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What States Require Mileage Reimbursement?

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Vehicle Reimbursement Laws exist in California, Illinois, and Massachussetts.

Introduction

In many of the previous entries in this series, we’ve spoken about the relative lack of statal restrictions or tax laws concerning mileage reimbursements. Keen readers will note a common theme: that the majority of the states in the Union elect not to expand the federal government’s oversight of vehicle allowances, but instead defer to them.

We’re going to buck that trend today by speaking about the three states in the Union that do expand that reach.

In short, of the 49 continental states, only three of them have additional rules and laws concerning mileage reimbursements for work use of personal vehicles. And those three states are:

  • Massachusetts
  • California
  • Illinois

Keep reading to find out more about what specific requirements each of these states have for fleet managers looking to manage their employees’ vehicle allowances (and keeping those allowances untaxed and free from scrutiny by federal or state tax departments).

Massachusetts’ state rules for mileage reimbursement

Reimbursing employees for business use of personal vehicles is a widely-accepted custom in this country (and we’ve written at length on why it’s a smart choice for businesses looking to lower their overhead costs and tax liabilities), but it’s just that: a widely-accepted custom.

Even though the majority of new job listings in this country contain some wording about a vehicle allowance, there isn’t any requirement for businesses to do so, other than the unspoken fact that it’s difficult to attract quality employees if your competitors are offering perks and bonuses that you do not.

What this means for many states is that businesses tend to defer to the federal mileage reimbursement rate—we’ve got the announcement for the 2023 federal mileage rate right here [1]if you’d care to review it—even though there is no legal requirement to do so.

Massachusetts, however, does have legal requirements that compel employers to offer mileage reimbursement. Cardata has written a deep-dive into those regulations here, but for this article, we’ll quickly review two of them:

  1. The Massachusetts Wage Act. This act covers a wide-ranging list of topics and governs most aspects of compensation for employment in the state. Crucial for readers of this article is the language that mandates fair compensation for expenses that employees incur while on the job, including—you guessed it—mileage. This act also levies heavy penalties on employers who don’t provide these refunds, so it’s extra important to ensure your program is in compliance with the Act when doing business in the Bay State.
  2. Code of Massachusetts Regulation 27.04. This regulation offers additional guidance to business owners on which expenses their employees must be reimbursed for. Notably, it includes a paragraph stipulating that “all travel time in excess of [the employee’s] ordinary travel time between home and work and shall be reimbursed for associated transportation expenses.”[2]

These are the two main pieces of legislation that compel employers to reimburse their employees for miles driven for business purposes in Massachusetts. 

California’s statal laws for mileage reimbursement

California has a reputation for many things: wide open skies, a Mediterranean climate, megamansions nestled into winding hills, great Mexican food, and a taste for government regulation.

It should therefore come as no surprise that the Golden State has some of the strictest regulations in the country for businesses and their drivers. We’ve got an overview of them all here, but for brevity’s sake, we’re focusing on California Labor Code Section 2802(a) and (c). 

California Labor Code, Section 2802(a)

This section of California’s state labor law states that employers must reimburse “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” Section 2802(c) of the same regulation stipulates that “necessary expenditures or losses” must encompass “all reasonable costs”.[3]

Read more: California Mileage Reimbursement: Rates and Rules | Cardata 

What is a “reasonable cost?”

There isn’t a specific definition provided for what is or is not a reasonable cost. However, it is clear that this language was left undefined in order to provide employees leeway in court to prove their case, as it does stipulate that these reasonable costs include legal fees required to file a challenge against employers who violate it.

This undefined term also features into the labor legislation of the Prairie State, whose regulations closely mirror that of California…

Illinois state laws about mileage reimbursement requirements

Illinois has some of the most robust language in their legislation for the protection of employees, and as we’ve detailed in this article, a variety of provisions that ensure all expenses that are of “primary benefit to the employer” are fairly reimbursed.[4]

Note that, like many other states, commuting expenses are not considered under these Acts. Nor are losses “due to an employee’s negligence, losses due to normal wear, or losses due to theft unless the theft was the result of the employer’s negligence,” so just as “reasonable expenses” must be reimbursed for the employee, you aren’t on the hook for unreasonable expenses as the employer.

This is one of the many reasons Cardata counsels switching from a fleet of company cars to some method of personally-owned-vehicle reimbursement, as with a fleet, your business would be liable for any accident or theft happening on or off the clock.

One more thing: any other driving done for business purposes must be reimbursed promptly, “within 30 calendar days of incurring the expense,” unless your business has a specific written reimbursement policy that stipulates extra time that the employee has agreed to prior to incurring the expense. Failure to do so could end with fines, or even a lawsuit. 

My company does business in all three states. How do I determine a fair mileage reimbursement rate for my drivers?

It’s a good rule of thumb no matter what state you’re doing business in to set mileage reimbursement in line with the Internal Revenue Service’s standard Cents per Mile rate for reimbursement.

Ensuring your payment doesn’t exceed the CPM rate means it’s pretty likely you and your employees will do just fine at tax time, as any rate up to the IRS federal rate will be considered tax-free (if it meets specific requirements).

However, while that’s the safest option, there are two more tax programs that allow you to reimburse tax-free and stay in line with statal guidelines, namely accountable allowance and Fixed and Variable Rate (FAVR).

More complex reimbursement strategies such as FAVR can reduce your expenses significantly compared to taxable allowance and fleet, while also ensuring you and your drivers remain on the right side of the road when it comes to taxation.

Moreover, FAVR programs are the only programs that allow you to exceed the IRS federal rate for reimbursement, so if you have high costs in one territory this program protects employees.

Both of these programs should abide by the stringent statal rules we’ve discussed in this article because they require strict accounting and reporting practices in order to be considered tax-free, meaning your car allowances will be justified.

Conclusion

While these three states do stipulate additional requirements on employers doing business in the state, they fundamentally operate on a reasonable assumption: that employees provide value to their employer for their labor, and should not be required to subsidize that value out of their own pockets.

That said, there are many ways a savvy fleet manager or business owner can reduce overhead costs, generate additional economic activity, and ensure everyone is fairly paid and taxed


Sources:

[1] IRS issues standard mileage rates for 2023; business use increases 3 cents per mile | Internal Revenue Service 

[2] DEPARTMENT OF LABOR STANDARDS 454 CMR 27.00: MINIMUM WAGE Section 27.01: Purpose and Scope 27.02 

[3] Labor Code 2802 

[4] Illinois Compiled Statutes

Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.

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