Ruling 2002-1, Income Tax / Federal Preemption of State and Local Income Taxation

FACTS:

A person (hereinafter “the Company”) owns and operates ferries on the navigable waters of Connecticut and New York.  The Company’s ferries transport passengers and cargo exclusively between a Connecticut municipality and a New York municipality.  Virtually all of the Company’s employees are residents either of Connecticut or New York.

Onshore employees.  Some Company employees work exclusively onshore (“onshore employees”).  Ticketing agents who sell tickets or supply information to customers, and yard personnel who greet customers, stage cars for loading, provide parking instructions, and clean facilities and grounds are onshore employees who work either in Connecticut or New York.  Employees who take ferry reservations and mail schedules, and employees who maintain the Company’s accounts receivable, accounts payable, and payroll records are onshore employees who work exclusively in Connecticut.

Ferry employees.  Some Company employees work on the Company’s ferries (“ferry employees”).  Ferry employees include captains, able-bodied seamen, mates, engineers, and deckhands.  Some ferry employees work exclusively on the ferries, and do not, during the course of a particular shift, step off the ferry to which they are assigned.  Other ferry employees work on the ferries most of the time and have de minimis onshore duties either in Connecticut or New York, such as collecting tickets, obtaining information from the ticket office, or getting supplies for the ferry.  Except during the winter months, some of the ferries may remain in New York overnight, and some ferry employees may be required to stay overnight in the crew’s house in New York.

ISSUES:

1. Whether the wages due or accruing to a ferry employee working exclusively on the ferries are subject to Connecticut income tax withholding.
2. Whether the compensation to a ferry employee working exclusively on the ferries is subject to Connecticut income tax.
3. Whether the wages due or accruing to a ferry employee working on the ferries most of the time and having de minimis onshore duties in Connecticut or New York are subject to Connecticut income tax withholding.
4. Whether the compensation to a ferry employee working on the ferries most of the time and having de minimis onshore duties in Connecticut or New York is subject to Connecticut income tax.
5. Whether the wages due or accruing to an onshore employee are subject to Connecticut income tax withholding.
6. Whether the compensation to an onshore employee is subject to Connecticut income tax.

RULING:

1. The wages due or accruing to a ferry employee working exclusively on the ferries are not subject to Connecticut income tax withholding, pursuant to 46 U.S.C. §11108(a).
2. The compensation to a ferry employee working exclusively on the ferries is subject to Connecticut income tax if the employee is a resident of Connecticut, but is not subject to Connecticut income tax if the employee is a nonresident of Connecticut.
3. The wages due or accruing to a ferry employee working on the ferries most of the time and having de minimis onshore duties in Connecticut or New York are not subject to Connecticut income tax withholding, pursuant to 46 U.S.C. §11108(a).
4. The compensation to a ferry employee working on the ferries most of the time and having de minimis onshore duties in Connecticut or New York is subject to Connecticut income tax if the employee is a resident of Connecticut, but is not subject to Connecticut income tax if the employee is a nonresident of Connecticut.
5. The wages due or accruing to an onshore employee working in Connecticut are subject to Connecticut income tax withholding, whether or not he or she is a resident of Connecticut. The wages due or accruing to an onshore employee working in New York are subject to Connecticut income tax withholding if the employee is a resident of Connecticut but only in accordance with Conn. Agencies Regs. §12-705(a)-2(b)(2). The wages due or accruing to an onshore employee working in New York are not  subject to Connecticut income tax withholding if the employee is not a resident of Connecticut.
6. The compensation to an onshore employee working in Connecticut is subject to Connecticut income tax, whether or not he or she is a resident of Connecticut. The compensation to an onshore employee working in New York is subject to Connecticut income tax if he or she is a resident of Connecticut. The compensation to an onshore employee working in New York is not subject to Connecticut income tax if he or she is not a resident of Connecticut.

DISCUSSION:

For more than a century, federal law has “prevent[ed] the seizure of the seaman’s wages, not only by writs of attachment issued before judgment, but [by] extending the like protection from proceedings in aid of execution, or writs of attachments . . . after judgment.”  Wilder v. Inter-Island Navigation Co., 211 U.S. 239, 249 (1908) (referring to §61 of the Act of June 7, 1872, 17 Stat. 262, 276, which became §4536, Rev. Stat. (1874)).   In 1915, Congress passed the Act of March 4, 1915, ch. 153, 38 Stat. 1164.  “The language of section 12 of the Act of March 4, 1915, [38 Stat. 1164, 1169] [was] substantially the same as that of section 4536 of the Revised Statutes.”  G.C.M. 3697, VII-1 [1928-1] C.B. 133.  Section 12 (which was codified as 46 U.S.C. §601) provided that wages must be paid to a seaman in full notwithstanding any previous assignment, attachment, encumbrance, or arrestment on the wages.  The Court of Appeals for the Ninth Circuit, in Alaska Steamship Co. v. Mullaney, 180 F.2d 805 (9th Cir. 1950), concluded that 46 U.S.C. §601 did not prohibit the Alaska territorial income tax from being deducted and withheld from the portion of the wages that were earned in the waters of Alaska by nonresident seamen employed by a steamship company operating a line of vessels between Seattle and ports of Alaska.  “The payment of taxes is not included in those things from which Congress undertook to protect the seaman.”  Id. at 814.

As an outgrowth of Alaska Steamship, Congress, in 1959, amended 46 U.S.C. §601 by enacting Pub. L. No. 86-263, 73 Stat. 551, to “clarify the apparent conflict between Section 601 . . . and the recently enacted provisions of State law which require withholding of local taxes from the wages of seamen.”  S. Rep. No. 433, 86th Cong., 1st Sess., reprinted in 1959 U.S.C.C.A.N. 2530, 2531.  Pub. L. No. 86-263 added the following language at the end of  46 U.S.C. §601:

And provided further, That no part of the wages due or accruing to a master, officer, or any other seaman who is a member of the crew on a vessel engaged in the foreign, coastwise, intercoastal, interstate, or noncontiguous trade shall be withheld pursuant to the provisions of the tax laws of any State, Territory, possession, or Commonwealth, or a subdivision of any of them.

Even though 46 U.S.C. §601, as amended by Pub. L. No. 86-263, prohibited State income tax withholding from “[w]ages due or accruing to a master or seaman on a vessel in the foreign, coastwise, intercoastal, interstate, or noncontiguous trade,” it did “not relieve the seaman of his liability to pay taxes properly due, [did] not effect [sic] the Federal withholding taxes, and [did] not in any way impair the general tax authority of the States.”  S. Rep. No. 433, 86th Cong., 1st Sess., reprinted in 1959 U.S.C.C.A.N. 2530, 2531.

The recently enacted Pub. L. No. 106-489, 114 Stat. 2207, maintains the prohibition on State income tax withholding, but preempts State income taxation of wages due or accruing to an individual who performs regularly-assigned duties while engaged as a master, officer, or crewman on a vessel operating on the navigable waters of more than one State (or is engaged on a vessel to perform assigned duties in more than one State as a pilot licensed under 46 U.S.C. §7107 or licensed or authorized under the laws of a State) other than by the State or political subdivision in which the individual resides.  As amended by Pub. L. No. 106-489, 46 U.S.C. §11108 (formerly 46 U.S.C. §601 before its recodification by Pub. L. No. 98-89, §1, 97 Stat. 500, 580) provides:

1. Withholding.  Wages due or accruing to a master or seaman on a vessel in the foreign, coastwise, intercoastal, interstate, or noncontiguous trade or an individual employed on a fishing vessel or any fish processing vessel may not be withheld under the tax laws of a State or a political subdivision of a State.  However, this section does not prohibit withholding wages of a seaman on a vessel in the coastwise trade between ports in the same State if the withholding is under a voluntary agreement between the seaman and the employer of the seaman.
2. Liability.  (1) Limitation on jurisdiction to tax.  An individual to whom this subsection applies is not subject to the income tax laws of a State or political subdivision of a State, other than the State and political subdivision in which the individual resides, with respect to compensation for the performance of duties described in paragraph (2).

Application.  This subsection applies to an individual—

1. engaged on a vessel to perform assigned duties in more than one State as a pilot licensed under section 7101 of this title or licensed or authorized under the laws of a State; or
2. who performs regularly-assigned duties while engaged as a master, officer, or crewman on a vessel operating on the navigable waters of more than one State.

The terms “master” and “seaman” are defined in 46 U.S.C. §10101, which provides in part:

In this part—

(1) “master” means the individual having command of a vessel.
. . .

(3) “seaman” means an individual (except scientific personnel, a sailing school instructor, or a sailing school student) engaged or employed in any capacity on board a vessel.

(“[T]his part” is Part G of Subtitle II of Title 46 of the United States Code, which includes 46 U.S.C. §11108.)

However, the terms “officer” or “crewman” are not defined in 46 U.S.C. §10101 or 46 U.S.C. §11108.

Ferry employees who work exclusively on the ferries

Connecticut income tax withholding.  A ferry employee who works exclusively on the ferries is either “engaged or employed in any capacity on board a vessel” or “[has] command of a vessel.”  Therefore, the employee is either a “seaman,” as defined in 46 U.S.C. §10101(3), or a “master,” as defined in 46 U.S.C. §10101(1).  Because the employee is either a “seaman” or a “master” on a vessel in the interstate trade, the preemption pursuant to 46 U.S.C. §11108(a) of State income tax withholding from wages due or accruing to a master or seaman on a vessel in the interstate trade applies to such employee, even if the employee is a resident of Connecticut.  (The preemption pursuant to 46 U.S.C. §11108(a) does not excuse an employee who is a resident of Connecticut from making estimated Connecticut income tax payments, if required under Conn. Gen. Stat. §12-722.) 

Connecticut income tax liability—resident or nonresident of Connecticut.  Each employee who performs regularly-assigned duties while engaged as a master, officer, or crewman on the ferries (or who is engaged to perform assigned duties as a pilot licensed under 46 U.S.C. §7107 or licensed or authorized under Connecticut or New York law) and who is a resident of Connecticut is subject to Connecticut income tax on his or her compensation. The preemption pursuant to 46 U.S.C. §11108(b) of State income taxation of compensation for the performance of duties described in 46 U.S.C. §11108(b)(2) other than by the State or political subdivision in which an individual resides does not apply to such an employee who is a resident of Connecticut.  However, each such employee who is a nonresident of Connecticut is not subject to Connecticut income tax on his or her compensation because of the preemption pursuant to 46 U.S.C. §11108(b).

Ferry employees who work most of the time on the ferries and have de minimis onshore duties in Connecticut or New York

Connecticut income tax withholding.  An employee who works most of the time on the ferries is either “engaged or employed in any capacity on board a vessel” or “[has] command of a vessel” during that time.  Therefore, the employee is either a “seaman,” as defined in 46 U.S.C. §10101(3), or a “master,” as defined in 46 U.S.C. §10101(1), during that time.  Because the employee is either a “seaman” or a “master” on a vessel in the interstate trade, the preemption pursuant to 46 U.S.C. §11108(a) of State income tax withholding from wages due or accruing to a master or seaman on a vessel in the interstate trade applies to such employee’s compensation for the performance of duties as a master or seaman, even if the employee is a resident of Connecticut. (The preemption pursuant to 46 U.S.C. §11108(a) does not excuse an employee who is a resident of Connecticut from making estimated Connecticut income tax payments, if required under Conn. Gen. Stat. §12-722.)

As long as the performance of onshore duties in Connecticut is de minimis, the preemption also applies to wages due or accruing for those de minimis onshore duties. “[T]he venerable maxim de minimis non curat lex (‘the law cares not for trifles’) is part of the established background of legal principles against which all enactments are adopted, and which all enactments (absent contrary indication) are deemed to accept.”  Wisconsin Dept. of Revenue v. Wrigley Co., 505 U.S. 214, 231, 120 L. Ed. 2d 174, 191 (1992).

Connecticut income tax liability—resident or nonresident of Connecticut.  Each employee who most of the time performs regularly-assigned duties while engaged as a master, officer, or crewman on the ferries or is engaged to perform assigned duties as a pilot licensed under 46 U.S.C. §7107 or licensed or authorized under Connecticut or New York law and who is a resident of Connecticut is subject to Connecticut income tax on his or her compensation. The preemption pursuant to 46 U.S.C. §11108(b) of State income taxation of compensation for the performance of duties described in 46 U.S.C. §11108(b)(2) other than by the State or political subdivision in which an individual resides does not apply to such an employee who is a resident of Connecticut.  However, each such employee who is a nonresident of Connecticut is not subject to Connecticut income tax on his or her compensation because of the preemption pursuant to 46 U.S.C. §11108(b).  As long as the performance of onshore duties in Connecticut is de minimis, the preemption also applies to compensation for those de minimis onshore duties.  Conn. Agencies Regs. §12-711(b)-11 supports this conclusion.

Conn. Agencies Regs. §12-711(b)-11(a) provides in part that:

1. The items of income, gain, loss and deduction of a nonresident seaman derived from or connected with Connecticut sources do not include any such items attributable to employment on a ship which is operating exclusively foreign ports [sic; should be “operating exclusively between ports of Connecticut and foreign ports”], or between ports of Connecticut and ports of other states, even though at times the ship touches at a port within Connecticut and remains there a reasonable time for the transaction of its business.

2. The term “seaman” is not defined in Conn. Agencies Regs. §12-711(b)-11.  The term “seaman” is used, but not defined, in Conn. Gen. Stat. §§1-57 and 31-76i, and the term “seamen” is used, but not defined, in Conn. Gen. Stat. §15-131. Given that Conn. Agencies Regs. §12-711(b)-11 pertains to an individual’s employment on a ship operating exclusively in foreign or interstate trade, it is appropriate to adopt the definition of “seaman” in 46 U.S.C. §10101.

Conn. Agencies Regs. §12-711(b)-11(a) further provides in part that:

The presence within Connecticut of a seaman aboard a ship which enters a Connecticut port for the purpose of foreign or interstate trade is merely transitory, and the items of income, gain, loss and deduction of a nonresident seaman during that period in respect of such person’s employment aboard the ship do not constitute items derived from or connected with Connecticut sources.

Compensation for the performance of de minimis onshore duties in Connecticut constitutes “items of income . . . of a nonresident seaman . . . in respect of such person’s employment aboard the ship . . . .”

Onshore employees

Connecticut income tax withholding.  An employee who works exclusively onshore in either Connecticut or New York is not “engaged or employed in any capacity on board a vessel” and does not “[have] command of a vessel.” Therefore, an employee who works exclusively onshore in either Connecticut or New York is neither a “seaman,” as defined in 46 U.S.C. §10101(3), nor a “master,” as defined in 46 U.S.C. §10101(1).  Consequently, the preemption pursuant to 46 U.S.C. §11108(a) of State income tax withholding from wages due or accruing to a master or seaman on a vessel in the interstate trade does not apply to such employee.

Working exclusively onshore in Connecticut.  If an employee is working exclusively onshore in Connecticut, his or her wages are subject to Connecticut income tax withholding, whether or not he or she is a resident of Connecticut.

Working exclusively onshore in New York.  If an employee who is working exclusively onshore in New York is a resident of Connecticut, his or her wages are subject to Connecticut income tax withholding only in accordance with Conn. Agencies Regs. §12-705(a)-2(b)(2). If an employee who is working exclusively onshore in New York is a nonresident of Connecticut, his or her wages are not subject to Connecticut income tax withholding.

Connecticut income tax liability. An employee who works exclusively onshore in either Connecticut or New York is not engaged as a master, officer, or crewman on the ferries, and is not engaged to perform assigned duties as a pilot licensed under 46 U.S.C. §7107 or licensed or authorized under Connecticut or New York law. Consequently, the preemption pursuant to 46 U.S.C. §11108(b) of State income taxation of compensation for the performance of duties described in 46 U.S.C. §11108(b)(2) other than by the State or political subdivision in which an individual resides does not apply to such employee.

Working exclusively onshore in Connecticut.  If the employee is working exclusively onshore in Connecticut and is a resident of Connecticut, his or her compensation will be includable in his or her Connecticut adjusted gross income, as defined in Conn. Gen. Stat. §12-701(a)(20).  If the employee is working exclusively onshore in Connecticut and is a nonresident of Connecticut, his or her compensation will be includable in his or her Connecticut adjusted gross income and in his or her Connecticut adjusted gross income derived from or connected with sources within Connecticut, as described in Conn. Gen. Stat. §12-711.

Working exclusively onshore in New York.  If the employee is working exclusively onshore in New York and is a resident of Connecticut, his or her compensation will be includable in his or her Connecticut adjusted gross income, as defined in Conn. Gen. Stat. §12-701(a)(20). If the employee is working exclusively onshore in New York and is a nonresident of Connecticut, but, for some other reason, is required to file a Connecticut income tax return, his or her compensation will be includable in his or her Connecticut adjusted gross income but not in his or her Connecticut adjusted gross income derived from or connected with sources within Connecticut, as described in Conn. Gen. Stat. §12-711.

LEGAL DIVISION

March 26, 2002