Coalition to Protect Interstate Commerce

American Bar Association Report on Business Activity Tax Nexus

The American Bar Association recently issued a Report dealing with business activity tax nexus, titled Report of the Task Force on Business Activity Taxes and nexus of the ABA Section of Taxation State and Local Taxes Committee (Tax Lawyer, Vol. 62, No. 4 (Report), pp. 935-1006).

The Report "attempts to educate readers on business activity taxes and the current business activity tax nexus debate, by objectively presenting the issues and positions of various constituencies affected by the debate." (Report at 935.)

The Report concludes that the following escalating problems may pose a threat to the smooth functioning of interstate commerce:

1. Many taxpayers have historically viewed the principal limit on a state's ability to tax the income or profits of a nonresident to be a prerequisite that the nonresident have some "physical presence" in the taxing jurisdiction -- a standard facing increasing and successful challenges by state-taxing authorities.
2. An increasing number of states are asserting the equivalent of nation-wide taxing jurisdiction over nonresidents on the basis of “economic nexus.” Taxpayers contend that an economic nexus standard results in tax imposition on businesses that do not receive meaningful government benefits from the taxing jurisdiction, and who are likely to be already paying for such benefits in the jurisdictions in which they are located.
3. The states have widely varying, and sometimes not clearly articulated, approaches to jurisdiction over nonresidents, as well as varying systems of taxation, arguably creating an increased risk of multiple taxation of the same income and difficulty in planning for any business operating in interstate commerce.

(Report at 937.) The Report also notes that “[a]ll of the issues arise in the context of interstate commerce, an area within the concern and jurisdiction of the federal government. However, the judiciary has been much more active than the legislature, creating piecemeal, case-specific law, not wholly satisfactory to any constituency." (Id.)

While the Report does not advocate any solution to the problem (according to the Report, the ABA refrained from doing so “[i]n light of [the] ongoing national debate and the potential for federal legislation”), it does discuss the Business Activity Tax Simplification Act (H.R. 1083). That discussion may be found on pages 981-83 and 990-1001.

More about the Issue

• Overview, Congress Must Act to Clarify the Nexus Standard for State Business Activity Taxes


• Examples of Actual and Potential Aggressive State Actions and Positions Against Out-of-State Companies


• Examples of Federal Commerce Clause Legislation
  

Congress Must Act to Stop State Interference with Interstate Commerce

The U.S. Supreme Court has never upheld a state attempt to tax interstate commerce in the absence of physical presence of the taxpayer in the taxing jurisdiction. Ignoring this fact, some states are attempting to use "economic nexus" theories to expand their tax base by assessing income and franchise taxes against out-of-state companies that have customers but no property or employees in the taxing state. Such efforts violate the U.S. Constitution by unduly burdening the free flow of interstate commerce.

Efforts by state taxing officials to apply "economic nexus" theories to raise additional revenue from out-of-state entities are sure to increase dramatically in light of a recent refusal by the U.S. Supreme Court to review two cases that challenged the constitutionality of such schemes.

Congress has an obligation to act to provide relief from the resulting chaos by clarifying that state tax jurisdiction over out-of-state businesses is limited to those entities that engage in activity, through some form of physical presence, within the state's bounds.

If Congress fails to act, problems caused by state overreaching will increase. Already, overly-aggressive state attempts to expand taxing authority has:

• led to unfairness and uncertainty;
• increased compliance costs (inevitably, such increased costs will be passed on to consumers in the form of higher prices);
• hindered business expansion;
• put companies at the risk of duplicative over-taxation;
• threatened the continued development of electronic commerce;
• threatened the revenue collections of states that fully comply with constitutional nexus requirements;
• stymied the intent of accounting reporting rules for publicly traded companies; and
• negatively affected international competitiveness.

Left unchecked, this unwarranted expansion of the states' power to impose business activity taxes on companies that do business across state lines will have a chilling effect on the entire economy as tax burdens, compliance costs, litigation and uncertainty escalate.