February 4, 2010
Tax Foundation Submits Statement Supporting Business Tax Simplification
Federally Established Uniform Physical Presence Standard Would Limit Destructive State Efforts to Export Tax Burdens, According to Statement from Tax Counsel Joseph Henchman
Washington, DC, February 4, 2010 -- The Business Activity Tax Simplification Act would establish a clear physical presence standard to apply to online retail transactions and prevent burdening interstate commerce, according to written testimony submitted today by Tax Foundation Tax Counsel Joseph Henchman to the House Judiciary Commercial and Administrative Law Subcommittee.
The subcommittee is scheduled to host a hearing titled "State Taxation: The Role of Congress in Defining Nexus" today at 11 a.m.
"Our written testimony makes two broad points," Henchman writes. "First, the physical presence standard limits destructive and likely unconstitutional state efforts to export tax burdens, efforts that stifle interstate commerce and harm economic growth. Second, a uniform physical presence standard would decrease transaction costs for interstate commerce, especially small businesses using mail and the Internet."
The full statement, "A Uniform Physical Presence Standard Would Limit Destructive State Efforts to Export Tax Burdens," is available online at http://www.taxfoundation.org/research/show/25790.html.
Changing nexus rules is just one way states have attempted to shift the tax burden to non-residents -- something they've been doing for a long time, according to Henchman. With the growing popularity of online retail sales, questions arise about where the transaction takes place and the proper way to tax it. A physical presence rule provides an easy and logical answer to where the transaction is located, identical to the answer given for brick-and-mortar businesses.
Taxation based on economic nexus standards threatens interstate commerce, harms long-term economic growth and undermines the principles of sound tax policy: simplicity, neutrality, transparency, and stability, Henchman notes.
Congressional action to adopt a physical presence standard may be the best vehicle for preventing burdens to interstate commerce, because it can be more comprehensive and accountable than judicial action and can also better address issues of transition, retroactivity, and de minimis exemptions (which would allow a business to conduct limited business activity without establishing nexus and being subject to a tax), according to the statement. Henchman writes:
"The Tax Foundation has catalogued the growth in state tax exporting. Increasingly, states have imposed higher, non-neutral taxes on individuals, goods, and services more likely to be used by non-residents. Our research has reviewed such taxes on visiting athletes, businesses engaged in interstate commerce, and hotel rooms and rental cars. States have also enacted subsidies and tax credits only available to favored in-state activities, and have shifted corporate tax burdens by changing apportionment and nexus rules.
As these states have reached beyond their borders for a larger share of taxes that would otherwise go to other states, they have reduced neutrality in the tax system, burdened interstate transactions with uncertainty, increased compliance costs, and threatened multiple taxation of the same business income by different states. ...
A uniform physical presence standard for all forms of taxation would avoid many of these problems."
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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The full statement, "A Uniform Physical Presence Standard Would Limit Destructive State Efforts to Export Tax Burdens," is available online at http://www.taxfoundation.org/research/show/25790.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.
