Congress Examines US Business Activity Taxes

by Mike Godfrey, Tax-News.com, Washington

19 February 2008

While US small businesses regularly sell their products and services around the globe, increasing numbers are finding it difficult to do business within their own country as a result of Business Activity Taxes, according to witnesses at a hearing of the House Committee on Small Business.

Last week's hearing heard how many entrepreneurs are finding that Business Activity Taxes (BAT), which vary considerably from one state to the next, significantly inhibit their ability to engage in commerce. The congressional panel, chaired by Congresswoman Nydia M. Velázquez, explored the issue with an eye towards balancing the needs of entrepreneurs with the fiscal interests of states.

“We are seeing cases where entrepreneurs are charged a USD400 BAT for less than USD100 of total sales in a state. Not only does that have a chilling effect on small firms, it hurts the national economy,” observed Velázquez.

In an effort to support an eroding tax base, many states are aggressively levying BATs on firms located outside their borders. As entrepreneurs look across state lines to grow their businesses — an obvious move in the internet age — they are finding BATs to be inordinately burdensome and difficult to anticipate.

Several witnesses noted that entrepreneurs are often unaware that they are subject to these taxes until they receive the bill from a state. Furthermore, small businesses already spend more than a billion hours per year on tax compliance. Because they lack the large tax departments of their big business counterparts, challenging an incorrect assessment can prove prohibitively costly and time consuming.

“Unlike large corporations, most small businesses operate on very tight margins. Any additional expenses — particularly unexpected ones — can have a devastating impact on their solvency,” added Velázquez.

During the hearing, members considered ways to provide small firms with greater certainty in the face of the current economic downturn. One of the options reviewed was having a single standard for state-imposed business activity taxes. This would allow businesses to determine with more accuracy when they are subject to a BAT and how much they would have to pay.

“When it comes to business activity taxes, the status quo is obviously not working,” noted Velázquez. “The success of entrepreneurs is predicated on their ability to plan. Ensuring clarity in the tax code promotes the well-being of small businesses and that of our nation’s economy.”

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