What a California Mileage Tax Would Mean for Employers

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Quick Hits

• California’s transition to electric vehicles is causing a decline in gas tax revenue, prompting the state to consider a mileage tax to fund transportation infrastructure.
• The proposed mileage tax would likely trigger existing state labor laws, requiring employers to reimburse employees for the tax as a necessary business expense.
• Employers may face significant financial impacts from increased reimbursements, potentially leading to higher prices for customers, reduced employee travel, or other cost-control measures.

In response, the California Legislature is seriously considering new ways to fund the state’s transportation infrastructure—including by imposing a tax on miles driven.

From August 2024 through January 2025, the state tested the road charge pilot program, a monitoring system to measure vehicles’ mileage with a potential 2.8-cents tax per mile. With the pilot program having recently concluded, the official results and subsequent legislative proposals are anticipated to arrive in the next few months.

For California employers, this is not a distant policy debate; it is a looming financial reality. The implementation of a mileage tax would likely trigger existing state labor laws, creating a new mandatory business expense with significant bottom-line implications.

At the heart of this issue is California Labor Code Section 2802, a cornerstone of the state’s employee-protective public policy. The statute mandates that an employer must indemnify an employee “for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”

The underlying principle is that an employee’s wages should not be indirectly diminished by forcing them to bear the operational costs of the employer’s business.

In simpler terms, employers must cover any reasonable costs that their employees incur while performing their job, ensuring that employers bear the costs of doing business and do not shift those costs to their employees.

For decades, California courts have consistently interpreted Section 2802 to require employers to reimburse employees for the business use of their personal vehicles.

As clarified in cases like the Supreme Court of California’s 2007 decision in Gattuso v. Harte-Hanks Shoppers Inc., employers have two primary methods for this reimbursement: (1) paying the employee’s actual expenses, which requires detailed tracking of costs like fuel, maintenance and insurance; or (2) paying a reasonable per-mile rate.

The latter is far more common, with most employers opting for the standard mileage rate that is set annually by the Internal Revenue Service. The California Division of Labor Standards Enforcement expressly approves the use of the IRS mileage reimbursement rate.

The IRS rate is a carefully calculated composite figure designed to cover both variable costs, including fuel, oil, and tires, and fixed costs, such as insurance, registration, depreciation, and wear and tear. The rate is intended as a proxy for the total cost of operating the vehicle, a fact that becomes central when considering the addition of a new, separate tax.

To put the current financial obligation into perspective, Californians drove an average of 11,409 miles in 2024, per Trusted Choice, citing Federal Highway Administration data. If we assume that 10 percent of total mileage is for work-related travel, the average California employee would drive 1,140 miles for work, excluding their commute.

Using the 2026 IRS rate of 72.5 cents per mile, this translates to an existing annual reimbursement cost of approximately $826.50 per employee. For industries that are reliant on a mobile workforce, such as outside sales, home healthcare, construction and field services, this figure is substantially higher.

This existing reimbursement requirement under Labor Code Section 2802 already places a significant financial responsibility on employers, establishing a baseline cost that is poised to increase with the introduction of a mileage tax.

The introduction of a state-mandated mileage tax would create a new, distinct layer of financial obligation. Under established California legal precedent, a plaintiff’s potential argument that this tax would be a reimbursable necessary expenditure on top of the IRS reimbursement would be exceptionally strong.

In Cochran v. Schwan’s Home Service Inc. in 2014, the California Court of Appeal, Second Appellate District, ruled that employers must reimburse employees for the business use of a personal cellphone, even if the employee has an unlimited data plan and incurred no extra out-of-pocket cost.

The court reasoned that the employer benefits from the use of the employee’s personal asset and, therefore, must pay a reasonable portion of its cost.

A mileage tax presents an even more straightforward case. It would be a direct, government-levied charge incurred for the specific act of driving for work. The causal link is undeniable: The tax was only incurred by the employee because the employee had to drive for work purposes. Therefore, it fits squarely within Section 2802’s definition of a “necessary expenditure” that was incurred “in direct consequence” of performing job duties.

To illustrate, consider an employee who drives their personal car 100 miles round trip for a client visit. There is no current rate proposed for the mileage tax, but assuming a hypothetical mileage tax of 5 cents per mile, and using the 2026 IRS standard rate of 72.5 cents per mile, the total reimbursement calculation would be twofold.

First, the employer must reimburse the employee for the general use and wear of the vehicle, covered by the IRS rate: 100 miles x 72.5 cents per mile = $72.50. Second, the mileage tax represents a separate, direct cost levied by the state for that specific activity.

The employer would almost certainly have to reimburse this tax in its entirety: 100 miles x 5 cents per mile = $5. This results in a total reimbursement of $77.50 for the trip. If this employee makes such a trip just once per week, the new tax alone would add $260 to the annual reimbursement cost for this single employee.

Given the geographic layout of California, employees can easily drive long distances for work.

One area where employers find some relief is the long-standing commute rule, established by the California supreme court’s 2000 ruling in Morillion v. Royal Packing Co., which generally holds that employers are not responsible for reimbursing employees for their regular commute between home and their primary worksite.

However, this rule is narrow and its exceptions are critical. Any travel from an employee’s home to an alternate location—such as a client’s office or a temporary jobsite—at the employer’s direction is considered work-related, and must be fully reimbursed from the moment the employee leaves home.

For example, if an employee drives from home to a client meeting, and then to the office, the first leg of that journey is reimbursable. Likewise, for itinerant workers who have no fixed office, e.g., home health aides or field technicians, travel from their home to their first work location of the day is typically reimbursable.

Employers may want to apply these rules diligently, as misclassifying reimbursable travel as a nonreimbursable commute can lead to significant liability.

California employers will want to keep a close watch on the mileage tax proposal—Assembly Bill (AB) 1421—as it will have a significant impact on many of their bottom lines if enacted.

Increased reimbursements will cause employers to either increase their prices for customers or attempt to reduce travel for their employees to control costs. Either action could result in significant impacts for employers.

Potential outcomes could include loss of sales, loss of service and customer relations, increased costs in technology spending, or reductions in workforce.

Ogletree Deakins’ California offices and Wage and Hour Practice Group will continue to monitor developments and will post updates on the California and Wage and Hour blogs as additional information becomes available.

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A version of this article was published in Law360.