HR-365-119
Referred to the House Committee on Ways and Means.
Sponsored by Stacey Plaskett (D-VI)
What it does
This bill would modify how the IRS determines whether income earned by residents of U.S. territories (Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, and the Northern Mariana Islands) is considered U.S.-sourced. Under the bill, income would only be classified as U.S.-sourced — and thus subject to federal income tax — if it is attributable to an office or fixed place of business located in the United States. It would also authorize the IRS to limit the income tax payment threshold that the U.S. Virgin Islands must meet to treat income from certain personal property sales as foreign-sourced, bringing the Virgin Islands in line with rules already applicable to the other four territories.
Who benefits
Bona fide residents of U.S. territories — particularly the U.S. Virgin Islands — who earn income not tied to a U.S. mainland office or business, as they could more easily exclude that income from federal gross income. Businesses operating in U.S. territories that sell personal property and seek foreign-source treatment for that income. Territory governments, which may attract more economic activity and investment if residents face lower federal tax burdens. Tax attorneys and accountants specializing in territorial tax planning.
Who is hurt
The U.S. federal Treasury, which could collect less income tax revenue from territory residents and businesses if more income qualifies for exclusion. Mainland U.S. taxpayers who do not have access to similar exclusions and may bear a relatively larger share of the federal tax base. Competitors of territory-based businesses on the U.S. mainland who operate under standard federal tax rules. IRS enforcement personnel, who may face increased complexity in auditing income sourcing claims.
Supporters argue
Supporters argue that the current rules create an uneven playing field among the five U.S. territories by subjecting Virgin Islands residents to a stricter income tax payment threshold than residents of Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico. They contend that equalizing these rules — as the bill's title suggests — removes an arbitrary disparity that discourages economic activity in the Virgin Islands and that residents of all territories should be treated consistently under federal tax law.
Opponents argue
Opponents argue that expanding income exclusions for territory residents narrows the federal tax base and shifts the burden onto mainland taxpayers, who have no equivalent exclusion available to them. They contend that the income sourcing changes could be used by high-income individuals to shelter income by establishing nominal residency or business presence in a territory, a concern that has previously prompted IRS enforcement actions against abusive territorial tax arrangements, particularly in the Virgin Islands.
Constitutional context
The Taxing and Spending Clause (Art. I, §8, cl. 1) requires that federal taxes be geographically uniform, and the Sixteenth Amendment authorizes Congress to tax income without apportionment. This bill adjusts income sourcing definitions rather than creating a new tax or wealth levy, so the unresolved realization question from Moore v. United States (2024) is not directly implicated. No clear active constitutional tension applies.
Checks and balances
Congress sets the income sourcing rules; the IRS gains explicit authority to limit the Virgin Islands' tax payment threshold, subject to judicial review if taxpayers or the territory government challenge IRS determinations.
Historical precedent
The IRS has previously pursued enforcement actions against abusive tax arrangements in the U.S. Virgin Islands, including litigation over whether individuals claiming bona fide residency were improperly excluding U.S.-sourced income under existing territorial tax rules.