Tax Foundation Testifies before Congress on Physical Presence for Business Taxation
In testimony submitted today to the Commercial and Administrative Law Subcommittee of the U.S. House Judiciary Committee, Tax Foundation Tax Counsel Joseph Henchman outlined the importance of a consistent and predictable presence-based standard for business taxation.
“Today, with new technologies, even the smallest businesses can sell their products and services in all fifty states through the Internet and through the mail,” Henchman wrote in his testimony. “If such sales can now expose these businesses to tax compliance and liability risks in states where they merely have customers, they will be less likely to expand their reach into those states.”
The Tax Foundation testimony made two primary points: (1) the physical presence standard limits destructive and likely unconstitutional state efforts to export tax burdens, efforts that stifle interstate commerce and harm economic growth; and (2) a uniform physical presence standard would decrease transaction costs for interstate commerce, especially small businesses using mail and the Internet.
The hearing was held to consider H.R. 5267, the Business Activity Tax Simplification Act (BATSA), which clarifies that states may only tax businesses that have property or employees in the state. While the Tax Foundation takes no position on the bill, it has categorized the trend of states shifting tax burdens to out-of-state commerce, which makes democratic accountability difficult and harms interstate commerce.
“The Internet has seen an increased amount of commerce, but some seem to view it as a golden goose that can be squeezed without adverse effects on economic growth,” Henchman wrote. “A uniform physical presence standard would restrain these efforts, maintain a level playing field for all types of businesses, and reduce costs and burdens to interstate commerce.”
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