Mixed reception for bill requiring “physical presence” for state taxation.

Industry representatives had praise for a bill that would prevent states from taxing businesses with no in-state physical presence in Congressional hearings yesterday. State government representatives, not so much.

National Taxpayers Union representative Andrew Moylan testified for the Bill, H.R. 2887:

  1. First, it says that no state can tax or regulate the activity of a person or business in interstate commerce unless that person or business is physically present in the state.
  2. Next, it defines physical presence as including property, employees, and other markers of genuine connection to a state.
  3. Then it goes on to define what does not constitute physical presence, including things like tangential advertising relationships, presence in a state for less than 15 days, and other kinds of transitory connections that states have used as avenues of tax collection.
  4. It protects non-sellers, such as intermediaries that are neither the buyer or seller in the case of the sale of an item, from being ensnared in tax or regulatory schemes.
  5. Next, it places original jurisdiction in federal district courts to help ease some of the morass of state litigation.
  6. Finally, it defines the terms it uses in more specific fashion.

South Dakota state Senator Deb Peters, appearing on behalf of the National Conference of State Legislators, disagreed, testifying that the bill “is one of the most coercive, intrusive, and preemptive legislative measures ever introduced in Congress.”

Joseph Henchman of the Tax Foundation testified that while the bill addresses real problems with overreaching state taxation, it leaves the collection problem of internet sales to in-state residents unsolved. Also: “…the bill’s language of prohibiting state regulation of interstate activity even where ‘otherwise permissible under Federal law’ arguably might disrupt the enforceability of interstate compacts previously approved by Congress.”

Given the strong opposition of state legislatures to the bill, it has an uncertain future. It is certain that state taxation of out-of-state businesses remains a very real problem for taxpayers as states become more aggressive in pushing the unclear boundaries of their taxing authority.

If you have questions on how to deal with your state taxation issues, contact Eide Bailly’s State and Local Tax team.

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