Statements on Introduced Bills and Joint Resolutions

Floor Speech

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - June 28, 2007)

BREAK IN TRANSCRIPT

Mr. SCHUMER. Mr. President, I want to speak about the bill I am introducing today with Senator Crapo, the Business Activity Tax Simplification Act of 2007. Our bill tries to address a very important question: How should States tax businesses that locate their operations in a few States, but have customers and earn income in many States? This issue has grown in importance in recent years, and the Supreme Court's decision last week not to get involved in the issue raises the stakes even further.

The crux of the issue is this: A majority of States impose corporate income and other so-called ``business activity taxes'' only when companies have ``physical presence,'' such as employees or property, in their States. However, some States contend that the mere presence of a business's customers, or an ``economic presence,'' is all that is necessary to impose a business activity tax. These companies are facing a confusing and costly assortment of State and local tax rules, some enacted by legislatures and others imposed upon them by State revenue authorities and upheld by State courts.

Senator Crapo and I introduced similar legislation in the 109th Congress to try to address this problem of double taxation and tax practices that vary from State to State. That bill came close to passing the House, but some last-minute objections were raised. Now, the need for legislation and congressional action has taken on new urgency, and we have revised the bill to address many of the concerns expressed last year.

Just last week, the U.S. Supreme Court denied certiorari in two cases that challenged the constitutionality of State taxation of out-of-State companies with no physical presence in a State. The States involved in these cases, West Virginia and New Jersey, asserted theories of economic nexus to tax out-of-State corporations. They claimed that because some customers of such corporations reside in the State, even though the corporation is not physically present, they are subject to business activity taxes.

The first case involves a credit card company headquartered in Delaware. The bank issued credit cards nationwide, including credit cards issued to West Virginia customers. The bank had no property or employees, no office or any other physical presence, in the State. The second case involves a Delaware holding company that licensed intellectual property trademarks and trade names to a customer that does business in New Jersey. The holding company itself had no offices, employees, or property in New Jersey, and did not otherwise have a physical presence in the State. In both cases, the State courts ruled that the out-of-State corporation was taxable.

What is so disappointing about the Supreme Court's silence on this issue is the fact that these State court decisions conflict with an earlier Supreme Court ruling. In 1992, in Quill Corp. v. North Dakota, the Supreme Court prohibited States from forcing out-of-State corporations from collecting sales and use tax, unless the corporation has a physical presence in the taxing State.

However, some State courts have held that the physical presence test established by Quill creates no such limitations on the imposition of business activity taxes.

Currently, 19 States take the position that a State has the right to tax a business merely because it has a customer within the State, even if the business has no physical presence in the State whatsoever.

These States' actions in pursuing these taxes have caused uncertainty and widespread litigation, so much so that it has created a chilling effect on foreign and interstate commerce. I have spoken out against double taxation on many issues in the past, and the double tax in these cases, while not as large, is just as wrong.

Let me be clear about this: I know that several Governors and State revenue commissioners have spoken out against the legislation because they don't like the Federal Government telling them what they can and cannot tax. They are also concerned about any revenue they might lose as a result. But if the States are collecting a tax they shouldn't be collecting in the first place, the fact that they might lose a small amount of revenue is not the most persuasive argument, in my view.

I believe Congress has a responsibility to create a uniform nexus standard for tax purposes so that goods and services can flow freely between the States. Firm guidance on what activities can be conducted within a State will provide certainty to tax administrators and businesses, reduce multiple taxation or the same income, and will reduce compliance and enforcement costs for States and businesses alike.

The last time Congress acted on this issue was in 1959, when Public Law 86-272 was enacted to prohibit States from imposing ``income taxes'' on sales of ``tangible personal property'' by a business whose sole activity within a State was soliciting sales. No one can deny that in the almost 50 years since, interstate commerce has taken on a whole new character. New technologies allow companies headquartered in one State to provide services to consumers across the country. The Internet is replacing bricks-and-mortar stores. Companies and consumers are increasingly linked across State lines.

The Business Activity Tax Simplification Act of 2007 addresses these changes over the last 48 years both modernizing Public Law 86-272 and codifying the physical presence standard. Our bill extends the protections of the 1959 law to include solicitation activities performed in connection with all sales and transactions, not just sales of tangible personal property. The bill protects the free flow of information, including broadcast signals from outside the State, from becoming the basis for taxation of out-of-State businesses.

BATSA also protects activities where the business is a consumer in the State. It makes little sense to impose tax on out-of-State businesses that purchases goods or services from an in-State company. Obviously, in this very common scenario, the out-of-State business is not using these goods or services to generate any revenue in the State. Why should they be subject to tax?

Most importantly, BATSA codifies the physical presence standard. States and localities can only impose business activity taxes on businesses within their jurisdiction that have employees in the State, or real or tangible personal property that is either leased or owned. It is consistent with current law and sound tax policy, which holds that a tax should not be imposed by a State unless that State provides benefits or protections to the taxpayer. Further, the physical presence standard is the basis for each and every one of our treaties with foreign nations--adoption of a more nebulous standard by the States undermines these international treaties.

We need to act now. Already, State legislatures are interpreting the court's denial of cert as an affirmation of their position that they are free to enact whatever policies affecting interstate commerce that are beneficial to their particular State revenue needs, regardless of the national impact. Because the court will not review their nexus standard and Congress has not acted, States now have an ideal opportunity to raise revenues from out-of-State corporations regardless of the national impact.

Only 3 days after the Supreme Court denied cert, the New Hampshire Assembly added an amendment to the State budget at 3:40 a.m. to allow the State to collect revenue from out-of-State businesses. The denial of cert thereby resulted almost immediately in a $10 million to $100 million windfall for New Hampshire. No one can deny that this was an extremely aggressive action; why else would the legislature have taken such drastic measures to tack on this amendment it? the wee hours of the morning?

States are clearly overreaching in their efforts to collect these taxes, and it creates a difficult situation for businesses. It is laughable to think that a company would decide to cut off all transactions with individuals within a certain State to avoid similar laws. And so they will have to start paying taxes to States where they start generating no revenue, hiring no employees, and contributing nothing to the State's economy from their phantom presence aside from these taxes. But these companies are not going to stand idly by and be double-taxed; they will simply declare less income in their home States as a result.

I know that my legislation with Senator Crapo has raised concerns in the past. The States have argued that BAT legislation represents an intrusion into their authority to govern. But I believe the contrary: A fundamental aspect of American federalism is that Congress has the authority and responsibility under the commerce clause to ensure that interstate commerce is not burdened by State actions.

In fact, the exercise of such congressional power is necessary in order to prevent excessive burdens from being placed on businesses engaged on interstate activity by virtue of their customer's residing in a particular State. Congress must act to ensure certainty, predictability, and fairness of taxation of multistate corporations. The lack of a bright-line physical presence standard encourages each State to act in its own self interest by taking action to maximize its revenues, regardless of the potential double taxation that results.

Let me address a few concerns that have been raised about the bill. Opponents claim that BATSA includes so many exceptions to the physical presence standard that large, multistate companies will utilize the legislation to ensure they pay minimum State tax nationwide. But our bill explicitly States that it preserves States' authority to adopt or continue to use their own tax compliance tools.

In response to those who say that this legislation will be a huge hit to State budgets, the figures just don't add up. There have been a number of studies done, but even the highest revenue estimate represents only a very small percentage of the total amount of business activity taxes collected by the States. The studies leave out one important fact, however: Companies affected by double-taxation are going to declare less income in their home States, if they have to pay taxes on that same income to another State.

Let me cite just one example from a company in my State. In 2005, Citigroup paid 63 percent of all it State and local taxes to New York State and New York City, all based on physical presence in the State and the city. As more States follow the lead of New Hampshire, the city and State of New York will be getting less from Citibank, one way or another, as they won't want to be double taxed, once by New York because of our physical presence and again in New Hampshire and other States because they have customers in those States. This is why any revenue loss estimates from any city or State are overblown.

In short, this is no longer a theoretical discussion. Federal legislation is required to stop this food fight.

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. That is why I am asking my colleagues on both sides of the aisle, including the chairman and ranking member of the Finance Committee, to carefully consider this legislation.

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