Nexus Issues: Looking for a Cure

IMGCAP(1)]The House Judiciary Committee, through its Subcommittee on Regulatory Reform, Commercial and Antitrust Law, held a hearing Tuesday on nexus issues involving three bills before the Committee.

The bills are the Mobile Workforce State Income Tax Simplification Act of 2015, the Digital Goods and Services Tax Fairness Act of 2015 and the Business Activity Tax Simplification Act of 2015. The unifying theme of the legislation, according to Chairman Bob Goodlatte, R-Va., is “No Regulation Without Representation.”

Since the Supreme Court held in the 1992 case of Quill v. North Dakota that states may tax interstate commerce if there is a “substantial nexus” to the taxing state, states are increasingly exploiting the gray area in the law to tax and regulate beyond their borders, according to Goodlatte.

“For example, California is now requiring that out-of-state farmers who want to sell eggs in California comply with California cage-size requirements, which are twice the industry standard,” he said. “The Alabama Attorney General described the new law as ‘California’s attempt to protect its economy from its own job-killing laws by extending those laws to everyone else in the country.’ This is precisely the sort of protectionism that the Commerce Clause is intended to prevent.”

“These bills codify clear boundaries as to a state’s authority to tax individuals, businesses and products,” said Grover G. Norquist of Americans for Tax Reform, who testified at the hearing. “These boundaries prevent the taxman’s arm from growing forever longer and from always coming back for seconds.”

“Chairman Goodlatte sees a commonality among these bills as addressing the extent to which a state’s jurisdiction to tax should extend to activities that occur outside its borders,” said Arthur Rosen, a member of McDermott Will & Emery LLP, which successfully represented the taxpayers in the landmark Quill decision. Rosen spoke as a representative of the Coalition for Rational and Fair Taxation (CRAFT).

He described the history of the Business Activity Tax Simplification Act of 2015, or BATSA, which has been introduced and re-introduced several times in Congress.

“Although BATSA has been around for quite a while, for various reasons Congress appears to have had higher priorities in each session, so we have not been able to move it as far as we hoped,” he said. “However, there is a reasonable likelihood of enactment in this Congress.”

The issue in BATSA is a totally separate issue from the Marketplace Fairness Act, Rosen noted. “The focus in MFA is on when a seller has to collect the tax from a state’s residents and remit the tax to that state. BATSA, in contrast, is focusing on direct tax on businesses,” he said.

“Unfortunately, some state revenue departments and state legislatures have been creating barriers to interstate commerce by aggressively attempting to impose direct taxes on out-of-state businesses that have little or no connection with their state,” he told the committee. “Specifically, some state revenue departments have asserted that they can tax a business based merely on its economic presence in the state—based on the recently-minted notion of ‘economic nexus.’ The economic nexus concept flies in the face of the underlying basis of business activity taxation, which is that a business should be subject to tax only by those states from which the business receives meaningful benefits and protections.”

“The underlying principle of the BATSA legislation is that only states and localities that provide meaningful benefits and protections to a business—like education, roads, fire and police protection, water, sewers, etc. —should be the ones who receive the benefit of the business’ taxes, rather than a remote state that provides no services to the business,” he added. “Further, businesses should only pay tax to those states and localities where they earn their income, and income is only earned where a business is actually located.”

“A physical presence nexus standard provides a clear test that is consistent with the principles of current law and sound tax policy and that is consistent with Public Law 86-272, a time-tested and valid congressional policy,” he said.

“At this time, there is no indication that the business activity tax nexus issue will be settled absent congressional action.” Rosen said. “BATSA will not cause any meaningful dislocations in any state’s revenue sources and will not encourage mass tax-sheltering activities. Instead, its enactment will ensure that the U.S. business community, and thus the American economy, are not unduly burdened by unfair attempts at taxation without representation.”

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