The House Judiciary Committee today moved forward critically important legislation to curb state efforts to force out-of-state, non-resident businesses to pay income tax. The Business Activity Tax Simplification Act, or BATSA (H.R. 1439) would prevent states from reaching across their borders by setting a uniform physical presence threshold for when a state may target an out-of-state business for income tax.
States across the country have begun to throw their tax burdens onto out-of-state businesses and individuals to collect more tax revenue and grow the size of government. In doing so, they have gradually replaced the “physical nexus” standard for tax collection with a nebulous “economic nexus,” allowing them to go after companies with mere economic activity in a state.
The shift to an economic nexus is an attempt by states to raise tax revenue beyond what their own economies and taxpayers can sustain. Economic nexus poses a direct threat to the principles of democracy and republican governance by the people, shifting the cost of government to non-residents. It also violates the “benefits principle” by pushing the tax burden onto those that receive no direct benefit from the state.
BATSA, sponsored by Rep. Bob Goodlatte (R-VA), helps to create certainty for businesses and states alike by keeping the long arm of income tax collectors restrained in their respective states. In approving the bill, Reps. Goodlatte and Dan Lungren (R-CA) fought back against attempts by Democratic Reps. Judy Chu (D-CA) and Jerrold Nadler (D-NY) to delay or strip the physical footprint standard from the bill, as they favor instead a vague economic nexus for states. The issue of Internet taxation was also touched on by Democrats in favor of an economic nexus, as Congress is considering the so-called “Main Street Fairness Act" that would allow states to reach across their borders to collect sales tax on Internet and other sales.
For more information, check out ATR’s letter of support below.
I write in support of strengthening the physical nexus standard for tax collection as contained in the Business Activity Tax Simplification Act, or BATSA (H.R. 1439). The measure, sponsored by Rep. Bob Goodlatte, would not only create uniformity in the states and certainty for business, but would help to quell the multitude of states inappropriately attempting to shift their tax burdens to out-of-state companies and individuals.
BATSA establishes a clear physical presence standard for taxing multistate businesses engaged in cross-border transactions. The bill will help to foster inter-state economic activity by eliminating the burden for businesses of having to comply with varying and complex state income tax laws. As nearly half of states have already sought to loosen their physical nexus standard, BATSA could not come at a more critical juncture.
In lieu of a physical nexus, states are adopting policies that force new tax liability onto those with a mere “economic nexus.” Codified in many different forms across the country, the economic standard grants nebulous authority to force out-of-state, nonresidents to comply with a state’s tax code. The gradual shift to economic nexus is an attempt by states to raise tax revenue beyond what their own economies and taxpayers can sustain. Economic nexus poses a direct threat to the principles of democracy and republican governance by the people, shifting the cost of government to non-residents. It also violates the “benefits principle” by pushing the tax burden onto those that receive no direct benefit from the state.
It is critically important that Congress takes steps to reaffirm and strengthen the physical nexus standard, and to avoid attempts to weaken it. Already, efforts in Congress are underway to dissolve the physical footprint standard for sales tax collection through the so-called “Main Street Fairness Act.” This legislation would reverse the U.S. Supreme Court’s longstanding precedent in Quill v. North Dakota by forcing out-of-state businesses and individuals to collect and remit sales taxes.
Congress has well-established Constitutional authority to protect against economically destructive state tax laws. We urge you to exercise it by passing the Business Activity Tax Simplification Act (H.R. 1439). If you have any questions, please contact Kelly William Cobb at firstname.lastname@example.org.
President, Americans for Tax Reform