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> Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.

State Income Tax A summary of the basis of State income tax.

State Income Tax Rates For 2006 A table showing the rates of state income tax for 2006.

Business Activity Taxes Some states attempt to tax out-of-state corporations on their in-state sales.

Delaware A summary of the advantages of Delaware as a corporate base
Nevada A summary of the advantages of Nevada as a corporate base.

 

Business Activity Taxes

In September, 2005, a lobby group representing several major corporations, including Citigroup and Nike, urged Congress to pass a bill aimed at clarifying when companies face corporate taxes for remote sales from other states.

The measure, known as the 'The Business Activity Tax Simplification Act,' which was discussed at a House Judiciary administrative law subcommittee hearing, sought to resolve the issue of states seeking to collect business activity taxes from businesses headquartered in other states by setting out specific guidelines for when an out-of-state business may be charged a tax for doing business in a state.

Over the past several years, a growing number of states have sought to collect business activity taxes from businesses in other states. The problem is that different states use different standards for determining what constitutes sufficient contacts with a state to justify taxation. According to the bill's sponsor Rep. Bob Goodlatte (R.-Va), this has resulted in businesses being deterred from expanding their presence in other states for fear of exposure to further taxation, and it is becoming a growing concern for internet-based companies in particular.

"Just because a website can be accessed by consumers in a certain state, doesn’t mean that state should be able to collect taxes from the website owner. This legislation focuses on allowing the Internet and the commerce that it facilitates to expand, by eliminating excessive taxes that harm on-line growth," Mr. Goodlatte stated when the legislation was introduced to the House earlier in the year.

The proposals have been attacked by the National Governors Association and other state and local government officials, who fear the bill would put a "major strain" on state treasuries, depriving them of some $8 billion in revenues.

However, Mr Goodlatte has cited numerous other examples of "aggressive state actions" and positions against out-of-state companies. For example some states take the position that a business whose trucks pass through the state just a handful of times per year without picking up or delivering goods has sufficient connections with the state to justify imposing business activity taxes on that company. Other states believe that merely listing a phone number in a local phone book in that state is a sufficient connection to justify taxation.

Mr. Goodlatte says that his legislation would benefit both states and business by eliminating grey areas and by establishing "bright lines" regarding what constitutes a physical presence.

"This legislation will ensure that businesses are not subject to double taxation at the state level, which will ultimately facilitate the continued growth of e-commerce, job creation and the overall strength of the American economy," he declared.

In July 2007, Senators Mike Crapo (R-Idaho) and Charles E. Schumer (D-New York) announced the introduction of new legislation that would remove from affected businesses the burden of double taxation which results from a varying mix of state tax laws.

Crapo and Schumer introduced the bill following the Supreme Court’s refusal the week prior to hear two cases relating to multiple layers of tax on multi-state businesses.

At issue was whether companies, in addition to being taxed in the state where they are physically located, should also be subject to business activity taxes where they solicit business or have customers, even if they do not have employees or a physical location in the state.

The Schumer-Crapo legislation, known as the Business Activity Tax Simplification Act (BATSA), codifies the physical presence standard, which is common practice for the imposition of sales and use taxes but not for income taxes. This bill would thus eliminate one type of double taxation and its resulting effect on interstate commerce.

“Businesses should not be punished with double taxation simply because their products reach beyond state borders,” stated Schumer. “At a minimum, this is a huge administrative burden. In the worst case scenario, these differing state tax treatments will drive businesses to states with more favorable laws. Either way, the effect on commerce is debilitating.”

Crapo added: “This effort by a large number of states to impose business activity taxes based on economic presence has the potential to open a Pandora’s Box of negative implications for businesses. Without clarification by Congress, states will be free to enact revenue-raising nexus legislation and policies that, by definition, will not and cannot take into account the national impact of such activities.”

The Senators said that in recent years, states which impose taxes based on economic presence have caused widespread litigation and stifled commerce. With a dizzying maze of state and local tax rules – some enacted by legislatures and others imposed by state revenue authorities and upheld by state courts – simplification is desperately needed, they added.

According to Crapo and Schumer, the legislation will have positive benefits for companies big and small. For smaller businesses facing different taxing standards in different states, BATSA would eliminate costly litigation and administrative issues. For larger companies that have customers throughout the country, the legislation creates clarity and reduces the likelihood of double taxation. For the states, the bill creates a uniform taxing standard that permits them to compete on a level playing field for business activity and jobs, while establishing a predictable and relatively easily discernable tax base.

On June 18, 2007, the Supreme Court denied certiorari in two cases which challenged the constitutionality of taxing companies with no physical presence in a state. In addition to ignoring the tax imbalance, Crapo and Schumer argue that the court’s inaction has emboldened at least one state to introduce new legislation that would allow it to levy taxes based on economic presence – and other states could follow suit if Congress doesn’t act.

“In short, this is no longer a theoretical discussion,” Schumer stated. “I believe that Congress has a duty to prevent some states from impeding the free flow and development of interstate commerce and to prevent double taxation.”

The Schumer-Crapo legislation updates current law by codifying the physical presence standard, requiring a business to have a physical presence, such as employees or property, in the state before it can be subject to state business activity taxes. The bill establishes a bright-line standard that will eliminate any confusion for both state tax administrators and businesses as to the circumstances under which businesses are subject to state business activity tax (BAT). Under BATSA, mere economic activity – such as in-state customers – would be insufficient for a state to impose income and other business activity taxes on out of state businesses. Firm guidance on what activities can be conducted within a state that will trigger that state’s taxing power is expected to provide certainty for tax administrators and business, reduce multiple taxation of the same income, and reduce compliance and enforcement costs for states and businesses alike.

 

State Income Tax A summary of the basis of State income tax.

State Income Tax Rates For 2006 A table showing the rates of state income tax for 2006.

Business Activity Taxes Some states attempt to tax out-of-state corporations on their in-state sales.

Delaware A summary of the advantages of Delaware as a corporate base
Nevada A summary of the advantages of Nevada as a corporate base.
LOWTAX NETWORK SITES
  Lowtax.net
  Tax-News.com
  USTaxNetwork.com
  USA-Federal-State- Company-Tax.com
  USA-Federal-State- Individual-Tax.com
  USA-International-Offshore- Company-Tax.com
  USA-International-Offshore- Expatriate-Tax.com
  USA-Sales-Use-Tax-E - Commerce.com
  USA-Investment-Tax.com
  USA-Tax-News.com
  Investors Offshore.com
  LawAndTax-News.com
  Offshore-E-Com.com
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