Senate Bill To Simplify US Interstate Taxation And Commerce

by Leroy Baker, Tax-News.com, New York

03 July 2007

US Senators Mike Crapo (R-Idaho) and Charles E. Schumer (D-New York) have 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 last week to hear two cases relating to multiple layers of tax on multi-state businesses.

At issue is 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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