Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Good afternoon. Morning. Still morning. Still Friday, whatever date it is. Thirtieth, 11:00 in the morning. Here we are, Ways and Means Committee. We are taking some testimony from the Department of Taxes to follow-up on questions that have come up throughout the year on tax compliance. And we have two folks from the tax You department all are welcome to join us in whatever configuration you would like. And I also just want to sort of I'm sure that you all will say that, but just let the committee know that when we're talking about things like compliance and enforcement, probably there's some stuff that the tax department won't want to talk to us about for privacy, but also in order to be able to do their jobs well. So I'll say that. You'll probably say it with better words. Will, I don't know if you've met our new member representative, Page.

[Unidentified Committee Member]: Is. Will

[Will Baker, Legal Director, Vermont Department of Taxes]: Baker, I'm the legal director of the tax firm. Nice to meet you. And

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: I'll just add for the record, Rebecca Samaroff, Deputy Commissioner of the Department of Tax.

[Will Baker, Legal Director, Vermont Department of Taxes]: So we are happy to answer any questions you have, but we don't have a prepared presentation today. We're not sure exactly what your questions are, but we're happy to answer any questions. I was aware you wanted to talk a little bit about the use of IRS data in compliance efforts and our interactions with the IRS these days as far as our compliance programs. So I can start there.

[Rep. Emilie Kornheiser (Chair)]: Yeah, that's one, like sort of as the IRS removes staff, how is that?

[Will Baker, Legal Director, Vermont Department of Taxes]: Sure. Sure. Yep, so we use IRS information and processes in a variety of ways. Probably the most kind of relevant this time of year is during the filing season. That's the current year filings. Participate in the IRS, it's called MEF, Modernized E filing System, in which taxpayers who file their personal income taxes electronically, whether it's like at home using software and they do it by themselves, or whether they go to a preparer, the preparer is actually filing them electronically. And so those all go up to the big computer in the sky and then go to the IRS. That's what literally happens. And then they move through the IRS to the states and Vermont participates in that program. So that is a process that is going right this minute with the filing season, and that's going smoothly. They opened earlier this week. That was the official open, and we're off to the races filing season this year. We're not aware of any challenges or anything different, particularly with respect to that this year. So that's kind of the current year stuff. And then as those returns come into the Vermont systems, we also use federal information for some screening processes where the return comes in, and we have what we call a fraud manager, which kind of looks at all the data really quickly as it's coming through and sorts through and scores what looks to be, what looks that might be a fraudulent return.

[Rep. Emilie Kornheiser (Chair)]: It's an automatic process?

[Will Baker, Legal Director, Vermont Department of Taxes]: It's an automated process, yep. And baked into the fraud manager scoring is federal information, both sort of past year general information about each taxpayer, but also in real time, if the IRS identifies what happens to be a suspicious filing, it'll put a red flag on that as it comes through to Vermont. So Vermont, likewise, gets the same red flag in the fraud manager. Or if another state identifies, this is not just with the IRS, but it's sharing among participating states, if other states see what they think could be a suspicious return, they'll flag it, that'll go into the dataset to the IRS, they'll come to us, and then we'll flag it as well. So that's in the current year, that's how we use that data. And even if a return is flagged like that doesn't necessarily mean it's suspicious. It just means that it has a heightened review system at the department. So that's what it looks like in the current year. And then shifting over to our audit function, which is totally different and is really looking a few years back. The audit folks are always a few years back in time doing audits. So they have just completed runs of the 2022 filing season for a variety of audit programs. And we use federal data in those programs too, so the IRS sends us data sets for those years for a variety of things. We look at it for your basic non filer. So that would be someone who has filed a return federally and has a Vermont address on their return, but we don't see a Vermont return. That's obvious, that's number one, that goes on to a list that we work in an automated fashion. It could be where the federal return information doesn't match what the person filed on their Vermont return. Again, that goes on a different list for us to work. Then there's just federal, where our filings don't match federal data. Maybe they have two jobs and they remembered to report the income from one W-two, but not from their second job. And then on their, the IRS has all that W-two data. And so we would pick that up as well. And then discrepancies in that federal data versus the Vermont data, W-two data, that would be another audit program. And then there's more, that's all like massive data sets that are coming in and we get hundreds of thousands of hits that may or may not be true audit problems. It could just be a problem with the data or something like that. But then the more one off things are data sets of federal audits. So if the IRS does an audit, then it'll send us not all of the information, but the conclusion of that audit, how the person's federal adjusted gross income or federal taxable income was finally determined, and it'll send us that information, if it doesn't match our information, we will wait to see if the person files a Vermont amended return after the federal audit, which they're required by law to do. If they don't, then we'll pick it up and assess that information as well. Everything that we see now has gone very well with the 2022 runs of that. We're going to do 2023 soon. Our compliance director did note that that bucket of federal audits, that program, the data set for that program is down a little bit. She generally sees 400 to 500 of those a year for Mon, and she's recently seen about 200. So that has been down a little bit.

[Rep. Emilie Kornheiser (Chair)]: Can I ask a quick question about that? Has it been trending down, or it's been four hundred five hundred continually and then slowed down?

[Will Baker, Legal Director, Vermont Department of Taxes]: Think it was not trending down. She reminded us that she saw something similar with another program, but then there was a supplement to that and it shifted back up. So she's not sure if that's like a final, if it's fair to conclude that that is like a true final judgment of the work on behalf of the IRS for that year or whether it's just we're midway through process there. So that's a high level summary of it all. Everything that I just said on the audit side, all those programs, we call them discrepancy programs usually, meaning there's some discrepancy between what we're seeing federally and what we've seen in Vermont or lack of Vermont filing. That together is all those are automated processes that we do. In other words, a human doesn't necessarily get that federal data on a taxpayer by taxpayer basis, sharpen their pencil and figure of remote liability. It all happens automated in an automated fashion. And that's about $11,000,000 a year of assessments. And so that's just one corner of our compliance division and other areas of the compliance division to all kinds of other audits, but just not based on automated federal data.

[Rep. Emilie Kornheiser (Chair)]: You mentioned if a Vermont address is on someone's federal return, that's one of the flags. Do you do any data matching with property tax records and income tax filings?

[Will Baker, Legal Director, Vermont Department of Taxes]: Yes, definitely for homestead issues and household income issues. Oh, I I left that out.

[Rep. Emilie Kornheiser (Chair)]: Do you do it for income tax filing purposes?

[Will Baker, Legal Director, Vermont Department of Taxes]: Do we

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: Do you

[Rep. Emilie Kornheiser (Chair)]: check to see if it's possible that people are have are for income tax avoidance, do you check property tax records?

[Will Baker, Legal Director, Vermont Department of Taxes]: Yes. When we're do when we're looking at a taxpayer and we're trying to figure out where they live, that's a whole another audit exercise based on domicile. And an important fact there will, among others, will be, do they file homestead declarations in Vermont? Do they file property tax credits? That is like one of the first things we look at. Should have also said another use of that federal data is all that I mentioned, first household income for property tax credits. So all that data coming in, it's not just reviewed for purposes of the Vermont income, personal income tax, but also household income flowing into the property tax credits.

[Rep. Emilie Kornheiser (Chair)]: Yep, representative. So if there's an appeal process and both the feds and you folks are involved, and we gave a couple of different examples, but is it one appeal process or is it separate? I mean, are they gonna appeal the feds and then appeal through you? How does that work?

[Will Baker, Legal Director, Vermont Department of Taxes]: It is separate. If you received a notice of assessment from the IRS and you don't like it, you would want to appeal that in the federal administrative process and then if you get something based on that on the Vermont side, you would have to appeal that in Vermont. And often the federal action comes first. So you're going to be in that process when you get something from Vermont and you would appeal that in Vermont. What we often hear from taxpayers is, I'm working with the IRS on this, can you just wait a little while until we get a final determination from the IRS? And so a lot of our appeals that have been sitting a while are sitting a while because we're just trying to, we're waiting for a final decision on the federal side. Going

[Rep. Woodman Page (Member)]: back to the property tax question, so do you have the ability to compare in data sets? Is it automated where you're comparing the income for somebody's personal tax return and the homestead declaration? You're saying that's the first thing you really check, but is there something that comes, spits something out and saying, here's this person, this address, filing in Vermont for their income tax, and they live at this address, we know they own it, but they're not filing a homestead declaration. Is there anything that comes out and says, that's them, we should look at that or?

[Will Baker, Legal Director, Vermont Department of Taxes]: It's generally on the taxpayer, the taxpayer has an obligation to file a homestead declaration or not. So we don't necessarily look at that for like, on a taxpayer by taxpayer basis for like the tax rate, I don't believe. Household, if they fall for property tax credit, we would compare property tax household income data with personal income data. And really, that should have already happened when they filed their returns. Like whether it's a professional preparer or online software, that is a calculation that's made essentially based on the same inputs from the taxpayer. So I don't know why someone would file an income tax return with us and then skimp on their household income, that they would have to do that manually, I suppose, and we would identify that.

[Rep. Woodman Page (Member)]: So there's a potential where the homestead rate is actually higher than the non homestead rate for someone to say, why file the homestead declaration? I don't get a penalty if I don't, and I get a lower tax rate. So that's why there's probably 60 communities where that situation exists.

[Will Baker, Legal Director, Vermont Department of Taxes]: Yeah. So that's another process that we do do, not so much related to like personal income tax auditing, but there's a process by which we can evaluate and flip homestead treatment based on the information that we have and then also based on information that we get from listers.

[Rep. Woodman Page (Member)]: And then one more follow-up. I know of a few instances in which an LLC, the homeowner will transfer the property to an LLC out of their personal names, and that it can be treated as a non homestead as well. So it's another way to get around the compliance issue from that. I don't know if you're looking for that or is that where it is, their personal income tax return is coming off that same address, but now it's Woodman Page LLC that owns the property and not Woodman Page.

[Will Baker, Legal Director, Vermont Department of Taxes]: Yeah, homestead is a different issue and data field than the ownership of the property. For example, like technically speaking, a renter also has a homestead and that's their apartment and they don't own it. So like on the grand list, it's going to be the name of the landlord. So those are not one of the same things. So when we're looking at homestead, we tend to be looking at homestead for auditing for personal income for domicile issues or looking at the property tax credit or renter credit and whether that was appropriate with their household income. We're not so concerned about the name of the owner on the grant list. Does that make sense?

[Rep. Woodman Page (Member)]: It does, and it's just a small loophole. I'm just not sure how many people are fitting through it.

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: And in this example, that would be someone would be trying to take advantage of a lower non homestead rate. And just, you know, a reminder that, well, it certainly is happening across, like, you know, many jurisdictions. Like, those deltas are not the most meaningful, you know, to a a tax bill. You know, if that's gonna be your only motivation to do, create a business, its only purpose is to rent a house back to yourself. I think there's other instances of that type of tax planning that are much more lucrative, I would think.

[Rep. Emilie Kornheiser (Chair)]: Can you just talk a little bit about income tax responsibility liability in nexus for folks who are domiciled out of state but working remotely in Vermont. So you might not have, say, payroll tax records on them or something.

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: And I'll just flag for the committee that I think under my name, we just shared a document that's kind of like a residency and apportionment 101 that I look at it a lot, honestly, just like refresher of how we treat income of folks who are formerly residents, non residents, and for your residents. Do you want to talk us to start? Yeah, is that helpful for folks?

[Unidentified Committee Member]: Yeah, yeah.

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: Maybe I should have joined the Zoom after all. Yeah, I have it up and I can join if you'd like me to be sharing it up here. We can look. Okay, if you guys are okay with looking on your own, then that's great too. Yeah, so just to set us up, this is a document that starts with some residency basics. So first of all, just articulating what's a resident, what's a non resident and what's a part year resident. To be a resident, you qualify as a resident in Vermont for the part of the year where you're domiciled in Vermont. Domicile is a complex thing that

[Rep. Emilie Kornheiser (Chair)]: Bill can get into

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: the weeds of, but basically, this is your primary, your permanent home. And also, have to maintain a permanent home in Vermont that you're present in for at least one hundred and eighty three days of the taxable year. If you're a resident, like, an important thing to remember is all of your income is taxable in Vermont. And we when we get into apportionment, you know, we can get into how how residents manage it if they're have some income that's taxed in other states too. But that's kind of, like, the big takeaway there. A part year resident basically meets the definition of a resident, but only for part of the year. So we think of that as someone who's moving in state or moving out of state. You know, in that one year, you're a part year resident. To be a non resident, that means your domiciles elsewhere. You don't spend more than one hundred and eighty three days here in state. And if you're not a resident in Vermont, only tax you on the income that you've earned here in Vermont. And we'll talk about how that's done in the next section of this document too. But yeah, you can think about this as a person who lives across the border, drives into Vermont every day for work or someone who owns a business or a rental property here in Vermont, but lives in a neighboring state or somewhere far away. So then apportionment is how we scale someone's personal income tax liability based on whether they're a resident or you're a resident or a non resident. So in the case of residents, as we started off saying, all of your income is taxable and permanent. But for any income in which you have paid taxes to another state for that income, you owe another state because the income was made in another state, we allow a tax credit against your Vermont income tax liability for those taxes paid to another state. That's that other state tax credit or OSCAR that we talk about, sometimes come up in other miscellaneous tax bill discussions. And so this mechanism also applies if you're a part year resident and you are an income in another state during the part of the year that you're a Vermont resident, that's a little less common than the normal kind of part year resident is like, would earn income in another state for that part of the year that you were there. And then might earn income in Vermont for the part of the year that you're here. But if those, you know, if those facts were flipped, then you're treated like a resident using that credit for income taxes paid to another state. But generally for part of your residents, when you earn income in another state during the part of the year that you're not a Vermont resident, you calculate an income adjustment percentage using our schedule I-one 113. And that's where you calculate your Vermont income and then your everywhere else income and you get a ratio. What slice of the pie was the Vermont slice? And that apportionment percentage is actually applied to your calculated tax liability. So your tax is kind of calculated as if all the income was Vermont income, and then you apply this apportionment percentage that reduces it to reflect the share that was actually Vermont income. And that's the same strategy that we use for non residents, the same mechanism there. You calculate your income adjustment percentage, and then apply that to your tax calculation.

[Unidentified Committee Member]: There are exceptions to this, I think, or maybe they've changed, but for military personnel, that are active duty, that are Vermont residents, that are living elsewhere, their income is not taxed. Is that still correct?

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: I do know that that's a different situation.

[Will Baker, Legal Director, Vermont Department of Taxes]: We have a military tax guide that's about 30 pages long for this reason. It is complicated whether you're a Vermonter and you're called up to serve somewhere else, or whether you live somewhere else and you're called up and you're in Vermont, whether you're in Vermont but you're training somewhere else or whether you live somewhere else and you're training in Vermont, and whether you're overseas. There's a whole bunch of different rules about that. What I mean is generally they're pretty favorable to the military personnel.

[Unidentified Committee Member]: You Yeah. Come back to the moment. And

[Will Baker, Legal Director, Vermont Department of Taxes]: also, if you live overseas, I'm not talking about military here, but just someone who does live overseas does keep their domicile in whatever state they were in when they left as well.

[Rep. Emilie Kornheiser (Chair)]: And so how aware are folks who are not domiciled here of their responsibility to pay them up taxes? And how do you find those people and make sure they're aware? And then if you want to talk about the battle between New York State and all the other states around it, that would also be helpful.

[Will Baker, Legal Director, Vermont Department of Taxes]: Sorry, you talking about personal income taxes?

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: Personal income taxes.

[Will Baker, Legal Director, Vermont Department of Taxes]: Well, I would say how aware are people? I would say there's different levels of severity. I would say let's start at the very, very like minimal level. So this is someone who lives and works in another state, say in Massachusetts, and they come up to go on vacation in Vermont, maybe they're with their parents, staying at their parents house over Christmas and they do a little bit of work on their laptop in Vermont for their Massachusetts job. And I'm sure we've all done this, we've all gone to other states and maybe did a little bit of work in that state for our Vermont job and our Vermonters. That is pretty de minimis and I'm sure that happens. Technically speaking, that would be from income. However, if it's a day or two, it's really not I would say the awareness, if your question is how aware are people of their obligations, that would be like one end of the spectrum, like probably not very aware, probably not filing, and we don't spend a whole lot of time worrying about those. After all, it goes both ways, people coming to Vermont and then Vermont just going elsewhere. So that's one area. For employers, the people who are employing that person who is staying with their parents in Vermont over Christmas. We have just a de minimis rule that if you're going to be in Vermont for thirty days or less, then you don't have to withhold for Vermont. However, if you're having an employee going to Vermont for a longer period of time, that's when we tell employers that they need to start withholding for Vermont because that's Vermont income. And I think the compliance on that is pretty good because withholding is really controlled by the employer and generally pretty tightly controlled by payroll companies, which is a very consolidated industry. And we work with the payroll companies all the time, and they are very careful about learning all the rules in all the states because they're trying to get it right. So, I think the compliance on that is probably pretty good. You really are having an employee come to Vermont for long periods of time, the employer is usually good about that. And then of course, if you're withholding in Vermont, then Vermont is getting that tax first of all. And if the employee thinks it's too much, then the onus is on them to file returns everywhere, where they live, where they work, and true that up at the end of the year. It's a zero sum usually for the employee because if they pay a little bit of tax to Vermont, then they'll get a credit for that on their income tax return wherever they do live and generally washes out more or less.

[Rep. Emilie Kornheiser (Chair)]: I feel like there's a middle ground between the home for Christmas and the working like living here and working for a business somewhere else, which is you spend two months at your summer house and a month in January at the house, and you're working that whole time. And that middle ground is, I think, the one that I'm most curious about.

[Will Baker, Legal Director, Vermont Department of Taxes]: Yeah. I imagine compliance is probably best for pretty organized things like a consultant being assigned to Vermont for a couple months and working here, a traveling nurse, someone working in construction and building a property in Vermont for months. The compliance on that is probably quite good. The person who has gone a little bit over a month, but not quite as organized assignment as far as their work goes.

[Rep. Emilie Kornheiser (Chair)]: Like a knowledge worker, just hanging out.

[Will Baker, Legal Director, Vermont Department of Taxes]: That's probably an area of compliance that is not as good. Again, we start to look at how much tax would that really be. And then for our compliance division, we would have to look at the return on an investment for undertaking audit programs that are specifically targeted to

[Rep. Emilie Kornheiser (Chair)]: So that fact you haven't tried to look at property ownership and think about that before?

[Will Baker, Legal Director, Vermont Department of Taxes]: Property ownership, so second homes and and so identifying how often they're there. Not so much for personal income tax purposes other than domicile,

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: which

[Will Baker, Legal Director, Vermont Department of Taxes]: absolutely we do. That's a criteria of many factors as far as whether you're a robot or versus Floridian or a resident residing in another state, and that's a very complicated review. And that's a big chunk of our work, both audit work and legal work is domicile.

[Rep. Woodman Page (Member)]: Yeah. I have a question on real estate withholding tax. We talked about it, Jill Remick mentioned it and she responded, I had some questions about that, about how much is withheld every year, and that's not really reminiscent stay until they file their income tax, and then whatever is owed comes out of that and they get the due fund. I'm just wondering, there must be a very high compliance percentage for that because it's a lot of money. And I didn't know if you have an idea of that, I mean, it's like over 39 a year, I think. I don't have a revenue

[Will Baker, Legal Director, Vermont Department of Taxes]: view on that as far as revenue, but I do agree that the compliance is probably very high because it is baked into real estate transactions and undertaken by the real estate bar. And so they have, that's just one of the, I mean, many of you have probably done the closing or many closings, it's a big stack of documents that your attorney or paralegal is working through. And one of them is going to be real estate withholding if relevant, and they have professional obligations to do that. And so, yeah, I imagine that compliance is very high. However, yeah, lot of it is probably refunded back to the individuals and I have information on how much we get in and then how much goes back in. I imagine it's probably quite high.

[Unidentified Committee Member]: Go ahead. I might be taking us down a different path,

[Rep. Emilie Kornheiser (Chair)]: though, about estate tax. Okay. We wait one second? Oh, mine just totally went away. It's completely gone, so go ahead. Sorry. Yeah. No, it's fine. We had a question come

[Unidentified Committee Member]: up yesterday about how estate tax works if people are living in two different places. So are living in Vermont for part of the year, living someplace else for part of the year, they pass away. How is that estate apportioned? How does that work with different states? So

[Will Baker, Legal Director, Vermont Department of Taxes]: in the tax world, you do not live in two different states, period. Like everyone has a domicile and you only have one domicile. So that controls and so for estate tax, estate tax is assessed on and due from Vermont residents who pass away. So that's a Vermont resident, matter where they happen to be when they pass away or whether they own property in other states and whether they were there at the time that they passed away. If they're Vermont resident as far as domicile goes, and they meet the incomes that is taxable state thresholds, they would be responsible for Vermont estate tax. And so that's period. If you're a Vermont resident, it's due to the state of Vermont. If you are a non resident of Vermont, but you own property in Vermont, then again, and you are over 5,000,000 of the taxable estate, then you would owe, you could owe a state tax on your assets that are in Vermont. So, estate taxes due on taxable estates over 5,000,000, and if you're a Vermont resident, it's on the whole thing. If you're a non resident of Vermont, it's calculated. So we look at your taxable estate everywhere. And then if you have property in Vermont, we assess estate tax on the value of that property, not on 5,000,000, because your 5,000,000 are elsewhere. That's unconstitutional for us to tax that, but we do tax, we assess estate tax on the assets that are here, and the tax is We do look at the gross estate everywhere. And that is tricky as far as going back to compliance, that is tricky because if you say you're a Nevada resident and you own a ski house in Vermont and you are over 5,000,000 of taxable estate, 5,000,000 taxable estate. Well, I use Nevada as an example, but I probably shouldn't because I have no clue what the estate tax situation is in. But let's assume there's no estate tax. So that person may not be aware that they don't care about a $5,000,000 taxable estate. They did never planned for that. They've only planned for federal and Nevada estate planning theories. So they may not be aware of that. And so for that reason, we do get some weight, some stragglers on the estate tax, because where that will come up for us is when they go to sell that property in Vermont. If it's a, say a Vermont vacation home, when it comes time to sell that property, the buyer is gonna be very careful on title and clearing up that title, and they need to know that the seller has the authority to sell it to their client. And in order to do that, you need to get a clearance from us and all that. So that's when we catch it, when that vacation property is sold in Vermont, or it's not just vacation property, it could be an investment business or investment property or something like that. And Vermont, again, we would catch it when there's a transaction on that or financing on that. That's when we would catch it too.

[Unidentified Committee Member]: So we just saw a chart yesterday about the aging of Vermont's population. Is there a trend where people sort of establishing residency? They sold their house, their primary house, not their primary house anymore, but their house in Vermont, but they're establishing residency in a lower taxation place for one hundred and eighty four days a year. And so all of their investment assets, all of that other stuff that's kind of portable property essentially gets shifted to that other state as opposed to being taxed every month as part of your state?

[Will Baker, Legal Director, Vermont Department of Taxes]: I wouldn't say there's a trend towards that. I would say that that's always been an issue, and not just for estate tax, but also for personal income tax for retirees and frankly, weather. Weather's

[Rep. Emilie Kornheiser (Chair)]: a big part of it.

[Will Baker, Legal Director, Vermont Department of Taxes]: Don't know that there's in our estate tax numbers. I don't know that there's a trend

[Rep. Woodman Page (Member)]: along those lines.

[Rep. Emilie Kornheiser (Chair)]: I remember my question. So I know that you all discovered a loophole in the existing law with regarding property transfer tax that you noticed, asked us to close. Right? That was amazing. Good work. Loved it. How do you stay apprised of trends in legal tax loopholes? I learned about that one because someone sent me a random website link, which seems like not a system. Maybe that actually is a system. I have no idea.

[Will Baker, Legal Director, Vermont Department of Taxes]: Yeah, a variety of ways. It depends on the tax type, ranging from just professional development for our staff, conferences, collaboration with other states. The Federation of Tax Administration and the Multistate Tax Commission and those entities do this kind of work all the time, identifying problems and issues that affect all states. Domicile is an issue for every state. There's nothing unique about Vermont to it, and so they're always communicating about these sorts of things. So that, conferences, all those sorts of things. More locally, just the buzz in the state from practitioners about all this, what they're seeing. Like, for example, the property transfer tax rate for second homes. We understood that that was an issue in the past, but also there's chatter all the time on the Vermont Bar Association Real Property section, where all the lawyers are chatting about things all the time. Not in a nefarious way or like a way to try to chin up ideas for tax avoidance, but just

[Rep. Emilie Kornheiser (Chair)]: So anyway, to celebrate their legal job.

[Will Baker, Legal Director, Vermont Department of Taxes]: Yeah, they're just looking at a new law, like, and running through fact patterns in their head, like, well, what about this situation? What about that situation? So certainly that was an area of discussion there. So that's one of our local

[Unidentified Committee Member]: Thanks.

[Rep. Emilie Kornheiser (Chair)]: We spent a decent amount of time sort of touching on trust and then moving away from that conversation yesterday and a few other times. Might make sense to have a separate conversation about that, but I wonder if there's anything you wanna just sort of you would wanna share to start that conversation.

[Will Baker, Legal Director, Vermont Department of Taxes]: Trust from the estate tax point of view?

[Rep. Emilie Kornheiser (Chair)]: Yeah. But also, think, the income tax point of view as well.

[Will Baker, Legal Director, Vermont Department of Taxes]: Trusts are kind of people in terms of tax. Conveying assets to a trust itself doesn't that itself is not necessarily tax avoidance. The trust has to pay income tax every year on income generated from the trust, and then people receiving disbursements from the trust also are responsible for tax liability. That itself is not really, you know, it is what it is. There are rules for trusts that are very similar to personal income. In fact, most of the fiduciary trust stuff is right there in the personal income tax law. For Vermont, as far as trusts go, some part of estate planning could be to convey assets to a trust as you're thinking about your estate plan. But again, there could be pros and cons for that on the tax side. I'm not a trust and estates attorney, although I play one the housewives of me. You might ask some trust and estates attorneys as well, but generally speaking, you can put assets in a trust and if you do it years before you pass away, there are circumstances in which it could be outside of the taxable estate for state and federal estate tax. However, you've put in motion a tax treatment for that, that has other consequences. The trust still pays income tax on that income within a trust, and then anyone who's receiving property from that trust, they are not getting a step up in basis that someone enjoys when they inherit something from someone who has passed away. So if my grandfather passes away and he gives me 100 shares of stock, The basis that I have for that, the starting point when I'm going to calculate my future capital gain is the value of that on the date that he died. So that's good for me. Have a stepped up basis there. And I only pay tax on the capital gain that I experienced when I own it. That is not the case if you put money in a trust, generally speaking, that person, maybe your kid or your grandkid, who's gonna have the benefit of that wealth from the trust, their basis is your basis. So you're handing over a huge potential liability to them. So there tax consequences all around for all of this and it's a very case by case situation. In Vermont, for estate tax, we look back two years on any gifts that the decedent has made And if they've made gifts within that two years, that's any gifts including to a trust that's pulled right back into the taxable estate. So you can't do it within two years in Vermont. There's a similar rule for federal state, state and gift tax and it's it is three years federally, it's only two years in Vermont. And I think the two years went in at the last round of really a review of estate tax several years ago. So there is a look back of two years in Vermont for trusts in estate tax.

[Rep. Emilie Kornheiser (Chair)]: Anyone else? I think you were gonna started to ask a question about the New York the Oh, do you wanna explain a little bit about the great battle of New York's cape? Sure. Not like your personal battle. Every conference I go to, every tax professional talks about it.

[Will Baker, Legal Director, Vermont Department of Taxes]: Sure, and it's definitely a very hot topic, particularly in the Northeast Region. So Deputy Commissioner Samaroff mentioned that, try not to say Rebecca, mentioned that if you are a Vermont resident and you earn income elsewhere, generally you get an Oscar, another state tax credit for that tax you paid to another state. So that more or less it washes out for your Vermont tax liability, your overall tax liability. There could be some small differences in tax rates among states where it may not work out exactly right. But generally speaking, you're generally made whole because you're getting a debt from your Vermont tax for that income tax paid to other states. So Vermont loses out a little bit, but you pay tax in the other state, and same goes for the flip side, if you're ever monitored income and all the states that just sort of agreed to that. By the way, we only offer that if the other state offers a credit too. So that's the way it's worked where like all the states who have income tax have just done this because they want the same for their residents. Anyway, however, state laws do differ among all the states. So exactly what that means can be different in different states. And so the rules about sourcing might be slightly different in other states. This is huge on the corporate income side. You've heard a lot about that where a corporation every year generally is not paying tax on exactly 100 of its income. It could be 80%, it could be 125% because all the rules are different in all the states it's operating in. Same goes for personal income tax, if you're like a multi state taxpayer, the sourcing of that income might be different based on the state's rules. New York has the most aggressive rule about sourcing that I'm aware of. And their rule, it goes back many, many years, has to do with really the headquarters of your employer. So if I live in the Bennington area, I'm driving across state every day into New York state and working there and driving home at night, we all agree that's New York income. You're going to pay tax to New York, we're going to give you a credit in Vermont for that tax paid to New York, it's all fine. However, you say you ask that employer in Glens Falls, New York, do you mind if I work from home on Mondays and Fridays, is that a big deal? They say, oh no, your desk is here in New York State, this is your side work location, but you can work from home Monday and Friday. New York will consider that New York income, because you, the employee is asking for it. It's not something that the employer is doing that is assigning you a work location. And it's called the convenience of the employer rule in New York State. There's a long list of criteria about how they evaluate this, but they will generally consider that New York income. A different situation would be if that Glens Falls, New York employer says, We want you to head up our Vermont field region, work from home in Vermont, cover this area in Vermont. That's absolutely, even Vermont or even New York would agree, that's Vermont income, because the employer is saying to you, Hey, go work at your home in Vermont. So that's the tricky part where the rules in Vermont and New York are slightly different. Vermont has a straight, very simple physical presence rule. If you're in the state of Vermont working, that's Vermont income, period. And so there are situations where people are at their home in Vermont, this affects Vermont residents, not non residents, their home in Vermont and they're working for a New York employer, we consider that Vermont income, and New York considers that New York income. And a real unfortunate situation here is that if we were to accept that New York other state tax credit, Vermont is out that income tax, where our law suggests that that is Vermont income, not New York income. However, New York very much considers it New York income. States have really struggled with this over the years. This is not a new thing, particularly in like the New York Metro Area, where a lot of people are coming from Connecticut, New Jersey into New York. New York has always enjoyed that ability to expand their rules about what is considered New York income to the maximum extent. Legal scholars say there is nothing wrong with this on a constitutional basis, that this is even people who hate this rule agree that it's probably constitutional. It's probably, there are some hardliners who think it's either not constitutional, many feel that this is just unfair, that it's unworkable as we move into such era where people are working remotely for firms all over the world, that it just doesn't make any sense. This rule doesn't make sense anymore. It's very much like the old sales tax brick and mortar rule, where you have to have a physical presence in the state to be responsible to collect sales tax. And that was the rule of the US Supreme Court for a long time. And then the internet happened and the court had to just throw that out because they're like, this is not the world we live in anymore. I think we're probably in that era right now where we're moving toward that being unworkable, but that is the situation right now. And so it's a huge, hotly contested issue. There are legal cases going right now challenging New York's treatment, but it is a headache and the states in the region are at a real disadvantage because we can't there's nothing we can do from a Vermont perspective to recover from this. You know, so many more people live in Vermont and make big money in New York State than people who live in New York State and make big money in Vermont. So the the in the power imbalance is just massive here. And so there's there's really nothing that a state can do to change this. States have tried. Connecticut, New Jersey have passed all kinds of laws saying, you know, we'll give you reciprocal treatment, but only if you undo this. They're offering tax credits to people who go to New York and challenge their assessments in New York legally, they'll support you in your legal challenges in New York state, because that's where this needs to have, there's nothing you can do in suing in Vermont to solve this, you have to go to New York and challenge it there. And so they're trying all kinds of things right now, but really the answer ideally would be uniformity among the states and that's not something that New York has been working towards.

[Rep. Emilie Kornheiser (Chair)]: Is there something like, you know, the way we have it interstate sales tax compacts, is there a move towards doing something like that with the income tax?

[Will Baker, Legal Director, Vermont Department of Taxes]: You know, many states already have a physical presence rule. So we are uniform.

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: It's just the fact.

[Will Baker, Legal Director, Vermont Department of Taxes]: And by the way, I should say, it's not just New York. There's a couple other states that also have this rule. So I think we've all read, as far as changing our law, like a uniform law initiative, like the streamlined sales tax, we're already there.

[Unidentified Committee Member]: Thanks.

[Rep. Emilie Kornheiser (Chair)]: Sorry, I really appreciate you just coming in here to answer whatever random question we throw at you. Super nice. Thanks. I'm sure you've been looking forward to it all week. Is there anything you want to add before we close-up?

[Rebecca Sameroff, Deputy Commissioner, Vermont Department of Taxes]: Looking at your hype, man. That was great, Will.

[Rep. Woodman Page (Member)]: Added a lot of substance

[Will Baker, Legal Director, Vermont Department of Taxes]: to this One more thing I just will say on the estate tax thing. If you are considering changes to the estate tax, I highly recommend hearing from trust and estate attorneys. This area is tricky because, people make their estate plans when they make them. And if a law changes, it could be many years after they've made their estate plans and they could be in various stages in their life and health. I'll just use my father as an example. We don't have to worry about the estate tax. I wish we had to worry about the estate tax, but he's nowhere near the 5,000,000 threshold.

[Unidentified Committee Member]: But

[Will Baker, Legal Director, Vermont Department of Taxes]: my dad has had dementia since 2017. He retired in 2004, and he's still very much alive and kicking, it's 2026. So someone in his position probably couldn't change their estate plan now, unless they had a very strong POA, power of attorney, with someone that was watching out for them, because no attorney is going to change their estate plan for someone who's not of sound mind. And so they literally, we do have a POA for him, but if he didn't, there's no way that that could be changed. So people make these plans. Say you're 65, you retire, you solidify your, tighten up your estate plan. And then time goes by and you get older and you may not be paying attention to your finances as well anymore. And you may not have people around you who are paying attention, and your assets may have grown. You may not have had to worry about the estate tax if you were at 2 or 3,000,000,000, but if that was twenty years ago, maybe you do now. And so, no, I understand that this is a wealthy population.

[Rep. Emilie Kornheiser (Chair)]: I just wanna be I will speak firmly for the record right now for whoever is watching. I personally have absolutely no intentions to change the estate tax this year. It just came in really high, so everyone's talking about it. So And I thought it would be helpful to learn about it.

[Will Baker, Legal Director, Vermont Department of Taxes]: Yeah, my point is, while it is a wealthy population, maybe not a sympathetic population, it is a tricky thing to change the estate tax. Also just because if you change the law, everyone is going into the estate attorneys all at once, trying to make changes, and it's very difficult and overwhelming. So there's a tricky part of changing a state tax law that's a little bit different than your basic personal income tax changes. It's just that it's kind of a different, and the population is just, it's a different situation.

[Rep. Emilie Kornheiser (Chair)]: That makes sense, thank you. Thank you so much for your time. Have a great weekend.

[Will Baker, Legal Director, Vermont Department of Taxes]: Thank you. Thank you.

[Rep. Emilie Kornheiser (Chair)]: Committee, we're not taking any more testimony today. Encourage you to spend the afternoon looking at the regional assessment districts and the tax classifications so that you can really bring your best thinking when we take those on next week. Actionable ideas. Best thinking. Thank you. I mean, your best Friday afternoon thinking. So I'll see everyone back on Zoom on Tuesday after all the things that happen on Tuesdays, 01:00.