Question: I heard that California is considering passing a mileage tax. Is that true? If it did, would I have to reimburse my employees for the tax?
Answer: No, the Legislature isn’t currently considering a mileage tax—although there is a proposal to study whether one should be enacted. If such a tax is enacted, however, employers would likely need to reimburse their employees for the tax.
For starters, a proposed mileage tax is not currently pending in the state Legislature. However, the Legislature is actively considering whether one should be enacted in the near future. Assembly Bill 1424 (AB 1421) proposes to direct the California Transportation Commission (CTC) to evaluate whether a mileage tax system can serve as an alternative to California’s current gas tax. The CTC would be required to evaluate whether a mileage tax could replace California’s gas tax and, by January 1, 2027, would make a recommendation regarding whether the state should pass a mileage tax. So, while a mileage tax isn’t imminent, it could be on the horizon for California taxpayers, and employers, in the next several years.
If enacted, one chief impact for employers would be reimbursements. Labor Code section 2802 requires employers to indemnify employees for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” Put another way, employers must reimburse any reasonable costs employees incur while performing their job. The Legislature enacted section 2802 to ensure that employers do not shift the costs of doing business onto their employees.
California courts have adopted a very broad interpretation of section 2802. The most common example is that employers must reimburse employees for the business-related use of their personal cars. Employers do this by either paying the employee’s actual expenses—which requires detailed tracking—or paying a reasonable per-mile rate. Similarly, employers must reimburse employees for the business-related use of an employee’s personal cellphone, even if the employee has an unlimited data plan and incurs no out-of-pocket cost.
If a mileage tax were passed, employers would potentially be required to reimburse employees for the entirety of that cost, at least for business-related driving. The mileage tax would be a direct, government-imposed cost that is incurred during the performance of a specific task: driving. As long as the driving were work-related, the mileage tax paid by an employee would likely count as a “necessary expenditure” that was incurred “in direct consequence” of performing the employee’s job duties. So, an employer would potentially be liable for the entirety of the mileage tax.
This could represent a significant, and complex, new cost for employers. Given California’s size, long commutes are common. And the rule between reimbursable and non-reimbursable travel can be complicated. For example, an employee’s primary home-to-work commute is not reimbursable. But travel to an alternate location (e.g., temporary worksite or client meeting) is potentially reimbursable. Similarly, for workers with no fixed office, travel from their home to their first worksite is typically reimbursable.
Employers should keep a close eye on AB 1421 as it moves through the Legislature. Even a modest mileage tax could mean substantial new costs for employers—and potential liability for misclassifying reimbursable travel. Employers with questions about AB 1421 or general questions about employee reimbursements should contact their labor counsel.