Thoughts on the BATSA Hearing

June 25, 2008

Yesterday, several Tax Foundation staffers and interns attended a hearing held by the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law. The subject of the hearing was H.R. 5267, the Business Activity Tax Simplification Act of 2008 (BATSA), and the Tax Foundation submitted testimony analyzing the issue of business presence for taxation purposes.

As the world economy becomes more integrated, it is growing easier to move capital investment and job creation to states with better tax climates. As this occurs, it creates a dilemma for states that lose in-state businesses to this tax competition. It also makes it more difficult to answer the question of where a transaction occurs. If a seller is in Pennsylvania and a buyer in Colorado, which state can properly tax it-one, both, or every state in between?

States are using this ambiguity to shift tax burdens to out-of-state residents. This is problematic because it reduces democratic accountability and allows state government to grow larger than its residents are willing to pay for. It also harms the national economy, because businesses are left uncertain about where they will be subject to tax, suppressing investment and disrupting interstate commerce.

For example, one of the witnesses (Mark Ducharme, CFO of Monterey Boats) recounted a tale of being shaken down on the New Jersey state line (different from this one!). His Florida business had sold boats to customers located in New Jersey, and revenue officials stopped the truck at the state line and demanded cash payment of taxes allegedly due. This local business, which had no property or employees in New Jersey, quickly had to hire a lawyer and learn the intricacies of New Jersey nexus law.

BATSA would establish that businesses could only be subject to tax burdens in states where they have property and employees for at least 15 days in a year. This “physical presence” standard was reaffirmed most recently in the 1992 Supreme Court case Quill Corp. v. North Dakota, which remains binding precedent. Many states, however, are pushing for “economic presence” standards, which tax businesses based on where customers are located.

Rep. Zoe Lofgren (D-CA), a BATSA co-sponsor spoke about the importance of clarity in the law and congressional action to resolve the issue. Other members who spoke include primary sponsors Rep. Rick Boucher (D-VA) and Rep. Bob Goodlatte (R-VA), as well as Rep. Hank Johnson (D-GA), Rep. Bill Delahunt (D-MA), Rep. Jim Jordan (R-OH), and Rep. Tom Feeney (R-FL).

One of the interesting questions posed by Subcommittee Chairwoman Rep. Linda Sanchez (D-CA) was a congressionally-mandated economic nexus standard would produce the same benefits as a congressionally-mandated physical presence standard. Both would certainly produce uniformity, although only the physical presence standard would produce certainty, enabling businesses to know where will have tax liability.

Two witnesses argued against the BATSA bill. One, R. Bruce Johnson of the Utah State Tax Commission and Multistate Tax Commission, worried that the inability to tax out-of-state businesses would result in higher tax burdens for in-state businesses. However, Johnson did recognize the need for reform that would produce certainty for businesses, albeit based on a specified minimum level of economic activity. The other opposing witness, David Quam of the National Governors Association, argued that the BATSA bill would represent a $6 billion hit for state revenues. (Look for an upcoming Tax Foundation blog post on this issue.)

Judiciary Committee Chairman Rep. John Conyers (D-MI) echoed this point, asking the witnesses what he is supposed to tell Gov. Jennifer Granholm (D-MI) when the BATSA bill might reduce that state’s revenues by $400 million. My answer would be that it is money Michigan probably shouldn’t be collecting in the first place, and a tax reform based on broad bases and low rates (as opposed to Michigan’s current narrow bases and high rates) would improve the state’s fiscal situation and business climate.

The NGA and other government officials argue that businesses should have to pay income and sales taxes in states where they merely have customers, because they enjoy the benefits of a functioning economy and educated workforce. Putting aside the question of whether nexus-pushing states like New Jersey, West Virginia, and Michigan can boast about these things, residents in the state are the primary benefits of transportation infrastructure, property rights, and good courts. (Roads and courts also often have separate taxes and fees that out-of-state businesses pay when they use them.)

The benefits of living in a state accrue to the people and businesses who reside there. When a state starts reaching beyond its borders to tax out-of-state companies, it is admitting that their state government services are a product in-state residents are unwilling to buy.

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