New Analysis: When Can States Tax Out-of-State Companies?

July 24, 2006

We’ve posted a new analysis this morning of a bill the U.S. House of Representatives is likely to vote on tomorrow: H.R. 1956, the Business Activity Tax Simplification Act of 2005.

The bill would restrict states from taxing companies from other states unless the firm has property or employees in a state—something tax lawyers call “physical presence.” For companies selling products in multiple U.S. states, that would likely lead to dramatic reductions in the complexity of state corporate tax returns. Here’s an excerpt from the piece:

H.R. 1956 would amend federal law to restrict states from imposing corporate taxes if the corporation lacks a physical presence in the state. Since companies that are physically present in a state are receiving the benefits of government services, it is appropriate to use such a nexus standard for imposing corporate tax. Of course, if H.R. 1956 became law it would reduce some of the revenue that states have received from out-of-state companies. Such a reduction would also have the secondary impact of increasing federal revenues, since those state taxes would no longer be deducted on companies’ federal returns.

Lawmakers should not be concerned with such a federal revenue increase, nor should such an increase be labeled as a “tax hike.” Any business taxpayer that pays more federal tax as a result of H.R. 1956 will have an offsetting reduction in state taxes paid. Furthermore, business taxpayers will be able to spend less money on state tax compliance. That represents a win-win scenario for both interstate commerce and sound tax policy.

Click here to read the full analysis.

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