May 9, 2007
Court Action Necessary to Reduce Uncertainty and Administrative Waste
full study online at http://www.taxfoundation.org/research/show/22394.html
For more information, contact Bill Ahern at 202-464-5101
Washington, D.C., May 9, 2007 - In a brief submitted today, the Tax Foundation urged the Supreme Court to clarify that businesses do not have to pay direct taxes in states where they have no personnel or property.
In a case involving FIA Card Services, formerly known as MBNA America Bank, the state of West Virginia levied direct taxes, corporate income tax and franchise tax on the financial services firm because it had distributed credit cards to West Virginia residents. The firm has no property or personnel in the state.
In general terms, the state's position is known as "economic presence"—that is, a firm is liable for tax if it has customers in a state. The firm's position, supported by the Tax Foundation brief, is that physical presence is a better standard: if a firm has personnel or property in a state, it is subject to direct taxation.
The Tax Foundation brief, written by Chris Atkins of the Tax Foundation and Kyle Sollie of Reed Smith LLP of Philadelphia, contends that an agreed-upon standard for nexus, the right to tax, is important to our nation's economy, especially to our financial system and money system.
Atkins and Sollie chronicle the deleterious economic results if the Court does not hear this case, economic damage that the Court can prevent by re-affirming the physical presence standard.
"Confusion over nexus rules entices States to export their tax burden to nonresidents and may lead to retaliation by other States, creating a drag on the economy," said Atkins.
Congressional committees and the Federal Reserve Board agree this is an important question that should be resolved, but Congress has determined to leave the question to the courts.
"The courts have stepped into the void," points out Sollie, "and the Supreme Court in Quill correctly favored the physical presence standard."
In Quill the Supreme Court reaffirmed that under the Commerce Clause, a State may require a business to collect sales and use tax only if the business has a physical presence in the State.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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For more information, contact Bill Ahern at 202-464-5101