US House Postpones Vote On Interstate Company Taxation

by Mike Godfrey, Tax-News.com, Washington

27 July 2006

The United States House of Representatives has postponed a vote on a piece of tax legislation that would simplify and clarify state tax procedures for firms doing business across state lines, amid opposition from state governments.

According to Kevin Madden, a spokesman for House Majority Leader John Boehner (R - Ohio), GOP leaders decided to shelve the bill because they could not muster enough support to secure its approval. Madden blamed "misperceptions about its effect on states" for the delay. He added that he was unsure when the bill would be taken up again.

The Business Activity Tax Simplification Act attempted 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.

To accomplish this, the bill would create a 'physical presence' test to determine when an out-of-state business would be obliged to pay taxes to a jurisdiction. A physical presence is defined as leasing or owning real or tangible property in the state or assigning one or more employees in the state for more than 21 days.

However, the bill aroused opposition from the states, which feared that if approved, the law would lead to a drain on their coffers.

Earlier this year, governors sent a letter to Representatives James Sensenbrenner (R - Wi) and John Conyers (D - Mi) calling the tax an "unwarranted federal intrusion into state affairs" that would allow companies to avoid and evade business activity taxes and increase the tax burden on small business and individuals.

"This legislation essentially would shift the tax burden to small businesses and locally owned stores, while favoring out-of-state corporations and larger in-state companies with the means to exploit loopholes," argued David Quam, director of National Governors Association's Office of Federal Relations.

"This bill is neither clear nor fair, and its real legacy would be to encourage tax sheltering and discriminate against the local shop owner," he added.

The NGA claims that the legislation would cost state governments more than $6 billion annually.

However, the bill's sponsor, Bob Goodlatte (R - Va), believes that the current system is flawed and acts as a barrier to interstate trade and commerce, particularly with regards to e-commerce where the traditional physical boundaries are not easily defined.

"This legislation focuses on allowing the Internet and the commerce that it facilitates to expand, by eliminating excessive taxes that harm on-line growth," he has stated.

Recommended