INTRODUCTION OF THE BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2008 -- (Extensions of Remarks - February 07, 2008)
HON. RICK BOUCHER
IN THE HOUSE OF REPRESENTATIVES
THURSDAY, FEBRUARY 7, 2008
* Mr. BOUCHER. Madam Speaker, I rise to introduce the Business Activity Tax Simplification Act of 2008, a measure that will bring much needed clarification to the circumstances under which states may impose taxes on out of state businesses. This is a bi-partisan measure in the principal sponsorship of which I am pleased to be joined by my Virginia colleague Bob Goodlatte. We are joined in sponsorship of the measure by Mr. Chabot, Mr. Artur Davis, Mr. Feeney, Mr. Gallegly, Ms. Herseth Sandlin, Ms. Jackson-Lee, Mr. Hank Johnson, Ms. Lofgren, Mr. Pence, Mr. Bobby Scott, and Mr. Wexler, many with whom we are pleased to serve on the House Judiciary Committee.
* Traditionally, states and localities have levied corporate income, franchise and other taxes only on those businesses that have a physical presence in the taxing jurisdiction. The growth of the Internet and other forms of advanced communications has made it possible for businesses to conduct a broad range of transactions without the constraints of geopolitical boundaries. As a result, some states have attempted to expand their tax base by assessing business activity taxes against out-of-state companies that have customers but no property or employees in the taxing state. Both large and small companies are facing an increasingly unpredictable tax environment, which hinders business expansion and threatens the continued development of e-commerce.
* The measure we are introducing today will bring certainty to the increasingly chaotic tax environment for businesses by clarifying that the states cannot attempt to tax the income of a company that has no physical presence within the taxing state's borders. Our legislation sets forth clear, specific standards to govern when businesses should be obliged to pay business activity taxes to a state. Generally, a business must use employees or services in a state for 15 days or more in a calendar year before it is liable to pay business activity taxes to that jurisdiction.
* The Business Activity Tax Simplification Act also modernizes a law which Congress enacted forty-nine years ago that set clear, uniform standards for when states could tax out-of-state businesses based upon the solicitation of orders for specified kinds of sales. Reflecting the economy of its time, the scope of Public Law 86-272 was limited to income taxes on the sale of tangible personal property. Our nation's economy has changed dramatically over the past half-century, and the statute must be modernized to apply equally to the sale of intangible property and services, and to other business activity taxes.
* I want to emphasize that the Business Activity Tax Simplification Act does not diminish the ability of states and localities to collect tax revenue. Rather, it rationalizes and makes more predictable the process of doing so.
* The lack of clarity in current law has led to sometimes absurd results. A collection agent with the New Jersey Department of Taxation stopped a refrigerated truck loaded with product belonging to Smithfield Foods, a company headquartered in my state of Virginia, on the New Jersey turnpike. The agent held the truck and its driver for several hours and demanded that, to release the truck, Smithfield had to wire $150,000 immediately to the New Jersey Department of Taxation. The agent claimed that he had the right to hold the truck and its contents because Smithfield had failed properly to file New Jersey tax returns.
* Smithfield informed the New Jersey agent that his claim was unfounded. It explained that Public Law 86-272 protected it from New Jersey income taxation because it only engaged in solicitation by advertising in New Jersey and had no physical operations in the state. The agent refused to accept this explanation; however, he finally agreed to release the truck and its driver in return for $8,000.
* Smithfield appealed this aggressive and incorrect application of Public Law 86-272 to the New Jersey State tax commissioner. Ultimately, New Jersey accepted Smithfield's contention that it has no physical presence in the state and is, therefore, not subject to New Jersey income tax. It issued Smithfield a refund and an apology for its roadside justice system, but not before Smithfield had invested much time and expense in resolving a situation which should not have arisen. Our measure will help avoid such scenarios in the future by clarifying the physical presence standard embodied in Public Law 86-272.
* New Jersey has used similar tactics against out-of-state companies selling intangible goods to its residents, a situation not covered by Public Law 86-272. It has argued that a mom-and-pop South Carolina software company, with no physical presence in any states besides South Carolina and Georgia, owes a minimum of $600 per year in corporate income taxes and fees based only on the sale of licensed software to a New Jersey entity, and that the company would owe such tax every year that its software was in use in the state, even for those years in which the company had no income from any customer in New Jersey.
* The Louisiana Department of Revenue has threatened to assess business activity taxes on several out-of-state companies based merely on the fact that they broadcast programming into the state, arguing that the companies are exploiting the Louisiana market because the programming is seen or heard by individuals in Louisiana.
* Several states attempt to assess business activity taxes on out-of-state credit card companies based solely on the fact that people use the companies' credit cards in the taxing jurisdiction and enjoy the ``substantial privilege of carrying on business'' in the state.
* Some localities have attempted to impose personal property taxes on property orbiting in space. For example, Los Angeles County attempted to impose a property tax on a county-based company which owned eight communications satellites permanently orbiting in space. The city of Virginia Beach, Virginia, also attempted to impose personal property taxes on three transponders attached to satellites orbiting in space which were owned by a city-based cable company. If states were to use the same approach to impose business activity taxes, on the basis that a satellite orbiting above the state creates a physical presence there or because a business generates income in a state because its satellite passes over the state, there would be significant consequences for many industries.
* The Business Activity Tax Simplification Act offers Members the opportunity to put an end to nonsensical situations like these. In doing so, we will provide certainty to both U.S. businesses and to states, thereby fostering economic growth and development. I thank Mr. GOODLATTE and the original cosponsors of the Business Activity Tax Simplification Act for their support, and I urge each of our colleagues to join with us in passing this bi-partisan measure.