State income tax wage reporting for benefits provided to a same-sex spouse

[Peter Gulia]

I hope that BenefitsLinks smart practitioners will help me think through some practical questions.

A few States have issued some guidance about tax-reporting for same-sex spouses.

Nebraska

http://www.revenue.nebraska.gov/question/same-sex_FAQ.html

North Carolina

http://www.dornc.com/faq/ssmarriage_faq.html

Ohio

http://www.tax.ohio.gov/Portals/0/communications/information_releases/DOMA_EWH_InforRelease11142013.pdf

Wisconsin

http://www.revenue.wi.gov/faqs/ise/samesex.html#samesex1

Some of these documents suggest that the amount an employer reports as its employees wages for State income tax purposes must add the amount that is the fair-market value of health coverage provided to the employees spouse if the spouse, even if recognized as a spouse for Federal taxes, is not recognized as a spouse under the States constitution or statute.

If followed, this would result in different wage amounts for Federal and State (and locality) tax purposes. (As a Pennsylvania and Philadelphia resident, I know that there can be other kinds of differences between Federal, State, and locality wages.) And it asks an employer to estimate a fair-market value for something that has no market.

What proxy or method should an employer use to estimate the value of the coverage attributable to the spouse?

If an employer fails to do this reporting (and a States tax agency detects that the employer didnt do it), do you think that a State will be aggressive or lax in its enforcement efforts? Why?

If an employer cant settle (with little or no money, and a sin no more pledge) a States enforcement effort, will a State really take this to litigation?

[My 2 cents]

My opinion is that the smart money is on all such discriminatory state laws being thrown out in the not-too-distant future. There have been federal court rulings in several states now prohibiting those states from refusing to recognize same-sex marriages performed elsewhere (at the very least), with no contrary holdings anywhere since the Windsor decision. Wouldn't retroactive negation of any adverse tax actions on that basis be virtually automatic if the state's demand for extra taxes predicated on a refusal to recognize same-sex marriages is thrown out by higher courts (either directly with respect to that particular state or as a result of a decision that there are no sufficiently rational arguments to justify the disparate treatment to permit any states to maintain such laws)?

Many employers are pledged to not discriminate on the basis of sexual orientation. A state that attempts to force any such employers to report higher taxable income for those employees in same-sex marriages than for people in opposite-sex marriages will force the employers themselves to file challenges to the state laws.

Remember, for a state to treat two people differently for tax purposes, a compelling rational basis must be present or the distinction cannot stand.

[masteff]

Carol V Calhoun is a regular contributor on Benefitslink. Here's a fairly thorough page on her website.

http://benefitsattorney.com/charts/state-taxes-and-married-same-sex-couples/

I'll send her a PM and let her know that I'm linking to her in case she wants to add anything to this discussion.

[Peter Gulia]

Just to repose my query:

If an employer fails to report the value of a spouse's health coverage, do you think that a State will be aggressive or lax in its enforcement efforts?

I believe that this question matters because, although there seems little doubt about what the conclusion will be when the final court decision is in, there is an until-then time in which an employer must make practical decisions concerning the expenses of reporting or the expenses of fighting a State's action.

[My 2 cents]

Just out of curiosity (this thread having been started the day after all individual tax filings for 2013 were due, some 2-3 months after all W-2s were required to have been issued by all employers everywhere):

So what did employers do for 2013 tax reporting for their same-sex married employees? How did the same-sex married couples covered by health insurance report their earnings on the state income tax forms?

Has anyone heard of any legal challenges to states trying to charge higher individual taxes to same-sex couples than to similarly situated opposite-sex couples? The Windsor decision, to a large extent, resulted from a challenge to the federal government trying to charge higher estate taxes to someone who had been in a same-sex marriage, a policy that the Supreme Court ruled could not be justified.

It's not as though this just happened. All of those federal judges throwing out all of those state laws and constitutional provisions were, one presumes, ruling on litigation brought in 2013.

[Carol V. Calhoun]

I suspect that a lot of employers did not report spousal health insurance this past year, even when they should have. A lot of them just never realized the issue. Even for those that did, the issue is complicated. For example, you mention Pennsylvania. Pennsylvania will not allow same-sex married couples to file jointly, but does exclude from income health insurance coverage provided to a same-sex spouse. Three states that do not otherwise recognize same-sex marriage (Missouri, Colorado, and Utah(!)) nevertheless treat same-sex married couples as married for state tax purposes due to federal conformity. And even when an employer knows that health coverage should be taxable, there are also, as you say, issues in how health coverage is valued (particularly in the case of a self-insured plan). State tax withholding depends on the state of an employee's residence, not the location of the employer's business, so it's not even a question of just mastering one state's rules.

And I suspect that enforcement will be difficult. Most states rely heavily on federal matching as an enforcement mechanism. And this is an area in which the states have in effect said that state reporting is not supposed to match federal reporting. So they are going to be on their own as far as how to find the underreported income. And if a state did decide to litigate the issue, presumably it could succeed only if its ban were upheld, which seems unlikely (see below).

Has anyone heard of any legal challenges to states trying to charge higher individual taxes to same-sex couples than to similarly situated opposite-sex couples? The Windsor decision, to a large extent, resulted from a challenge to the federal government trying to charge higher estate taxes to someone who had been in a same-sex marriage, a policy that the Supreme Court ruled could not be justified..

There are currently challenges going on in all but five of the states with bans on same-sex marriage. They are typically not just against the higher taxes, but against the ban as a whole. And every one of them in which a decision has so far been issued has resulted in the ban being struck down. In Oklahoma, Virginia, Michigan, and Texas, federal District Court judges have struck down the state Constitutional ban on same-sex marriages, but the decision in each case was stayed pending appeal. In Kentucky, a federal District Court judge has struck down the ban on recognition of out-of-state marriages of same-sex couples, but the decision has been stayed pending appeal. In Tennessee, a federal District Court judge has struck down the ban on recognition of out-of-state marriages of three named same-sex couples, although the decision does not by its terms apply to other couples. In Ohio, a District Court struck down the ban on recognition of same-sex marriages from other states, although the judge stayed the decision pending appeal with respect to all couples other than the named plaintiffs. In Indiana, a District Court has required the state to recognize one same-sex couple’s out-of-state marriage. We'll have to see what happens with these cases on appeal. But at this rate, it's going to be hard even to get a conflict in the circuits that would motivate the Supreme Court to act.

My chart on the issue is being updated daily with new developments, in case anyone needs a reference source.