Clarity Necessary on Whom States Can Tax

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Nick Pyle

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Jan 13, 2012, 9:27:46 AM1/13/12
to Numismatists United for Political Action (NUPA)
Goodlatte and Scott: Clarity Necessary on Whom States Can Tax
• By Reps. Bob Goodlatte and Bobby Scott

States are hungry for revenue — sometimes too hungry — and the federal
government occasionally has to step in to prevent them from going too
far. That’s clearly the case when states levy corporate income taxes
on businesses that aren’t even located there.

Almost 20 years ago, the Supreme Court sensibly decided states can
impose taxes on out-of-state companies only if those companies have a
substantial connection to the state. Nonetheless, states and
localities have continued to assess businesses for “unpaid” taxes even
when they don’t have a single brick, item of inventory or employee in
their borders.

Chaos has been the result. Small firms, in particular, have been
forced to shoulder thousands of dollars of litigation fees to
challenge surprise tax assessments. As a result, American jobs and
economic growth have been put at risk because states think they have
the right to send big bills to unsuspecting companies in distant
states and shake them down for cash.

Smithfield Foods was assessed $150,000 by New Jersey when one of its
refrigerator trucks was stopped as it was driving through the state
and was ordered to wire the payment immediately in order to secure the
release of its truck. That’s a substantial connection?

Software-makers in Virginia and South Carolina were forced to settle
with New Jersey because they did nothing more than license their
products to companies there. Louisiana has even tried taxing out-of-
state companies for broadcasting into the state.

When will the madness end? We hope soon, thanks to a bipartisan
solution: the Business Activity Tax Simplification Act.

The legislation would clarify that a state or locality can’t levy a
direct tax on a business unless the business has employees, an office
or property in a state for more than two weeks during the year. The
standard, if enacted, would reduce litigation, improve certainty and
create greater investment in new jobs.
BATSA would apply to business-activity taxes, including income taxes
and franchise taxes, but would NOT apply to transaction taxes, such as
sales taxes. The famous, years-long battle over when sellers should
collect state sales taxes on purchases made online is a separate
question not affected by BATSA in any way.

BATSA is a pleasant anomaly in Washington: a thoroughly bipartisan
bill with nearly as many Democrats as Republicans onboard. BATSA has
also overwhelmingly been approved twice by the House Judiciary
Committee.

Lawmakers concur: Legislation is needed to remove doubt and
unpredictability. A growing number of state and local governments have
aggressively sought to increase their revenues by adopting ill-defined
standards that, in the end, conflict with Supreme Court
interpretations of the Constitution’s Commerce Clause.
State governments simply cannot interfere unreasonably with commerce
across state lines. Doing so hurts us all.

The Supreme Court has never said exactly what “substantial connection”
means in the context of corporate income and other business activity
taxes. But it has also never upheld a state tax on an out-of-state
company unless that company had a physical presence in the state.
BATSA fills that void.

In the meantime, even foreigners have noticed how silly — and
economically dangerous — the situation is. The ambassadors from
France, Switzerland and the Netherlands wrote earlier this year to the
governor of New Jersey to complain about its extraterritorial taxation
regime, which asks for tax payments even from companies headquartered
abroad.

It’s time for Congress to step in. BATSA does nothing to undermine the
ability of states and localities to impose taxes. Rather, it
rationalizes and finally makes uniform what the courts have long said
should be the law of the land. Corporate taxes should be imposed only
on companies that have some meaningful presence in the state. Congress
has the chance to do the right thing.
Virginia Reps. Bob Goodlatte (R) and Bobby Scott (D) serve on the
Judiciary Committee, where Goodlatte is chairman of the Subcommittee
on Intellectual Property, Competition and the Internet.
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