Congress is considering a bill that would drastically limit the ability of states to tax businesses that lack a physical presence in their boundaries.
The bill, HR 1439, has been introduced in the last four Congresses and had minimal success. But the last time it emerged from committee, in 2006, the Republicans had control of the House, suggesting it might have more luck this time.
The legislation establishes standards, based on what type of physical presence a business has in a state, that determine whether it can be taxed by the state.
Previously, the National Governors Association has estimated that a similar version of the bill, known as the Business Activity Tax Simplification Act, could cost states more than $6 billion in lost revenue annually.
At a committee hearing last week, the bill's sponsor, U.S. Rep. Bob Goodlatte (R-Va.), suggested the bill could help stimulate the economy, since state business taxes on out-of-state businesses hinder expansion. "We need a basic, fair, bright line rule in this area," Goodlatte said in his written testimony prepared for a hearing on the bill last week. He characterized states as overreaching their boundaries when it comes to state business taxes.
Goodlatte's bill gives various definitions for what, exactly, constitutes a physical presence of a business for state tax purposes. But critics say Goodlatte’s bill is really a how-to guide for businesses that want to stop paying state business taxes altogether.
Others, including Utah state tax commission chair Bruce Johnson, say Goodlatte has failed to demonstrate "a need or plausible purpose" for the law.
Currently, 44 states and the District of Columbia charge corporate net income taxes of 3 to 12 percent that would be affected by the law. Goodlatte's law would also apply to general taxes levied on gross recipients -- imposed by Washington, Ohio and Michigan -- and a value-added tax in New Hampshire.
The debate over the Goodlatte bill focuses on what, exactly, is a physical presence for state tax purposes. It's similar to the debate being waged in many states over whether Amazon.com should be forced to collect sales tax.
Under the bill, some large sectors would see their tax burdens dramatically lowered. Major banks, for example, often lack assets within the states in which they provide service. The law could make them immune from many of those taxes, according to the bill's critics. Nationwide retailers could also have an easier time using creative accounting to shift their earnings to states with more favorable tax policies. A franchisor (like Pizza Hut) would not be taxable in any state regardless of how many franchisees it has there, according to the Center for Budget and Policy Priorities.
Opponents of the bill say it's a canard to claim that it will aid small businesses, since most small businesses lack a presence outside their state and don't have the kind of income that would make them likely to incur those types of tax liabilities. Instead, they say, it's designed so companies can pay lower taxes, or in some cases, avoid paying them altogether.
They also argue that now is a bad time for the federal government to revoke a revenue-generating mechanism for states, given the shortfalls they're facing.
But the bill has its supporters. Outdoor Living Brands, Inc. CFO Corey Schroeder testified that, as a franchise business, his company is burdened by the existing tax structure and must file many different state tax returns due to its location nationwide.
"BATSA would ensure fairness, minimize costly litigation for both state governments and taxpayers, reduce the likelihood of a business being 'double-taxed' on the same income, and create the kind of legally certain and stable business environment that encourages businesses to make investments, expand interstate commerce and create new jobs," Rep. Robert "Bobby" Scott (D-Va.) testified.
According to a report by the Center on Budget Policies and Priorities, the bill would result in a significant amount of taxable corporate profits simply going untaxed by any state, as opposed to acting as a remedy against double-taxation.
The Center has endorsed a plan that would base taxing authority on the amount of sales a business has in a particular state, the value of property in holds in a particular state, or the amount of money it pays to employees in a particular state.
Advocates there argue that the type of "physical presence" standard on Goodlatte's bill is outdated in the current economy.