February 13, 2007
Arthur Rosen: States Export Tax Burden with New Rules
Court Decisions Will Have a Dramatic Effect on Interstate Commerce
For media inquires please email Brian Phillips or call 202.464.5102
WASHINGTON, D.C. - State laws that impose direct taxes on financial institutions with no physical presence in the state violate the letter and spirit of the Constitution's Commerce Clause, according to Arthur Rosen, a partner in the New York City office of the law firm of McDermott, Will & Emery.
"This was a departure from what I believe, and I think most people believe, was traditionally accepted as the law in this country -- that a state had the right to tax anything within its own borders, and not something outside its own borders," he said.
Rosen, who has also been the Deputy Counsel of the New York State Department of Taxation and Finance, discussed what is becoming a huge issue with potentially shockwave-like effects on state tax policy in the Tax Foundation's most recent Tax Policy Podcast (listen).
Rosen currently represents MBNA, a Delaware-based financial institution, in a dispute with the state of West Virginia over a statute that intends to tax MBNA's income based on the use of MBNA credit cards in West Virginia.
At least seven states have laws that levy a tax on institutions, such as banks and mortgage companies, which have customers in the state, but no physical presence.
If these states get their way, he said, "we are going to be faced with every business having to consider paying taxes in every little jurisdiction where it happens to have a customer. We think that really is an undue burden that will hurt the American economy."
As recently as last year, the U.S. Congress attempted to address the issue. Senator Charles Schumer (D-NY) sponsored an expanded version of the Business Activity Tax Simplification Act (BATSA) that would "prohibit state taxation of an out-of-state entity unless such entity has a physical presence in the taxing state," according to the Congressional Research Service.
In upholding the statute, Rosen believes the West Virginia State Supreme Court overstepped its boundaries by "making up new law."
"If there is going to be a change in the law, that is what we have Congress for," he said. "Congress has the power, the authority [and] responsibility for ruling under the Commerce Clause...Therefore, it's Congress's job."
The interview is Number 21 in the Tax Foundation's Tax policy Podcast series. It's available online here.
The Tax Policy Podcast features an interview that sheds light on the nation's tax system. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
For media inquires please email Brian Phillips or call 202.464.5102
