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Federal “Business Activity Tax Nexus” Legislation: Half of a Two-Pronged Strategy to Gut State Corporate Income Taxes


Major multistate corporations are engaged in a two-pronged lobbying strategy aimed at substantially increasing the share of their nationwide profit that is not taxed by any state.  The strategy involves the enactment of complementary state and federal legislation.  The state legislation — which corporations have already persuaded 22 states to enact — lowers corporate taxes for some in-state corporations and increases them for some out-of-state corporations.  The federal legislation would make it much more difficult for states to require many of those out-of-state corporations to pay any income tax to them at all.  Since federal law supersedes state law, the net effect would be to lower the taxes of the in-state corporations and eliminate them entirely for the out-of-state corporations.  In other words, the two changes in tax law would create a “heads I win, tails you lose” system of state corporate income taxation — with corporations the winners and state treasuries the losers.

The federal legislation is H.R. 1439, the “Business Activity Tax Simplification Act of 2011” (BATSA).   Like similar proposals filed in past years, H.R. 1439 would impose what is usually referred to as a federally-mandated “nexus threshold” for state and local “business activity taxes” (BATs).  State taxes on corporate profits collected by 44 states and the District of Columbia are the most widely-levied state business activity taxes and are the focus of this report.  The “nexus” threshold is the minimum amount of activity a business must conduct in a particular state to become subject to taxation in that state. 

Nexus thresholds are defined in the first instance by state law.  State laws levying a tax on a business set forth the types of activities conducted by a business within the state that obligate the business to pay some tax (which usually is proportional to the level of activity in the state).  If a business engages in any of those activities within the state it is said to have “created” or “established” nexus with the state, and it therefore must pay the tax.  Federal statutes can override state nexus laws, however, and BATSA proposes to do so in four key ways:

  • BATSA declares that a business must have a “physical presence” within a state before that jurisdiction may impose a BAT on the business.  This provision would nullify many state laws that assert that a non-physically-present business establishes nexus with the state when it makes economically-significant sales to the state’s resident individuals and/or businesses.  In establishing this true, “physical presence” nexus threshold, BATSA would reverse nearly a dozen state court decisions holding that physical presence is not required to establish nexus under a corporate income tax or other BAT.
  • Under BATSA, moreover, some businesses could have a physical presence in a state without creating nexus.  The bill would create a number of nexus “safe harbors.”  These are categories and quantities of clear physical presence that a corporation or other business could have in a state that nonetheless would be deemed no longer sufficient to create BAT nexus for the business.  For example, the bill allows a corporation to have an unlimited amount of employees and property in a state without creating nexus, so long as neither employees nor property is present in the state for more than 14 days within a particular year.  (As discussed in another Center report, this 14 day limit can be easily circumvented.)
  • BATSA substantially expands an existing nexus “safe harbor,” federal Public Law 86-272.  P.L. 86-272 provides that a corporation cannot be subjected to a state corporate income tax if its only activity within a state is “solicitation of orders” of tangible goods, followed by delivery of the goods from an out-of-state origination point.  The protected “solicitation” may be conducted by advertising alone or through the use of traveling salespeople; it may be conducted by an unlimited number of salespeople and on an unlimited number of days in the tax year.  BATSA would expand the coverage of P.L. 86-272 to the entire service sector of the economy, apply it to all types of BATs (not just income taxes), and apply it to several activities in addition to “solicitation of orders” (such as “gathering information”).
  • BATSA would impose tight new restrictions on the ability of a state to assert BAT nexus over an out-of-state corporation based on activities conducted within its borders by a (non-employee) individual or other business acting on behalf of the out-of-state business.

In short, BATSA is intended to substantially raise the nexus threshold for corporate income taxes and other BATs — that is, to make it much more difficult for states to levy these taxes on out-of-state corporations.

The fact that BATSA’s enactment would raise state corporate income tax nexus thresholds means that the profits of particular corporations would no longer be subject to tax in particular states.  By itself, that would not necessarily cause states as a whole to lose corporate income tax revenue.  However, many of the same corporations pushing for BATSA have successfully lobbied for complementary changes in state corporate income tax laws.  These state laws (and similar state laws proposed in many other states) ensure that the enactment of legislation like BATSA would result in a substantial corporate tax revenue loss for states in the aggregate:

  • Multistate corporations have convinced policymakers in 22 states to switch to a so-called single sales factor apportionment formula.  Apportionment formulas embedded in each state’s corporate income tax law determine how much of a multistate corporation’s nationwide profit is subject to tax in a state in which it does have nexus.  If a corporation makes 10 percent of its sales to customers in a single sales factor state, then 10 percent of its nationwide profit will be subject to tax in that state.
  • A corporation that produces all of its goods in single sales factor states but has all of its customers in other states will have no corporate income tax liability to the states in which it does its production.  However, if this same corporation did not have nexus in its customers’ states, because the activities it conducted in those states would be deemed no longer nexus-creating under BATSA, then all of this corporation’s profit would become “nowhere income” — profit not subject to tax by any state.
  • In reality, of course, most corporations do have at least some customers in the states in which they produce their goods and services, and even under BATSA they would likely have nexus in some other states as well.  So most multistate corporations would continue to pay some state corporate income taxes even if BATSA were to be enacted.
  • Nonetheless, if the state corporate income tax nexus threshold were raised sharply by new federal legislation, the already widespread adoption of single sales factor apportionment formulas would interact with BATSA in a way that would vastly expand the share of total nationwide corporate profit that escapes taxation entirely.

The creation of more “nowhere income” is a major goal of the multistate corporate community in seeking BATSA’s enactment, notwithstanding past claims that the legislation is only intended to regulate which states can tax a corporation and not to affect the aggregate taxation of corporate income.  The evisceration of state corporate income taxes — the source of $50 billion in annual revenue — would harm states already struggling to provide adequate education, health care, homeland security, infrastructure, and other critical services.  In 2006, the Congressional Budget Office estimated that the enactment of a less restrictive version of BATSA would cost states $3 billion in lost revenue annually within three years of enactment.   Almost a dozen states have implemented single sales factor apportionment formulas since that time, meaning that the revenue loss today would be significantly greater.

It is not at all clear that congressional action to clarify and harmonize state BAT nexus thresholds is warranted, but if Congress is determined to act, viable alternatives to BATSA are available that would do less damage to state finances.  Congress could implement a proposed model nexus threshold carefully crafted by the Multistate Tax Commission, which would base the existence of BAT nexus on relatively objective measures of the amount of a corporation’s property, payroll, or sales present in a state.

The remainder of this paper explains these points in more detail.

Click here to read the full report.

End Notes

See: Michael Mazerov, “Proposed ‘Business Activity Tax Nexus’ Legislation Would Seriously Undermine State Taxes on Corporate Profits and Harm the Economy,” Center on Budget and Policy Priorities, updated April 13, 2011.  See especially pp. 3-5 of the Appendix to this report, at

See the sources cited in Note 1 for a detailed discussion of the myriad ways in which BATSA would enable sophisticated multistate corporations to shelter their profits from taxation.

If the corporation in the example were producing its wares in certain states, it might not entirely avoid state corporate income taxes.  Some states have “throwback rules” in place that ensure that the corporation’s home state taxes effectively profits earned in states in which the corporation has no nexus.  Some states also require corporations to have nexus in at least two states before they can apportion their income.  Corporations can often circumvent these policies, however.  For example, corporations can avoid the throwback rule by selling and delivering their production to a subsidiary operating a warehouse in a state without the rule in effect.  They can get around the second rule by deliberately creating nexus in just one state outside their home state in which they don’t have substantial sales (thereby paying a small amount of tax).  This ensures that they are able to assign the rest of their profits to states in which they have not crossed the nexus threshold — thus avoiding tax on those profits.

CBO Cost Estimate for H.R. 1956, July 11, 2006, available at

Arizona, California, Colorado, Maine, Michigan, New Jersey, and South Carolina all enacted single sales factor formulas after July 2006, when the Congressional Budget Office prepared its BATSA revenue loss estimate.  Pennsylvania’s adoption of a 90 percent sales factor weight also occurred after that date.  Georgia, Indiana, Minnesota, New York, and Wisconsin were phasing in single sales factor formulas as of the time of the CBO estimate, and it is unclear whether the estimate took account of the higher revenue loss that would occur after full phase-in.