The House Committee on Small Business held a hearing on business activity taxes and their impact on small businesses.

Speaking before the committee, Michael Petricone, senior vice president of government affairs at the Consumer Electronics Association, complained about the increasing number of states using "economic nexus" theories to levy income and franchise taxes on out-of-state companies that have customers but no physical presence in the state.

"Unfortunately, our small businesses are now being threatened with onerous and inappropriate taxation by the states," he said in his opening statement. "Congress needs to act quickly to stop this alarming trend."

He described the cases of Atlantic Technology and Mitek, two companies that have been taxed by other states because of their use of independent sales representatives. Seattle-based Amazon.com has also recently protested New York Governor Eliot Spitzer's plan to tax the e-tailer's online sales because of its use of affiliate sites in New York that help steer customers to its products (see Amazon Opposes New York State Online Sales Tax).

Barry Godwin, the controller at Stingray Boat Co., related his own experiences to the committee. His North Carolina-based company received a letter in 2006 from a Maine revenue agent asking him to fill out a nexus questionnaire. The agent told Godwin that Stingray had created nexus by paying an independent dealer for warranty work performed on one of its boats. Stingray objected to the determination, but decided it would be less costly to pay the retroactive taxes and fines than to go to court over the matter. Last year, a revenue agent from New Jersey threatened to impound a truck carrying a delivery of Stingray's boats on their way to Massachusetts. The truck had been stopped at a weigh station, and the agent demanded $46,200 in jeopardy assessment taxes before she would release the vehicle.

"The manner in which the state of New Jersey acted is commonly defined as extortion," said Godwin.

Stephen Joost, CFO of franchiser Firehouse Restaurant Group, said his Jacksonville, Fla.-based company needed to hire a plethora of tax accountants and lawyers to comply with all the regulations and file all the tax returns and documents required by the various states.


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