June 29, 2007
Schumer-Crapo Bill on Tax Nexus Could Stem Tide of Out-of-State Tax Returns, Administrative Waste
For more information, contact the press office at 202-464-6200.
Washington, D.C., June 30, 2007 - Senators Charles Schumer and Mike Crapo have introduced a bill to set standards for out-of-state taxation, which appears to be a helpful step in the long campaign to stop state tax collectors from making unreasonable demands on out-of-state companies.
The bill is S. 1726, the Business Activity Tax Simplification Act of 2007.
Advocates of court action to set a good standard for interstate taxation were discouraged by a recent court decision in which West Virginia won the right to impose its corporate income and franchise taxes on a financial services firm that had no personnel or property in West Virginia. FIA Card Services, formerly known as MBNA America Bank, had distributed credit cards to West Virginia residents, and on this basis, the state levied its taxes on the firm's income. The Supreme Court declined to hear FIA's appeal.
In general terms, the state's position is known as "economic presence," a theory by which a firm is liable for tax if it has customers in a state because it is taking advantage of the market there. The firm's position, supported by a Tax Foundation amicus brief, is that "physical presence" is a better standard: if a firm has personnel or property in a state, it is taxable because it benefits directly and substantially from large taxpayer-funded spending programs, such as police protection of personnel and property and the public education of employees' children.
A Tax Foundation amicus brief, written by Chris Atkins of the Tax Foundation and Kyle Sollie of Reed Smith LLP of Philadelphia, had urged the Supreme Court to hear the case and reverse the West Virginia decision. The brief chronicled the deleterious economic results that have ensued as more state tax administrators have adopted the economic presence standard. See http://www.taxfoundation.org/publications/show/1173.html.
"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.
In a famous, related case known as 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. However, the courts have not extended this reasoning to business activity taxes, and Schumer and Crapo's bill would do that, codifying a physical presence standard.
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 the press office at 202-464-6200.
