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.
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