Claims that Proposed Federal “Business Activity Tax Nexus” Bill Would Have a Negligible Impact on State Revenues Are False and Disingenuous
[i] No Senate counterpart to H.R. 1956 has been introduced.
[iii] H.R. 1956 applies equally to BATs imposed by local governments. This paper generally refers to states alone, however, because most of the discussion in it is applicable to corporate income taxes. Corporate income taxes are not commonly imposed by local governments, with the prominent exceptions of New York City and the District of Columbia.
[iv] One of the amendments adopted in the subcommittee mark-up clarifies that the 21-day limit applies to employees and property combined. In other words, a corporation that had employees in a state on 15 days and property in the state on an additional 10 days would be outside the 21 day limit; a state would not be barred from asserting nexus over the company. As discussed in the previously-published Center analysis of H.R. 1956, however, such a provision is largely meaningless because a corporation that wished to have employees in a state for 15 days and property in the state for 10 more without establishing nexus could easily incorporate a separate subsidiary to be the nominal owner of the property. In that event, neither corporation would exceed the 21-day limit. The limit applies separately to each separately-incorporated subsidiary in a group of commonly-owned and commonly-controlled corporations.
[v] Letter dated September 27, 2005 from Arthur Rosen on behalf of the Coalition for Rational and Fair Taxation in support of H.R. 1956 to the Chairman of the Subcommittee on Commercial and Administrative Law, House Judiciary Committee. Hereafter referred to as the “CRAFT Statement.”
[vi] Proponents of H.R. 1956, including CRAFT, frequently characterize the entire bill as doing nothing more than establishing a “physical presence” nexus standard. That characterization is misleading. A physical presence nexus standard would mean that if a corporation had no physical presence in a state it would not be taxable there, and if it had a physical presence it would be taxable. In contrast, H.R. 1956 provides several new “safe harbors” that would allow a corporation to have substantial physical presence in a state without creating nexus, and it also preserves Public Law 86-272, which allows a corporation to have sales and delivery personnel in a state without creating nexus. Nonetheless, the quoted language is one provision of H.R. 1956, and — operating independently of the rest of the bill — it would establish a “physical presence” standard. That is why it is referred to in this section as the “true” physical presence threshold in the bill.
[vii] See: Affidavit of Thomas K. Condon, Massachusetts Department of Revenue, in the case of Prime Receivables Corporation v. Alan LeBovidge, dated December 3, 2003. This document indicates that a number of large multistate banks with customers in Massachusetts but no direct physical presence there dropped their challenges to the state’s bank income tax, which asserts that nexus is established if out-of-state financial institutions have a significant number of Massachusetts-resident customers. See the longer discussion on pp. 6-7 of this report.
[viii] See: Michael Mazerov, Federal "Business Activity Tax Nexus" Legislation: Half of A Two-Pronged Strategy To Gut State Corporate Income Taxes, Center on Budget and Policy Priorities, Revised November 30, 2005.