. Moving Expenses: 16

d. Group Term Life Insurance: 17

e. Medical Related Expenses: 17

f. Certain Payments Due to Death or Disability:
18

g. Dependent Care Programs 18

h. Certain Non-Medical and Non-Retirement Fringe Benefits: 19

i. Reimbursements for Employment Related Expenses: 19

j. Payments to and From Pensions and Similar Arrangements: 20

k. Tips: 20

B. Level 2 Wages 22

1. Additional Income for Certain Purposes: 22

2. Increases in Wage Base for purposes of Unemployment Insurance
23

a. The value of any meals or lodging 23

b. Expenses of moving 23

c. Employer provided dependent care benefits
23

d. Any fringe benefit 24

e. The amount of any payment for illness or injury
25

C. Level Three Wages 25

D. Unemployment Insurance Wage Base 26

E. Reporting and Payment Schedules 30

Exhibit A -- STAWRS Report Excerpts On Selected Items For Inclusion or

Exclusion From Income Tax Withholding Wage Base 31

Exhibit B -- Selected Items For Inclusion or Exclusion

From Unemployment Insurance Tax Wage Base 32

Exhibit C -- CHART OF STATE COMPLIANCE DATES 33

1. PRELIMINARY REPORTER'S NOTES FOR THE COMMITTEE

Report Approach: As discussed in the below, the Internal Revenue Service and other agencies have been engaged for the last few years in a project to analyze the statutes governing FICA and FUTA on the federal side and state income tax withholding and unemployment tax requirements on the state side. The purpose of this review has been to study the possibility of harmonizing the various provisions in a way that will reduce costs of compliance and administration. As part of their study they have analyzed and compared hundreds of federal and state provisions to determine the existing state of harmony or differences in the way various items of income are treated by the various jurisdictions.

This Committee's work will be in large part based upon the data derived from this federal study. That data is an objective and thorough comparison of provisions, without any commentary, regarding suggestions as to how or if the seeking of harmony should proceed. In addition this Committee will have the opportunity to review the analysis and suggestions made by the federal project, however, unlike the data, the evaluations of the data can be considered or ignored as the Committee so chooses.

You are being asked to consider the efficacy and efficiency of providing a statutory construct in each of the States that is similar enough to all the other States that compliance with the statutory compliance requirements will be essentially the same in each State and, within each state, the statutory compliance requirements will be essentially the same for both the income tax withholding regime and the unemployment tax regime. In other words, you are being asked to consider recommending the use of similar, if not identical, wage bases for both these purposes so that knowledge of one code is tantamount to knowledge of all codes.

The Committee's project is complex because of the cross jurisdictional issues as well as the fact that the harmonization process needs to include two different policies within each single jurisdiction: income collection on the one hand and benefit funding and dispersal on the other. This problem is further complicated in an attempt to bring cross jurisdictional harmony by the fact that each of these policies may have different but significant nuances in the various jurisdictions. As you are reviewing this document might I suggest that you keep a few issues that the Committee will need to address. Other issues will no doubt arise during the Committee's deliberations, but these issues will no doubt face us; and those are:

1. Should the Committee recommend harmonization at all?
2. Should the Committee recommend harmonization of the unemployment laws across jurisdictional lines?
3. Should the Committee recommend harmonization of the income tax withholding laws across jurisdictional lines?
4. Should the Committee recommend harmonization of the income tax withholding laws and the income tax withholding laws within each state and among the states?
5. Should the Committee's recommendations be limited to the 14 items of the Targeted Harmonized Wage Code or should it attempt to harmonize most, if not all, of the items reviewed.

Project Background: The purpose of this project is to consider the development of a statutory construct that, if adopted by the states⁽¹⁾, will create (1) substantial conformity between each state's income tax wage base and that same state's unemployment insurance wage base as well as (2) substantial conformity of those wage bases among the states⁽²⁾. The goal to be reached if conformity is achieved is substantially reduced compliance costs for employers and government agencies responsible for collecting the withholding taxes and unemployment insurance taxes.

The fifty states, the District of Columbia, and the federal government have a total of 96 different employment tax laws. Within the 96 employment tax laws, there are almost 500 different components or provisions. Employers must maintain separate wage records for federal income tax withholding, state income tax withholding, the federal insurance contributions act (FICA), the federal unemployment tax act (FUTA), and state unemployment insurance (SUI) taxes. In many cases, employers must report this information to government agencies at different times, on different forms, and on assorted media. ...

In addition to requiring employers to report tax-and wage-related information, employment tax laws require government agencies to process the information reported, verify that the information complies with the laws, work with employers to correct reports and do not comply, and provide assistance to employers attempting to comply. The diversity in current laws and filing dates makes it difficult for government agencies to provide consistent, accurate, and timely service to their customers.

The diverse state and federal laws governing wage taxes and withholding significantly increase employer burden....⁽³⁾

The Internal Revenue Service, in 1996, commenced a study which they termed the Harmonized Wage Code Project for the purpose of developing a data base upon which recommendations for such a code could be made⁽⁴⁾. That data base is the foundation for the this Committee's deliberations. The study was conducted by a working group the project manager of which was Mr. Philip Corn and consisted of members 26 members from various states' agencies, professions, private companies and federal agencies⁽⁵⁾. The project is still ongoing and, in addition to various reports, it has developed a comprehensive data base located at [SITE TO BE DETERMINED]. The data located at this cite together with its search engine will make analysis of the issues by this Committee far easier than it would have otherwise been. In fact, without this data base, it is unlikely that the National Conference of Commissioners on Uniform State Laws would have undertaken this uniform law project.

Conflicting Policies: As the Committee discusses harmonization it is important that it keep in mind the conflicting policies pursued by the income tax withholding laws and the unemployment insurance laws. The purpose of the income tax withholding laws is primarily to establish a procedure by which taxes are to be collected and secondarily assist in the characterization of certain income⁽⁶⁾ while the unemployment tax structure is intended to raise revenue from employers for a specific employee benefit, and most importantly, to provide a basis upon which benefits are paid out⁽⁷⁾. Thus, unlike the income tax withholding provisions, the unemployment insurance provisions impose a direct cost of taxation on a specific taxpayer the assessment of which is dependent upon whether a payment by that employer is a wage paid to an employee⁽⁸⁾. The result of this conflict of policies is not only the obvious question of employer cost, but the somewhat less obvious interests of states' unemployment benefit paying agencies to broaden the definition of compensatory payments made by a hiring entity to an individual as wages paid to an employee.

Consequently, any attempt to harmonize the income tax withholding provisions with the unemployment insurance provisions within a given state will have to recognize the difficulty of dealing with these two different policy concerns. The difficulty of harmonizing the withholding and insurance provisions among the various states is multiplied by 51. Nonetheless, the attempt should be made and the states should be encouraged to adopt appropriate changes to their respective laws.

On the other hand, it appears that harmonizing the income tax withholding provisions among the states that impose an income tax is more easily accomplished. Though there are differences among the states as to various definitions, there is already significant similarity between existing statutes making the harmonization process less problematic. However, filing dates are a significant issue in this arena.

Compliance costs are high: Reporting complexities are very costly to everyone. Small employers must attempt to understand sometimes subtle distinctions, have knowledge of a large number of definitions and attempt to understand the different requirements of them for two different codes within their state. Large and small employers that do business in more than one state must deal with these issues in each state and the administrative complexities caused by multi-jurisdictional differences. States must maintain two separate taxpayer auditing capabilities (and staffs) to insure compliance with two separate laws.

On the other hand, each state has its own unique issues with which to deal, and thus policy compromises with other jurisdictions or within a single state to reduce complexity may not be appropriate. However, it is not unreasonable to assume that much, if not all, of each state's legislation dealing with income tax withholding and unemployment insurance tax assessment is done without consideration of other jurisdictions or even other statutory schemes within the same state. Consequently, a review by each jurisdiction, with the assistance of a uniform law drafted by this Committee, may cause the various states' to realize they are able to make modifications to their laws which, while making little if any policy compromises, will assist in the cost reducing simplifications of more uniform assessment and collection practices.

Though it will be impossible to construct a single code that will conform each state's income tax withholding and insurance tax provisions or that will cause the various states' codes to conform to the other states', it is quite possible to find sufficient areas of compromise to substantially reduce compliance burdens for states and for employers in general and small employers in particular.

"Eighty-five percent of employers of the 6.7 million employers in the United States employ 20 or fewer workers. ... [T]hese 'small' employers deal with fewer of the component provisions found in .... federal [and state] employment tax laws."⁽⁹⁾ For these employers, most of which do business in a single state, great relief from compliance burdens would be realized if there was harmonization of the most common elements of compensation because it is with those that they deal almost exclusively. Even for large employers and those doing business in more than one state the harmonization of the most common elements of compensation would provide significant alleviation of compliance complexity. The more the various codes can be harmonized the greater taxpayer and governmental compliance relief.

The Targeted Harmonized Wage Code: The Targeted Harmonized Wage Code ("THWC") developed by the IRS and the STAWRS project consists of the fourteen most common elements of wages⁽¹⁰⁾. It is the Service's view that these elements, if harmonized throughout the income tax codes of all states and federal government would be a good first step in simplifying filing requirements. The preliminary statutory provisions contained in this draft to the Committee takes the suggestion of the IRS one step further. It suggests that the Committee consider that these fourteen points be adopted not only by the various states in determining their income tax withholding wage base but also be adopted by them to determine their unemployment tax wage base. Because these fourteen items are the most common forms of remuneration for employees' services a large majority of employers will be directly, and positively, impacted by this conformity. Hopefully, this structure will also simplify the compliance process and administration of reporting for large and intra-state employers by making the number of their wage components effecting the majority of their employees the same for all jurisdictions and both wage bases.

States may balk at conforming even their own income tax and unemployment tax wage bases let alone conforming those wage bases to other states and, possibly, even the federal withholding and FICA wage bases for a number of good reasons. Two of these reasons is that conformity will most likely lead to a loss of revenue, and conformity will reduce benefits in some⁽¹¹⁾ The Plantonics report set out the following example in explaining the revenue impact of reducing the unemployment insurance wage base:

To illustrate the impact on tax revenues, consider the following: An employer has an employee in state A and an employee in state B and each earns $20,000 per year. State A has a taxable wage base of $10,000 as opposed to state B's $21,000. (Taxable wage base is that portion of an employee's total wages subject to SUI tax [and may not be the same as that employee's income tax wage base].) Consider as well that the reduction in taxable wages resulting from these definitional chages is $1,000 per year. There would be no impact in state A inasmuch as the portion of the employee's taxable wages would be unchanged. However, in state B taxable wages would be reduced from $20,000 to $19,000 and there would be a commensurate reduction in tax paid by the employer.

When considering worker unemployment benefits, there are two types of impacts that can occur. First, there are minimum earning levels in each state that must be met before an employed worker becomes eligible for benefits. If any reduction in wages would drop a worker's earnings below the minimum earnings level, that worker would no longer be eligible for benefits...

Second, and more likely, is the potential reduction in weekly benefit amounts (WBA). These amounts are calculated on a worker's earnings, generally a combination of annual earnings and high-quarter earnings. Any reduction of annual or high-quarter earnings reduces the worker's WBA...⁽¹²⁾

Though traditional contributions might be diminished and benefits reduced under some circumstances, it does not appear that the amount of loss of revenue or aggregate reduction in benefit payments will likely be dramatic if the fourteen items of income are harmonized within a state and among the states and federal government. However, it is possible that at least as to reduction of benefits, the though the macro problems will not be significant, the micro problems could be devestating. The dollar amounts of benefits paid to any one individual, or individuals within any single employee sector, may be reduced by a significant percentage or eliminated altogether.⁽¹³⁾

This draft recognizes that some jurisdictions may determine that complete conformity is not possible or desirable. Thus, a provision is made to add back components to either or both wage bases those items that are not included in a jurisdictions "conformed" provisions but the inclusion in one or the other tax base is deemed necessary. This may be viewed as simple window dressing because it would appear on its face not to result in any consequential changes to what already exists inter and intra-state. However, there are some advantages even to the "add-back" regime. First, it is hoped that many, if not all, states can be convinced that total conformity is in their best interest; that compromises that reduce the revenue raising capacity of their unemployment tax provisions can be at least off-set against private and governmental administrative savings. Even if this benefit is not found to be extant or compelling, it is thought (at least by the Reporter) that the format of general exclusion of these fourteen items from the definition of wages under either the withholding or unemployment tax wage bases together with a format for adding back items as necessary will make compliance far easier for employers. It is thought that this format will permit the drafting of forms that will be easier to deal with and far more self explanatory.

The suggested provisions also provides add back consideration for a large group of other items in the unemployment wage base. Whether these should be dealt with by this Committee is an issue that needs to be discussed, but a preliminary listing is attached as Exhibit B.

Reporting and Payment Schedule: The following outline deals briefly with the question of whether conformity within and among states of their reporting and payment dates should be recommended by this Committee. Ignoring transition problems (which may, in some cases, be insurmountable), common dates for compliance will greatly ease burdens imposed on multi-state employers. As one taxpayer put it when interviewed "...the fact that I have to send four different agencies every quarter is a real pain in the neck... I'd like to go to one place... [or] if I could do it electronically and just jet it to all four agencies at the snap of a button..."⁽¹⁴⁾

1. SHORT TITLE. This Act may be cited as the Uniform Wage Base Act.

1. WAGES DEFINED. For purposes of this Act the term wages shall include all forms of remuneration, whether in cash or in a medium other than cash, paid for services to an employee by an employer⁽¹⁵⁾. Wages shall include, but shall not be limited to, the following payments made by an employer to an employee for services rendered to the employer:

1. Level One Wages⁽¹⁶⁾

1. Level One Wages shall include, but shall not be limited to, the following items unless specifically excluded under Paragraph 2 of this Section:

1. Cash

1. Fair Market Value of property

1. Vacation Pay⁽¹⁷⁾

1. Level One Wages shall not include the following items paid to employees by an employer:

1. Cafeteria Plan: Any payment made to, or on behalf of, an employee or his or her beneficiary pursuant to an election by said employee or beneficiary under a plan meeting the requirements of Internal Revenue Code Section 125, or any successor thereto.⁽¹⁸⁾

1. Certain Meals and Lodging: The value of any meals or lodging furnished by or on behalf of the employer if at the time of such furnishing such value is excluded from the employee's income pursuant to Internal Revenue Code Section 119, or any successor thereto.⁽¹⁹⁾

1. Moving Expenses: Payment to, or on behalf of, an employee to the extent the employer shall reasonably believe that the payment will qualify for deduction (or portion thereof) under Internal Revenue Code Section 217 (as determined without regard to Internal Revenue Code §67).⁽²⁰⁾

1. Group Term Life Insurance: Premiums paid for qualifying group-term life insurance on the life of an employee. For purposes of this provision the term qualified group-term life insurance shall mean amounts excludeable under Internal Revenue Code Section 79 from an employee's remuneration subject to income taxation.⁽²¹⁾

1. Medical Related Expenses: The amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund to provide for any such payment) made to, or on behalf of an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of
1. sickness if mandated under this state's workers' compensation law,
2. sickness but only the amount of any payment or payments made after six consecutive months from the commencement of such payments due to sickness
3. accident disability payments received under this state's workers' compensation law,
4. medical or hospitalization expenses in connection with accident disability or sickness, or
5. death;⁽²²⁾

1. Certain Payments Due to Death or Disability: Any payment or series of payments by an employer to an employee or any of his dependents which is paid -
1. upon or after the termination of an employee's employment relationship with a given employer due to
1. death, or
2. retirement for disability, and
2. under a plan established by the employer which makes provision for his employees generally or a class or classes of his employees (or for such employees or class or classes of employees and their dependents), other than any such payment or series of payments which would have been paid if the employee's employment relationship had not been so terminated.
3. by an employer to a survivor or the estate of a former employee after the calendar year in which such employee died provided such payment is not considered income in respect of a decedent in accordance with [cite state law provision].

1. Dependent Care Programs: Any payment made or incurred or benefit provided by the employer which affords an employee dependent care assistance pursuant to a qualifying dependent care program as set forth at [cite state law] if at the time of such payment or such provision of a benefit it is reasonable to believe that the employee will be able to exclude such payment or benefit from his or her taxable income.⁽²³⁾

1. Certain Non-Medical and Non-Retirement Fringe Benefits: Any fringe benefit provided to or for the benefit of an employee or any cash reimbursement for any such benefit paid to an employee if, at the time of provision or reimbursement, it is reasonable to assume that such benefit shall be excluded from the employee's taxable income pursuant to [cite state code similar to Internal Revenue Code Section 132].⁽²⁴⁾

1. Reimbursements for Employment Related Expenses: Any payment that is a reimbursement for expenses incurred on behalf of an employer or is an allowance provided by an employer for such expenditures, but not in excess of the amount actually incurred by an employee for such expenditures, that meets the requirements for proper and adequate substantiation under Internal Revenue Code Section 62(c).⁽²⁵⁾

1. Payments to and From Pensions and Similar Arrangements: Any payments made to, or on behalf of, an employee or his beneficiary from or to a plan or plans described in Internal Revenue Code Section 3306(b)(5)(A) through (F).⁽²⁶⁾

1. Tips: Gratuities, which in the aggregate for an employee do not exceed $20 during any given month, paid by third parties or by an employer on behalf of third parties for services performed as part of the employment relationship.⁽²⁷⁾

1. Level 2 Wages⁽²⁸⁾

1. Additional Income for Certain Purposes: For purposes of assessing premiums or taxes on employers under this State's Unemployment Compensation Law and for purposes of calculating benefits for individual workers under said law, there shall be added to the amount of income calculated under Paragraph A. of this Article III those items listed at Section 2. this Paragraph B.

1. Increases in Wage Base for purposes of Unemployment Insurance

1. The value of any meals or lodging furnished by or on behalf of the employer if at the time of such furnishing such value is excluded from the employee's income pursuant to Internal Revenue Code Section 119, or any successor thereto.⁽²⁹⁾

1. Expenses of moving paid to, or on behalf of, an employee.⁽³⁰⁾
2. Employer provided dependent care benefits provided to an employee either as a reimbursement for assistance in caring for children and adult dependents as set forth at [cite state law] or direct provision of such assistance.⁽³¹⁾

1. Any fringe benefit provided to or for the benefit of an employee or any cash reimbursement for any such benefit paid to an employee even if, at the time of provision or reimbursement, it is reasonable to assume that such benefit shall be excluded from the employee's taxable income pursuant to Internal Revenue Code Section 132.⁽³²⁾

1. The amount of any payment for illness or injury (including any amount paid by an employer for insurance or annuities, or into a fund to provide for any such payment) made to, or on behalf of an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of illness or accident (but only to the extent that amounts paid exceed the amounts paid under the state's worker's compensation law).⁽³³⁾

1. Level Three Wages - Items that may be included in Level One wages (Income Tax Wage Base Inclusions).
1. Reporter's Note: These items which are treated differently by many states as well as many states and the federal government for purposes of the income tax wage base. They are included here for purposes of the Committee's discussion as to whether they should be included specifically as Level One wage inclusions or Level Two wage exclusions for income tax withholding purposes.
2. To the extent these items can be harmonized (by agreement among the states to include or to exclude) the simpler tax compliance and administration will be.
3. Possible Compromise to the proposition that all states agree to include or exclude items would be to provide an "add-back" feature whereby individual states can provide a specific option to add-back items to the Level One income
1. This may appear cosmetic, however, it would provide a consistent base income among all the states' income tax wage bases AND all the states' employment tax wage bases.
2. Consistent filing forms could be developed that make this add-back feature even clearer
3. Presumably a consistent form could be developed that could be filed with all agencies involved.
4. Unless specifically excluded these items will meet the general definition of Level One compensation that is included in the income tax wage base.
5. A list of these items from the IRS report⁽³⁴⁾ is attached hereto as Exhibit A.
2. Unemployment Insurance Wage Base
1. As mentioned above, the problem for harmonizing the unemployment insurance wage base with a state's income tax withholding wage base is that the later is intended to establish a process for identifying wages and collecting taxes while the former is intended both to raise revenue and pay benefits.
2. Any attempt to harmonize that has the effect of reducing the unemployment wage base creates two difficulties: it reduces revenues and may reduce or eliminate benefits to any one claimant.⁽³⁵⁾
1. For example, if an employee's compensation consists of the two components of (1) cash and (2) meals and lodging excluded from the income tax wage base, if the meals and lodging are excluded from the unemployment wage base, thus conforming it and the income tax wage base, the state will collect less unemployment insurance revenue (unless the cash wages already meet or exceed the maximum subject to unemployment taxes in the state)
2. From the benefits side, to the extent meals and lodging are excluded from the wage base an employee's benefits may be reduced or eliminated.
1. If the employee's cash wages already meet or exceed the state's maximum upon which unemployment benefits are calculated, then no reduction in benefits will occur.
2. If the employee's cash wages are less than the maximum upon which benefits are calculated but the shortfall is completely made up by the value of meals or lodging then the employee's benefits will be reduced from the amount that the employee would have received if the value of the meals and lodging had not been excluded from the wage base.
3. The STAWRS group has recommended that significant harmonization of the unemployment insurance tax base and the income tax withholding wage base can be accomplished by adopting the same provisions 14 provisions for the insurance wage base as is being recommended for the withholding tax wage base (See, above, at III.⁽³⁶⁾
4. The full detail of the STAWRS group's recommendations for items to be included and excluded are set out at Exhibit B hereto.
5. In addition to the THWC components that group has recommended the following exclusions from the unemployment tax wage base
1. Non-cash payments outside the employer's trade or business⁽³⁷⁾
2. Corporate director's fees⁽³⁸⁾
3. Supplemental employment benefits⁽³⁹⁾
4. Employer paid employee FICA for household domestic employees⁽⁴⁰⁾
5. Payments for jury service⁽⁴¹⁾
6. Employment Achievement Awards⁽⁴²⁾
7. The STAWRS group also recommends a series of exclusions from the unemployment insurance wage base based upon excluding certain relationships from the definition of employment. For detail, See, items 17 - 41 and 45 at Exhibit B.

1. Reporting and Payment Schedules
1. Filing and Payment dates and requirements for the various taxing jurisdictions are set out at Exhibit C
2. The Committee needs to determine whether it wishes to harmonize these dates and requirements.
3. It is the Reporters recommendation that the Committee should at least consider this issue. A great deal of the complexity within a state and among the states are the differing reporting dates and threshholds.

7. In the Department of Labor's recent report evaluating the THWC DOL's consultants stated: "Unlike revenues the impact ... [of the THWC on unemployment] claimant benefits are not directly linked to the taxable wage base. Rather, they are more closely related to workers' occupations, industries in which they are employed, and their level of earnings." de Silva, et. al., The Impact of the Targeted Harmonized Wage Code on Unemployment Insurance, report to the DOL and IRS, at iv (November 2001) (Hereinafter referred to as "the Planmatics report.")

8. There are many sub-issues hidden in the concepts of "wages" and "employee." The question of whether one is an employee or an independent contractor is critically important for a number of reasons including, for our purposes, the question of whether the employer is liable for an assessment of unemployment insurance or FICA on the amount paid to an individual. The classification of an individual as employee vs. independent contractor is far beyond the scope of this Committee's charge (thank goodness!!) and is one that continues to be only partially resolved, at least at the federal level. Additionally, there are similar classification issues in regard to whether a partner is performing services for the partnership as an employee or as a partner and whether a corporate officer-significant stockholder is an employee for unemployment tax purposes.

Also, the question of whether a payment to an employee is a wage or something else is of critical importance. For example, a reimbursement of an expense incurred by an employee on behalf of an employer is clearly not a wage, yet its mis-classification as a wage may result in an additional cost to the employer of a state's assessment of unemployment insurance taxes or premiums.

9. HWC/ITW, supra, note 3 at 1-7 [footnote omitted]. The accompanying note points out that "15% of the 'large' employers employ more than 50% of all workers in the U.S.", and further, the components of their employees' wages are far more complex than those of small employers. Consequently, harmonization among the states and, ideally the states and the federal government would have a dramatic impact on the compliance complexities faced by all employers but probably a greater impact on the country's largest employers. However, as pointed out in a study conducted by an outside contractor to the STAWRS group, though "small" employers, "[a]s a group... generally deal with a smaller number of wage components ... [they], in the aggregate, bear the greatest per employee costs associated with the payroll reporting process." Planmatics report, supra, note 7 at 5.

10. The fourteen items set out by the IRS to be excluded from the withholding tax wage base are (in no particular order of importance): vacation pay, compensation for jury duty, employer provided meals and lodging, group term life insurance, dependent care benefits, tips, employee business expense reimbursements, health insurance, cafeteria plans, moving expenses, death benefits, sick pay, fringe benefits and contributions to qualified retirement plans.

11. Anything that reduces the taxable wage base potentially can result in loss of benefit because the base upon which benefits are calculated will be reduced. For example, in California benefits are calculated based upon minimum wage payments during a base period of between $900 and 1,300 depending on certain variable (Cal. Unemp. Ins. Code §1281). Anything that lowers amounts considered as wages under the unemployment insurance regime, therefore, will go to lower, or possibly eliminate benefits.

12. Planmatics report, supra, note 7 at 10-11] The Planmatics report studied the impact of harmonizing the 14 items in twelve states: California, Connecticut, Georgia, Iowa, Louisiana, Mississippi, Minnesota, Montana, Nevada, New Jersey, Pennsylvania and Texas. Id. at 14.

13. The most controversial recommendation of the HWC Project is that dealing with 'meals and lodging.' ... Most states...[concur with the IRC §119 exclusion of meals and lodging from the income tax wage base], but about one-third of the states include 'meals and lodging' for UI purposes. This recommendation has caused a great deal of concern ... [in those states that do not exclude meals and lodging for their unemployment insurance wage base] primarily because of the possible impact such payments if made excludable might have on the amount of revenue available and the payment of benefits."

The Targeted Harmonized Wage Code, Internal Revenue Report, August 2000, at 2-8. Hereinafter referred to as the "THWC" report.

The 23 states that do not exclude meals and lodging from the unemployment insurance wage base (including California) have more than 26% of the countries work force. "...California's data indicate the average benefit claim over its duration is $2,422 and the average value of the exclusion of the meals and lodging component on affected claims is $487, amounting to 20% of the claim of the workers affected. This percentage of reduction, or one close to it, could occur in New Jersey, New York and Texas as well." Planmatics at v.

14. Planmatics, supra, note 7 at 18.

15. This provision anticipates the definition of employer and employee which will be the focus of some of the Committee's discussions.

In kind payments of wages ("medium other than cash") will be included at its fair market value at the time of payment to the employee by the employer. Cash, of course, will be valued at its face value. It is assumed that cash payments of wages made in a denomination other than United States currency will be its official exchange rate value as of the date of payment.

16. The term "Level One Wages" is adopted to reflect those components determined by the THWC project as the most common elements of compensation paid by employers to employees. As pointed out in the study [GET PROPER CITES(at 1-7 of the Aug. 2000 report (and BLS study)] 85% of US employers have fewer than 20 employees (See, THWC, supra, note 13 at 1-7.) Additionally, the elements of the Level One Wages are shared by most if not all employers.

The MAJORITY OF EMPLOYERS OWN SMALL BUSINESSES. Eighty-FIVE percent of the 6.7 million employers in the United States employ 20 or fewer workers. It is also known that these 'small' employers deal with fewer of the component provisions found in all the state and federal employment tax laws. Thus, most small employers will not be concerned with many of the components, usually those involving more complex forms of remuneration. Therefore, the project team looked at components that are most common among small employers and their employees..."

Id. [footnotes omitted]

The report also points out that "...15% of the 'large' employers employ more than 50% of all workers in the U.S." Id.

17. Delaware is the only state in which vacation pay is not always an element of wages for purposes of both income tax withholding and unemployment insurance premium withholding. Delaware excludes as wages vacation pay paid during a period of unemployment.

18. This provision provides that benefits otherwise excludeable from an employee's gross income and subject to income tax and unemployment insurance withholdings will not be considered includeable merely because of constructive receipt issues. Internal Revenue Code Section 125 permits taxpayers to select from a group of benefits provided by their employer. Individually, these benefits are permitted, under the Internal Revenue Code, to be provided on a tax free basis to an employer's employees. Without the intervention of this code provision, however, the fact that employees have the opportunity to select which tax free benefit, from a variety of choices, they prefer to have is sufficient to make these otherwise tax free benefits taxable under the doctrine of constructive receipt.

19. This provision excludes from income subject to income tax and/or unemployment insurance withholdings amounts that are excluded because they are items provided by the employer primarily because the physical location for the performance of services requires the employee to live and/or eat on the business premises. No state that imposes income taxes does not already provide such provision or, at least, a provision similar to IRC §119 for income tax withholding purposes. However, for unemployment insurance premium purposes there are 20 states that do not exclude these items from the employees' wage base. The Planmatics report, in commenting on the impact of the THWC, made the following point:

As expected, the major impact would be from the THWC recommendation of the meals and lodging provision that excludes the value of meals and lodging as designed in determining taxable wages and benefits for SUI purposes. At present, 23 states treat meals and lodging as wages in their laws and would be affected by this recommendation. These staes include California (included in this study), New Jersey, New York, and Texas. They represent in excess of 26% of the nation's work force. In terms of impact on affected claims, analysis of California's data indicate the average benefit claim over its duration is $2.433 and the average value of the exclusion of the meals and lodging component on affected claims is $487, amounting to 20% of the claim of the workers affected. This percentage of reduction, or one close to it, could occur in New Jersey, New York and Texas as well.

Planmatics report, supra, note 7 at v.

The same report pointed out that in California this reduction represents only "...about 0.2% of the total benefit outlay, it represents almost a 20% reduction for the 7600 affected claimants. Additionally, 660 claimants, or 0.1% of the claimant population would lose their eligibility entirely." Id. at 34. Of course, for those who have remuneration from their employers other than meals and lodging at or in excess of the maximum taxable unemployment insurance wage base the exclusion of the value of meals and lodging is of no consequence.

For those states which do not wish to conform their law to this provision, they will cause their state's employers to add back such amounts for purposes of the unemployment insurance premiums as provided at Section III.B.2 of this document.

20. This provision provides for the exclusion from the wage base for purposes of income tax withholding and unemployment insurance premium withholding amounts paid for what are commonly referred to as moving expenses. No state that imposes income taxes does not already provide such a provision except for two states with no provision. However, for unemployment insurance purposes there are two states that do not provide this exclusion. For those states who do not wish to conform their law to this provision, they will cause their state's employers to add back such amounts for purposes of the unemployment insurance premiums as provided at Section ???.

21. There is no state that imposes either an income tax or an unemployment insurance tax that does not have either a provision similar to this provision or has no provision at all.

22. In general only income from sick pay or wage continuation plans maintained by the employer but not mandated by a state's workers' compensation law are included in an employee's income wage base for purposes of either income tax withholding or unemployment insurance premium withholding. Additionally, amounts paid due to an employee's death but are considered income in respect of a decedent are not excluded.

23. This provision excludes the value of benefits provided under an employer provided dependent care plan providing non-discriminatory access to dependent care for young children and adults necessary to permit the employee to maintain employment. It is presumed that the state provisions will require a written, non-discriminatory plan similar to that required under Internal Revenue Code §129. Inclusion of this provision will require many states to adopt provisions not currently extant. Currently, 42 states have concurring statutes and 1state has no provision (9 states have no income tax). On the unemployment insurance side of the ledger, however, only only 15 states' statutes conform to these requirements. However, 35 states have no provisions dealing with this issue. Two states, Alabama and Michigan provide that payments made directly to the care giver or care facility are not wages to the recipient employee while benefits provided through a wage reduction plan are considered wages to the recipient employee (presumably because of some degree of constructive receipt).

24. Of those jurisdictions imposing an income tax forty-two have provisions that provide this treatment for purposes of income tax withholding and one state has no provision. For purposes of unemployment insurance withholding only thirty-three states have provisions similar to this provision. Ten states currently have no or minimally matching provisions.

25. Though the THWC report indicates that all states provide this exclusion for both income tax and unemployment insurance tax purposes, there are numerous states that do not currently comply with the reporting requirements set out in the Internal Revenue Code. If those states should adopt reporting requirements similar to those mandated for federal tax purposes, no additional compliance costs would be incurred by employers or employees who are currently complying with the federal requirements.

26. This provision deals with contributions to pension, profit-sharing and similar arrangements that meet the requirements for tax exemption under Internal Revenue Code Sections 501 and 401, et. seq. All states provide similar exclusions for both income tax and unemployment insurance tax purposes but the provisions for many states are complex and could be simplified.

27. In general all the states already provide that tips are wages and that the employer has a duty to withhold and to make unemployment insurance contributions on those wages. This provision assumes that each state has or will have a reporting measure similar to the federal requirement that the employee provide a monthly statement in writing to the employer stating the amount of tips earned during the preceding month. Because services for which tips are a significant form of remuneration are more and more paid for via credit and debit cards the record keeping requirements for both employer and employee are somewhat less burdensome than they may have been when such payments were made in cash.

28. Level one wages include all forms of compensation except those items which are specifically excluded or cannot be calculated (primarily de minimus benefits or what are considered working condition fringe benefits under the Internal Revenue Code.) For income tax purposes the provision is comprehensive. However, for unemployment tax purposes some states may feel that it is necessary to include in the wage base certain items that have been excluded for income tax purposes.

The reason for this different treatment is the result of the fact that the income tax is an income generating assessment whereas the unemployment compensation system is one in which benefits are paid out. Thus, for certain items, the states may consider items that are excluded for income tax purposes, because the utility of their inclusion is offset by the cost of acquiring the data necessary for accurate collection or because for various policy reasons certain items may not be wages for income tax purposes, should be considered part of a total compensation package upon which unemployment benefits are calculated.

The fact of different purposes for the income tax and the unemployment insurance provisions as well as different approaches to unemployment compensation among the various states has been part of the reason that the wage base is subject to so many similar but diverse statutory provisions. In an attempt to create a uniform definition of the wage base so that there can be conformity within a single jurisdiction and among all the states, the peculiar needs of each jurisdiction have been ignored in the development of Level One wages. However, these issues are dealt with by the add-back provisions discussed in this document as Level Two wages.

29. This item is currently excluded for income tax purposes by all but one income taxing state. However, at least 20 states currently include this item as part of their unemployment insurance wage base. Because it is unlikely that most employers need to deal with this type of expense, and very unlikely that small employers are concerned with this type of expenditure, and, further, because even in those states where this is an inclusion for unemployment insurance but not income tax purposes, it will simplify the reporting and record keeping for most employers if this item is generally excluded but easily added back to the wage base for those states which deem it necessary.

30. Certain of these expenses are deductible for federal income and most state income tax purposes. Most states provide that these expenditures, to the extent they are deductible for federal tax purposes under IRC §217, are also excludeable from their unemployment insurance wage base. There are currently, however, two states that do not exclude these amounts from the unemployment insurance wage base. For states wishing to include these amounts in this wage base, they are added back by this provision.

31. As discussed at footnote 23, supra, there is no consistent state pattern regarding inclusion or exclusion of these payments or benefits either for the income tax wage base or the unemployment insurance wage base. Though it is proposed above at subsection III. A.2.g. that these benefits should be excluded from the income tax wage base, there are different considerations for determining inclusion or exclusion of these benefits from the unemployment insurance wage base. For income tax purposes, at least at the federal level, IRC §129 provides, because it requires a non-discriminatory plan, an inducement to high paid individuals to encourage the maintenance of such a plan for all employees. Also, in general, it is fair to say that worker productivity should be enhanced (both through ability to concentrate on their work as well as their ability to be free from time consuming interruptions during the work day) if their dependents who need assistance are being provided adequate care and observation. From the perspective of unemployment insurance, however, the idea of reducing the wage base has been adopted only by 15 states. Most states have not addressed this issue by statute, and thus it is presumed that the amount in question are excluded. Two states have bifurcated treatment of these amounts by excluding amounts paid directly to care givers but including amounts set aside for these purposes under a wage reduction plan. Though it is hoped that states will adopt a general exclusion for these benefits for both income tax and unemployment insurance purposes, for those which do not, the amounts to be included in the unemployment insurance wage base will be added to the taxable income calculated under Section III.A.2., above.

32. Though, as noted above, all income taxing states match the federal exclusion for those purposes, twenty states either do not address or address negatively or in a marginal way the exclusion of what would be excluded fringe benefits under IRC §132 for purposes of their unemployment taxes. Presumably these states have an administrative policy excluding de minimus and working condition fringe benefits (as defined at IRC §132). With the exception of Maryland and Pennsylvania, which also exclude qualified transportation expenses (though their definitions differ somewhat from the federal statute), these 20 states include in the unemployment wage base the items listed at IRC §132.

33. This provision is an attempt to reconcile differences under various states' laws and the complexity within a given state's statute and the interpretation thereof. Though there appears to be substantial conformity among the various states and the states and the federal government excluding these items from the income tax base, there is substantial non-conformity regarding the inclusion and exclusion of these items from the unemployment insurance wage base. One might argue that items of this nature should be excluded from the income tax wage because payments for illness and injury are in the nature of non-taxable return of capital, and consequently they should be viewed similarly for unemployment insurance wage base purposes. Also, it should be noted that benefit payments may actually be higher (and therefor state expenditures greater) simply because they are subject premium payment. Nonetheless, if a state believes they need to subject some or all of these benefits to unemployment insurance premium assessment, then this provision provides that opportunity by adding back appropriate items to the income tax wage base to derive the unemployment insurance wage base.

34. HWC/ITW, supra, note 3.

35. "...[T]he components of the THWC have minimal impact on potential benefits accruing to workers. The impact on UI claimant benefits, while high in absolute numbers, when expressed in terms of percentage of annual benefits paid also shows minimal impact. In other words, overall the impact is minimal, but in any given industry, the impact could be greater... Unlike revenues the impact on claimant benefits are not directly linked to the taxable wage base. Rather, they are more closely related to workers' occupations, industries in which they are employed, and their level of earnings." Quoting Philip Corn, HWC project director in telephonic conversations on February 26, 2002.

36. " ...[B]ased on adoption of the overall HWC ... [which includes the provisions for both income tax withholding and unemployment insurance] [t]he ROI for HWC adoption is estimated at 77 percent for employers, and better than 24 percent for states. In other words, employers would see their tax and wage reporting burden signficantly reduced. In addition, states can expect to realize over $24.00 in benefits, or cost savings, for every 100 dollars they invest toward HWC adoption. Id.

37. The reporter is not sure what these items might be unless they are intended to cover gifts. Nonetheless, according to the STAWRS group there are a substantial number of states that exclude these amounts either statutorily or administratively.

38. Such payments are more appropriately viewed as fees paid to a non-employee than wages paid to an employee.

39. These are employer paid benefits in addition to state paid unemployment benefits. As such it is a close call as to whether they are or are not wages because, though they clearly derive from the employment relationship, at the time of payment the recipient is not a statutory or common law employee. The STAWRS group believes that in general those states who do not exclude these amounts statutorily do so administratively.

40. This provision basically establishes that for purposes of unemployment taxes, like federal income taxes, the wage amount will not be grossed up by the amount of these payments.

41. Not only are these payments more comparable to fees rather than wages, a juror is not an employee of the state or federal government.

42. This harmonizes with the income tax provisions for all jurisdictions currently though, apparently, few states currently exclude this amount from the Unemployment Insurance wage base.

43. Most of the issues presented in this exhibit are listed without comment. This one, however, the Reporter found particularly confusing. The Treasury defines these services as, essentially, work done for a non-corporate employer at or around the employer's home (See, IRC Reg. §31.3121(a)(7)-1). Also, there is some impact on farm labor. Issues peculiar to farm labor have not been addressed by this report to the committee.