Proposed “Business Activity Tax Nexus” Legislation Would Seriously Undermine State Taxes on Corporate Profits And Harm the Economy
A bill introduced in the U.S. House of Representatives would strip states and localities of their current authority to tax a fair share of the profits of many corporations that are based out-of-state but do business within their borders. It would reduce state and local governments’ revenues by at least $2 billion in the very first year after enactment, impairing their ability to fund education, health care, public safety, and other essential services. Representative Steve Chabot reintroduced this bill, the “Business Activity Tax Simplification Act” (“BATSA”), H.R. 2584, on June 1, 2015. The House Judiciary Committee approved the bill on June 17. The timing of full House consideration of the bill is uncertain.
BATSA defines many activities that corporations commonly conduct within a state as being no longer sufficient to obligate the corporation to pay several different kinds of taxes to the state (or to its local governments). Moreover, it defines these “safe harbors” from taxation in a highly ambiguous, arbitrary and inconsistent manner. These new restrictions on state and local taxing authority would have far-reaching, adverse impacts on the revenue-generating capacity and fairness of state and local tax systems. The most significantly affected taxes would be corporate income taxes levied by 44 states, the District of Columbia, and New York City. If enacted, BATSA would have the following effects:
The legislation would cause state and local governments collectively to lose substantial tax payments from out-of-state corporations that would be freed from their current obligations to pay taxes on their profits and gross sales to particular jurisdictions. A significant share of currently-taxable corporate profits would go untaxed by any state, leading to a net revenue loss for the states as a whole. According to a Congressional Budget Office (CBO) estimate done in 2011 on an identical version of the bill, state and local revenue losses would be $2 billion annually in the first full year after enactment and likely to grow in subsequent years.
State corporate income tax receipts have not recovered from the 2007-08 recession. In 2014, they were still 12 percent below their pre-recession peak — and that is before adjusting for erosion in their purchasing power due to inflation. Additional loss of revenue in the next few years would undermine state funding for education, health care, public safety, infrastructure, and other services important for states’ long-term prosperity.
- BATSA would block particular states from taxing particular corporations on income earned in those states. Even if those corporations’ profits might ultimately be taxed by their home states, BATSA still would unfairly deprive other states and localities of their right to tax the profits of specific out-of-state corporations that benefit from services these jurisdictions provide to them.
- BATSA would stimulate a wave of new corporate tax sheltering activity aimed at cutting state and local business tax liabilities, which would stimulate demand for tax lawyers and accountants but reduce economic productivity and competitiveness.
- The legislation would mire state and local governments and corporations alike in a morass of litigation over whether particular businesses are or are not protected from taxation under the numerous vaguely defined provisions of BATSA — another outcome that would benefit lawyers and accountants at the expense of everyone else.
- BATSA would reward major multistate corporations that have the resources to engage in aggressive tax-avoidance behavior with much lower tax burdens than their small, locally oriented competitors, thereby handing small businesses a competitive disadvantage.
For example, if BATSA were enacted:
- A television network would not be taxable in a state even if it had affiliate stations and local cable systems there relaying its programming and regularly sent employees into the state to cover sporting events and to solicit advertising purchases from in-state corporations.
- A bank would not be taxable within a state even if it hired independent contractors there to process mortgage loan applications and the loans were secured by houses located within the state.
- A restaurant franchisor like Pizza Hut or Dunkin’ Donuts would not be taxable in a state no matter how many franchisees it had in the state and no matter how often its employees entered the state to solicit sales of supplies to the franchisees or to train the franchisees in company procedures.
These are just a few examples of the types of corporations that would be protected from state corporate income taxes by the provisions of BATSA. That corporations engaging in such extensive in-state activities would be immunized from taxation suggests why a congressionally imposed business activity tax (BAT) nexus threshold even loosely based on the current text of BATSA would be a prescription for further litigation, inequity among businesses, and erosion of a vital source of funding for state and local services.
A compelling case for tighter federal limits on the authority of states to impose corporate profits taxes on out-of-state corporations has not been made. If, nonetheless, Congress decides to act in this area, workable and fair alternatives to BATSA are available. A proposed taxing jurisdiction (or “nexus”) standard developed by the Multistate Tax Commission, for example, would base taxing authority on relatively objective measures of the dollar amount of a business’ sales occurring in a state, the dollar amount of property located in a state, or the dollar amount of payroll paid to employees working in a state. Such an approach balances the legitimate objective of preventing states from imposing the burdens of complying with a business activity tax on a company that has relatively little activity in the state — and therefore little tax liability — with the right of states to tax income earned within their borders by businesses that are benefiting from state and local services and the organized marketplace the state provides.
What Would BATSA Do?
BATSA would impose what is usually referred to as a federally established “nexus” threshold for state (and local) BATs. State taxes on corporate profits are the most widely levied state business activity taxes. The term also encompasses such broad-based business taxes as the New Hampshire Business Enterprise Tax (a form of value-added tax), the Washington Business and Occupations Tax and the Ohio Commercial Activities Tax (both are taxes on businesses’ gross sales), and the Texas Franchise Tax (a modified gross sales tax). The “nexus” threshold is the minimum amount of activity a business must have in a particular state to become subject to taxation in that state.
Nexus thresholds are defined in the first instance by state law. State business tax laws set forth the types of activities conducted by a business within the state that obligate the business to pay the tax. 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 file a tax return and pay any tax that may be due. Federal statutes can invalidate state nexus laws, however, and BATSA proposes to do just that.
BATSA proponents claim that the bill would impose a “bright line,” physical presence requirement for BAT nexus. This claim implies that if a corporation has a physical presence in a state, it could be subjected to a BAT by that state. In reality, the bill would create a plethora of exceptions to a physical presence standard. Many types of clear and substantial physical presence in a state that establish nexus for a business under current state and federal law would no longer be sufficient to obligate the business to pay a BAT to the state. For example, a corporation would no longer have nexus in a state under BATSA even if it had dozens of employees in the state negotiating purchases of supplies for the business or a million dollars worth of inventory in the state being stored at a third-party warehouse for local delivery on demand to its customers. There is no question that such substantial physical presence in a state would establish BAT nexus for the corporation under current law.
In 1959, Congress enacted a BAT nexus threshold that was intended to be temporary (but was never repealed) and that covered just two limited categories of in-state business activity. Public Law 86-272 bars a state from taxing the profits of an out-of-state corporation selling physical products if the business’ activities within the state are limited to soliciting orders for those products (using the mail, telephones, the Internet, or traveling salespeople) and delivering them into the state from an out-of-state origination point. BATSA would vastly expand the reach of P.L. 86-272 by:
- extending it to the entire service sector of the economy; and
- extending it from income taxes to all business activity taxes; and
- establishing numerous new “safe harbors” from nexus (while retaining the safe harbors for in-state solicitation and delivery). For example, under BATSA a corporation could have an unlimited number of employees or an unlimited amount of equipment or other property in a state for up to (and including) 14 days per year without establishing BAT nexus.
(The Appendix to this report contains a more detailed discussion of the provisions of BATSA and the specific types of corporations and business activities it would exempt from state and local business activity taxes. The Appendix is available here.)
Adverse Impacts of BATSA on State Finances and Corporate Tax Fairness
Replacing existing nexus laws with the nexus threshold contained in BATSA would have a number of serious adverse consequences for state finances and tax fairness:
Substantial loss of state corporate tax revenue in the aggregate. BATSA would cause a large majority of states to lose substantial corporate profits tax payments (and other BAT payments as well) from out-of-state corporations that would no longer be subject to tax because of the higher nexus threshold that would be established by the bill. The untaxed profits frequently would not be taxed by the state(s) in which the corporations remained taxable, either, leading to a substantial net loss of corporate tax revenue for states in the aggregate.
- Example. A Maryland-based industrial equipment manufacturer takes its orders over the Internet but has nexus in every state in which it has customers because its employees install that equipment at its customers’ place of business. Under BATSA, this manufacturer could easily arrange to have corporate income tax nexus only in Maryland. The bill provides that the use of an agent in a state does not create nexus so long as the agent has more than one client. The clients may be related to the agent through common ownership. The manufacturer could bring itself under this safe harbor by forming one subsidiary to employ the equipment installers and two others to manufacture the equipment (say, one subsidiary to manufacture Product A and another to manufacture Product B). Such a restructuring would make the installation subsidiary the agent of two legally distinct manufacturer “clients.” This would satisfy the terms of the “safe harbor” in BATSA and block all states except Maryland from taxing the corporation’s profit from equipment sales. Because of how Maryland taxes the profits of multistate corporations, none of the corporation’s profit earned on equipment sales made to non-Maryland customers would be taxable in Maryland, either — meaning that this corporation’s total tax payments to the states taken together likely would drop precipitously. Multiply this scenario by thousands of businesses in scores of states, and it becomes clear that the aggregate loss of state corporate income tax revenue would be substantial.
In 2011, CBO estimated that the enactment of a version of BATSA that is identical to H.R. 2584 would have led to lost revenues for state and local governments that “would be about $2 billion in the first full year after enactment and at least that amount in subsequent years.” CBO also observed: “Subsequently, corporations likely would rearrange their business activities to take advantage of beneficial tax treatments that would result from the interaction of the new federal law and certain state taxing regimes. Those changes in business activities would likely result in additional revenue losses to the states” beyond the $2 billion immediate impact.
Individual states deprived of their fair share of tax revenue. Regardless of whether BATSA enabled a particular corporation to pay less business activity tax in total, the bill would deprive individual states of their fair share of taxes from out-of-state corporations earning profits within their borders and benefiting directly from public services the states provide.
- Example. A Massachusetts bank makes home mortgage loans to Connecticut borrowers who apply for the loans over the Internet or during an in-home visit by an independent mortgage broker engaged by the bank. The borrowers go to settlement at a Connecticut title company of their choice. BATSA would block Connecticut from taxing the bank’s profits on those loans: the bank has no employees and owns no property in Connecticut, and its use of Connecticut brokers and settlement agents does not create nexus because the companies provide these services to multiple banks. Connecticut is barred from taxing any of the bank’s profits on Connecticut home loans despite the fact that the banks use Connecticut’s courts to foreclose on delinquent loans and the value of the homes that serve as mandatory collateral for the loans is crucially dependent on the quality of local schools, parks, roads, and police and fire protection provided by Connecticut and its local governments. Under provisions of Massachusetts’ bank taxation law, Connecticut’s inability to tax the bank likely would result in the bank’s paying tax on profits from the Connecticut loans to Massachusetts instead. Nonetheless, BATSA would deny Connecticut its fair share of tax on profits earned within its borders by a corporation that is benefiting from public services Connecticut provides to the bank, the bank’s collateral, and the bank’s in-state settlement agents.
Hamstringing state efforts to stop abusive tax sheltering. BATSA would block states from asserting corporate income tax nexus over out-of-state companies that license trademarks to related in-state businesses. This would deprive states of a key tool they are using to shut down perhaps the most abusive state corporate tax shelter in widespread use.
- Example. Under a tax shelter employing a so-called “intangible holding company” (IHC), a corporation operating retail stores like The Limited transfers its trademarks to a subsidiary corporation it has created in a tax-haven state like Delaware or Nevada. The stores then pay royalties to this subsidiary for the use of the trademarks. These royalties are tax-deductible (as a cost of doing business) and hence can be used to largely or entirely eliminate corporate income tax liability in the states in which the corporation is actually doing business and earning its profits. Meanwhile, the royalty payments are not taxed by the tax-haven state. Almost two-thirds of the states with corporate income taxes seek to nullify this tax shelter by asserting that the IHC is directly taxable in any state from which it receives royalties. BATSA would close off this avenue of attack on IHCs by providing that the presence in a state of an intangible asset like a trademark does not create BAT nexus for the out-of-state corporation that owns it. In so doing, BATSA would reverse court decisions in Louisiana, Maryland, Massachusetts, New Jersey, New Mexico, North Carolina, Oklahoma, and South Carolina that held that IHCs had nexus in those states, as well as repeal the nexus policy of at least 21 additional states.
While states can amend their tax laws to implement alternative approaches to nullifying the IHC tax shelter, multistate corporations have blocked enactment or watered down such laws in many states. In contrast, most states can assert nexus over the out-of-state owner of the trademark under their existing BAT nexus laws — laws which BATSA would invalidate.
Opening up vast new tax-avoidance opportunities. BATSA would open up enormous new opportunities for corporations to shelter their profits from taxation in states in which the profits are earned by dividing themselves into separate legal entities (such as a parent corporation and several subsidiary corporations). For example, the bill provides that a corporation can send an unlimited number of employees and an unlimited amount of equipment into a state without establishing BAT nexus so long as the employees and equipment are not in the state for more than 14 days in a calendar year. However, this 14-day limit — like all the “safe harbors” from nexus in BATSA — applies separately to every individual corporation in a multi-corporate group.
- Example. A business providing on-site computer repair and troubleshooting services needs to have employees in a neighboring state an average of 180 days per year. However, it would like to avoid triggering BAT nexus in the neighboring state because the corporate tax rate in its home state is lower. The company could achieve both objectives with modest legal and accounting costs by incorporating 13 different subsidiaries to employ its repairmen and rotating responsibility for providing service in the neighboring state among those subsidiaries at 14-day intervals. If the company were too small to employ 13 repairmen, it could rotate their employment among the subsidiaries as well.
In a 2008 report, the Congressional Research Service concurred that the enactment of federal BAT nexus legislation like BATSA would lead to increased corporate tax avoidance:
[BATSA] would increase opportunities for tax planning and thus tax avoidance and possibly evasion. In addition, expanding the types of activities that are covered by P.L. 86-272 would also expand the opportunities for tax planning.
Adverse Impacts of BATSA on the Economy
Enactment of BATSA also would adversely affect the economy.
- Degraded public services. As noted above, CBO has concluded that the enactment of BATSA would cause state and local governments to lose approximately $2 billion in annual revenues almost immediately and even more after corporations have an opportunity to restructure their operations to take advantage of the tax-sheltering opportunities the bill creates. By depriving states of business activity tax revenues they currently are collecting, the legislation could further impair their ability to provide services that are a critical foundation of a healthy national economy — such as high-quality K-12 and university education and transportation infrastructure.
Costly litigation. The U.S. Supreme Court’s 1992 Quill decision reaffirmed a 1967 decision that established “physical presence” as the nexus threshold for state sales taxes. Far from being the “bright line” nexus standard sought by the Court, litigation on the meaning of “physical presence” has continued unabated since Quill. BATSA not only would recreate these conflicts in the BAT arena, but it would also create new areas of litigation because it contains numerous ambiguous definitions whose meaning could only be resolved by courts. Given the substantial new limitations placed on their revenue-raising ability by BATSA, states and localities would have no choice but to engage in widespread litigation aimed at establishing the narrowest possible interpretation of the nexus “safe harbors” contained in the law. Such litigation would waste the limited financial and human resources of taxpayers and tax administrators alike.
- Example. BATSA provides that having employees or property in a state in order to conduct “limited or transient business activity” does not create nexus. Neither “limited” nor “transient” is defined in BATSA. An exemption for “limited” activity could imply that a business will not be taxable in a state if it does not engage in the full range of activities involved in its business; for example, a manufacturer might not be taxable in a state in which it had a sales office but not one of its manufacturing plants. An exemption for “transient” presence means that a business might never be taxable in a state its employees entered temporarily no matter how many days per year they spent there. Given this ambiguity and the enormous revenue consequences for the states flowing from how just these two terms in BATSA might be interpreted, their enactment into law would be a prescription for constant litigation until the Supreme Court supplied some measure of clarity. In the case of the meaning of the term “solicitation” in P.L. 86-272, that was a period of more than 30 years.
Economically sub-optimal business location decisions. A physical presence nexus threshold may interfere with the efficient allocation of economic resources by creating an artificial disincentive for the placement of facilities in states where fundamental economic considerations might otherwise dictate they should be located. As a former Director of the Oregon Department of Revenue has argued:
[I]n an era when companies can make substantial quantities of sales and earn substantial income within a state from outside that state, the concept of “physical activity” as a standard for state taxing authority [nexus] is inappropriate. . . . If a company is subject to state and local taxes only when it creates jobs and facilities in a state, then many companies will choose not to create additional jobs and invest in additional facilities in other states. Instead, many companies will choose to make sales into and earn income from the states without investing in them. If Congress ties states to physical activity concepts of taxing jurisdiction, Congress will be choosing to freeze investment in some areas and prevent the flow of new technology and economic prosperity in a balanced way across the nation.
- Example. Jeff Bezos, the CEO of Amazon.com, has acknowledged that he would have preferred to establish his company in California rather than Washington but did not do so in order to avoid having to charge sales tax to the large customer market located in California. Had Amazon.com been obligated to charge sales tax to California customers regardless of whether it was physically present in that state, Bezos would not have had an incentive to establish the company in a less-than-ideal location. A physical presence nexus threshold for BATs could create the analogous incentive for economically sub-optimal location decisions.
Artificial competitive advantage for the most aggressive tax-avoiders. Enactment of BATSA would result in significant differences among corporations in the effective rate at which their profits are taxed — tilting the playing field to the competitive advantage of some corporations and the disadvantage of others. BATSA would reward with the lowest state corporate tax liability those corporations willing to implement the most aggressive corporate restructuring and tax-avoidance strategies — such as the intangible holding company tax shelter discussed above. Large corporations with multistate operations would have much greater expertise, resources, and opportunities to implement these strategies than would small, family-owned corporations serving a local market.
- Example. A multistate bookstore chain places computer kiosks in all its stores. The kiosks are linked to its Internet operation. Store employees help customers place orders for books not available in the store at the kiosks. The stores advertise the address of the website in all their advertising. The stores even accept returns of unwanted books purchased at the website. Despite this critical sales assistance provided by the stores to the online operation, under BATSA the Internet operation could easily avoid having to pay tax on its profit to any state(s) except the one(s) where it has offices, warehouses, or similar facilities. The owner of a local independent bookstore, on the other hand, lacking the resources to set up an out-of-state electronic commerce website and distribution facility, would have 100 percent of his profit subject to taxation by the state in which the store is located.
A “Physical Presence” Nexus Standard Out of Sync with a 21st Century Economy
We live at a time when the combination of the Internet, inexpensive interstate transportation, and widely available consumer credit enables even the smallest of businesses to tap into the market of distant states far more successfully, efficiently, and profitably than a horde of traveling salespeople could hope to do. Because of the vast expansion of interstate sales that has been sparked by the development of electronic commerce, there seems to be a growing realization that the “physical presence” nexus threshold for the imposition of state sales taxes established by the U.S. Supreme Court’s 1992 Quill decision makes little sense. Indeed, many trade associations supporting BATSA are on record supporting federal legislation reversing the Quill decision.
Thus, it is inconsistent for the supporters of BATSA now to propose permanently enshrining substantial in-state “physical presence” as the threshold for the imposition of state business activity taxes. And it is incorrect for them to characterize this as a “modernization” of P.L. 86-272. Given the numerous organizational strategies and technologies corporations can now employ to make substantial sales and earn substantial profits in a state without actually being physically present within its borders, it is clear that a physical presence nexus threshold is obsolete and unfair. It really cannot be argued seriously that states should be barred from taxing the profits of a corporation like Pizza Hut because it chooses to franchise its ubiquitous restaurants rather than own them directly. That is the kind of step backward in tax policy that BATSA would implement.
BATSA: An Internally Inconsistent Nexus Policy Designed to Favor Large Multistate Corporations
Proponents of federal BAT nexus legislation have stated time and again that the fundamental principle underlying the bill is that corporations do not benefit from public services in states in which they do not have a physical presence and therefore should not be required to pay a BAT to such a state. Even assuming for the sake of argument that this indefensible principle were valid, it is clear that the bill as actually drafted does not reflect it — nor any other rational balancing of benefits received by businesses from public services and the businesses’ obligation to support those services through the payment of taxes.
A principle that says that businesses should not be subject to tax in a state in which they lack a physical presence because they obtain no benefits from government services cannot be squared with a bill that allows corporations to have massive — indeed unlimited — amounts of several types of employees, property, representatives, and agents present within a state without establishing BAT nexus. Nor can the principle be squared with a bill that bars a state from imposing an income tax on a corporation that has 100 people in the state for 14 days in a particular year but allows the state to tax a business that has only a single employee in the state for 15 days. Clearly, the former business is likely to be benefiting more from state-provided services than is the latter.
Contrary to the claim of its proponents, what is on display in BATSA is not implementation of the principle that no physical presence equals no benefits from public services equals no obligation to pay taxes to support those services. Rather, BATSA is simply a “grab bag” of nexus “safe harbors” that the corporations lobbying for it would benefit from and think they may have sufficient clout to get through Congress. It is easy to discern the motives of many corporations that support BATSA. For example:
- Walt Disney (owner of ABC), CBS, Discovery, and Time Warner would benefit from the expansion of P.L. 86-272 to encompass service businesses, since this would insure that in-state solicitation of advertising contracts from major corporations would not establish BAT nexus for these companies’ television networks. They would also benefit from the safe harbor permitting employees to be present in a state gathering news and covering events without establishing nexus.
- A corporation like General Electric would likely benefit from a new safe harbor from nexus for any activities conducted in a state for up to 14 days by its employees or for an unlimited amount of time by one of its own subsidiaries. Presumably many G.E. products, such as medical imaging equipment, are complex and often require on-site installation or trouble-shooting assistance from G.E. employees — a post-sale activity not currently protected by P.L. 86-272.
- BATSA would benefit corporations like The Limited and The Gap, which have been sued by multiple states claiming that their trademark holding companies had nexus in those states. As explained above, BATSA would put an end to such litigation in the future and hinder state efforts to shut down this tax shelter.
- A company like UPS, which operates warehouses in which independent companies like Internet retailers store their inventory for quick delivery to customers, would benefit from a new safe harbor that provides that nexus is not created by the use of such third-party “fulfillment” services.
The pursuit of self-interest by these kinds of companies is not synonymous with a rational nexus threshold, however. A congressionally imposed BAT nexus threshold even loosely based on the current text of BATSA would be a prescription for further litigation, inequity among businesses, and erosion of a vital source of funding for state and local services.
Rational and Fair Alternatives to BATSA Are Available
BATSA proponents have failed to make a convincing case for its enactment. But if Congress nonetheless feels compelled to intervene in this area, workable and fair alternatives to BATSA are available. A proposed nexus standard developed by the Multistate Tax Commission, for example, would base the creation of nexus on relatively objective measures of the dollar amount of a business’ sales occurring in a state, the dollar amount of property located in a state, or the dollar amount of payroll paid to employees working in a state. Such an approach balances the legitimate objective of preventing states from imposing the burdens of complying with a business activity tax on a company that has relatively little activity in the state — and therefore little tax liability — with the right of states to tax income earned within their borders by businesses that are benefiting from state and local services and the organized marketplace the state provides.
A nexus threshold based on the volume of sales in a state can achieve this balancing of tax compliance costs and tax liability in a direct, administrable manner. Reasonable people can disagree about what the threshold should be. If business and state and local government representatives are unable to agree, Congress can be the final arbiter — just as Congress would be in proposed legislation establishing a sales-based nexus threshold for sales taxation. The “Marketplace Fairness Act” (S. 698) would empower any state adopting a prescribed set of measures aimed at simplifying its sales tax to require a non-physically present retailer to collect the state’s sales tax if the seller has more than $1 million in nationwide sales.
Qualitative nexus thresholds that look to the type of activities occurring in the state and/or the relationships between in-state and out-of-state entities inherently create irrational and conflict-ridden tax policy. Public Law 86-272 itself demonstrates this. A corporation earning millions of dollars of profit in a state in which scores of its employees are continuously soliciting sales and dozens of its vehicles are continuously plying the roads loaded with millions of dollars worth of goods does not have income tax nexus under P.L. 86-272. At the same time, a small out-of-state retailer who sends employees into the state just twice each month to assemble a swing set in someone’s backyard for a few hundred dollars in profit can be required to pay an income tax to the state. Such disparate results cannot possibly be characterized as “rational and fair taxation.”
If Congress is determined to act in this area, a better approach would be to repeal P.L. 86-272 and substitute a nexus threshold based entirely on objective, quantitative measures of in-state business presence and activities. The $1 million sales threshold in the current version of the Marketplace Fairness Act or the Multistate Tax Commission’s “factor presence” nexus standard (which looks to the dollar amount of property, payroll, or sales located in a state) would be good starting points for congressional consideration.
Appendix: What Kind of Tax-Avoidance Opportunities Would BATSA Open Up?
In lobbying for BATSA’s enactment, organizations representing major multistate corporations claim their goal is to invalidate state laws that impose a business activity tax (BAT) on a business with no “physical presence” in the state. This claim, however, is highly misleading. BATSA would also create numerous nexus “safe harbors” — types of clear and substantial physical presence a business could have in a state without having to pay a BAT.
Expanding an Existing Federal Limit on State Taxing Authority
Several of the new nexus safe harbors take the form of an expansion of an existing federal law, Public Law 86-272. Enacted in 1959, it was intended to be a temporary moratorium on states’ ability to impose corporate profits taxes on certain out-of-state corporations, but it was never repealed. P.L. 86-272 decrees that a state may not impose a corporate profits tax on an out-of-state corporation if the firm meets three conditions:
- its only activity within the state is soliciting orders for the sale of physical goods;
- it approves the orders at an out-of-state office; and
- it ships or delivers the goods into the purchaser’s state from another state.
P.L. 86-272 clearly represents a nexus safe harbor: it allows corporations to have an unlimited number of salespeople in a state at all times yet remain exempt from income tax if the salespeople work out of home offices or visit from out of state. In the law’s absence, the regular presence of a salesperson in a state would obligate the corporation to pay some income tax to that state (assuming the corporation was profitable). The law also permits companies to provide their sales forces with company-owned cars, product samples, computers, furniture, and similar equipment yet remain exempt from income tax in the states where the salespeople solicit business. Finally, P.L. 86-272 permits companies to have an unlimited number of their own trucks continuously plying the roads of a state loaded with an unlimited amount of goods en route to customers there without being liable for any corporate tax payment.
BATSA would expand the coverage of P.L. 86-272 in three significant ways.
Including Sales of Services and Intangible Property
First, BATSA would extend P.L. 86-272 — which deals only with the sale of physical goods — to include sales of services and intangible property. If BATSA were enacted, for example:
- A Delaware bank could send an unlimited number of loan officers into Maryland to encourage businesses to borrow from the bank, without having to pay Maryland tax on the profits it earns from its Maryland borrowers.
- A New York-based television network could send an unlimited number of advertising salespeople to visit major corporations headquartered in other states to solicit the purchase of air time, without having to pay taxes in those states.
- A franchisor like Pizza Hut could enter a state an unlimited number of times to solicit sales of its franchises (a form of intangible property) to potential franchisees — for example, by renting a meeting room in a hotel to conduct a sales meeting — without owing any tax in the state.
Including Activities Besides Solicitation of Orders
Second, while P.L. 86-272 deals only with the solicitation of orders, BATSA would extend the law to cover four new activities:
- “furnishing of information to customers or affiliates in [the] state”;
- “coverage of events,” if the information gathered is “used or disseminated from a point outside the state”;
- “gathering of information,” if the information gathered is “used or disseminated from a point outside the state”; and
- “business activities directly related to . . . [the] potential or actual purchase of goods or services within the state if the final decision to purchase is made outside the state.”
A company could conduct these activities for an unlimited number of days each year with an unlimited number of employees — and could furnish them with any equipment necessary to carry out these activities — without establishing nexus, provided they worked out of their homes. For example:
- A local TV station could permanently base reporters in a neighboring state within its media market so long as the footage was relayed to the home-state broadcasting facility for transmission to viewers. The station could furnish the reporters with a mobile broadcasting van and video cameras so long as the equipment was stored in a garage at one of the reporters’ homes.
- A fast-food franchisor could send an unlimited number of employees to its franchisees’ restaurants for an unlimited number of days to inspect compliance with company standards.
- A bank could permanently base employees in a state to investigate the credit-worthiness of potential borrowers.
- A corporation could permanently base an unlimited number of employees in a state to recruit new employees or purchase supplies or equipment for their employer.
In all of the above examples, the firm would be exempt from the state’s business activity taxes despite the police and fire protection, roads and other infrastructure, and other services provided to company employees and property.
Extending P.L. 86-272 to Include Other Business Activity Taxes
Third, BATSA would extend the protections of P.L. 86-272 (including the four new activities) to taxes other than corporate income taxes. Such taxes would include the following, most of which substitute for a state corporate income tax:
- the Washington (state) Business and Occupations Tax, the Ohio Commercial Activities Tax, and the Delaware Merchants’ and Manufacturers’ License Tax (all of which are broad-based taxes on business gross receipts),
- the New Hampshire Business Enterprise Tax (a form of value-added tax), and
- the Texas Franchise Tax (a modified gross-receipts tax that allows deductions from gross receipts for certain business expenses).
The adverse impact of BATSA on the revenues of these states would be much larger than in other states because they are not now subject to P.L. 86-272 and therefore are currently imposing these taxes on the many corporations that have salespeople within their borders soliciting orders of goods.
The 14-Day Physical Presence Safe Harbor
In order to interact with their customers and produce goods and services, many kinds of businesses need to send employees and equipment into states in which they do not actually maintain offices, factories, or other types of permanent facilities. For example, an equipment manufacturer may visit its customers to install and troubleshoot its products, a construction company may send heavy equipment to a building site, and advertising agency personnel may meet at a client’s office to plan a campaign.
Under current law, these kinds of activities would almost certainly obligate a company to pay the state’s corporate income tax or other BAT, if the state chose to impose it. Under BATSA, however, companies in the above examples could arrange their affairs to avoid income tax liability to any state in which they did not maintain a permanent, “brick-and-mortar” facility. This is because BATSA would permit a company to place any amount of property and any number of employees in a state to conduct any activity it wishes, without creating nexus, as long as the property or equipment remains in the state for 14 or fewer days per tax year.
Moreover, this provision effectively would allow many corporations to keep an unlimited amount of equipment and employees in a state for far longer than 14 days without creating nexus. This is because the 14-day limit applies to each individual corporation as a legal entity, including corporations that are subsidiaries of other corporations. For example:
- A movie studio that needed to shoot three different movies on location in a particular state for 14 days each in a given year could incorporate each of the three productions separately. When the movies were completed, the subsidiaries would be liquidated.
- A company that needed to have employees in a state for more than 14 days per year in order to repair customers’ computers could avoid establishing nexus outside its home state by incorporating a number of subsidiaries to employ its repair personnel and assign repair tasks to particular subsidiaries on a rotating basis to keep all of them below the 14-day limit.
There is nothing far-fetched about these scenarios. Corporations already go to great lengths to shelter their profits from state taxation by forming new subsidiaries:
- Hundreds (if not thousands) of corporations have incurred significant accounting and legal expenses to incorporate and operate “intangible holding company” subsidiaries. The North Carolina Limited case cited in the body of this report revealed that The Limited established nine separate Delaware subsidiaries to hold title to the trademarks of the various retail chains it owned.
- Over 1,300 corporations, including Dell Computer and former “Baby Bell” company SBC Communications, created new limited partnership subsidiaries to take advantage of a self-imposed nexus limitation on out-of-state corporate partners Texas enacted in the early 1990s.
- A number of states and the U.S. Government Accountability Office (GAO) have documented a widespread corporate practice of “SUTA [State Unemployment Tax Act] dumping.” In its most common form, corporations create new subsidiaries and transfer their employees to them to take advantage of lower unemployment tax rates for which new corporations typically are eligible. GAO documented that this strategy was widely marketed by certain accounting and consulting firms, which apparently saw it as a legal way to minimize their state unemployment taxes. Congress recognized SUTA dumping as an abusive tax shelter and enacted legislation in 2004 that bans it. Businesses quickly found ways around the ban, however, and SUTA dumping remains a problem.
- Until recently, well-known Internet retailer Amazon.com separately incorporated its distribution warehouses in order to avoid establishing sales tax nexus in the states in which they are located.
In short, BATSA’s 14-day safe harbor would allow many sophisticated multistate corporations to avoid having a business activity tax liability in many or all states in which they have customers. Firms could maintain substantial numbers of employees and substantial amounts of equipment in a state on a continuously rotating basis without creating BAT nexus.
This ability belies proponents’ fundamental rationale for BATSA: that “only states and localities that provide meaningful benefits and protections to a business. . . should be the ones who receive the benefit of that business’ taxes. . .” Clearly, a corporation that maintains personnel and property in a state for extended periods of time is receiving benefits and protections from that state — whether or not it maintains a permanent “brick and mortar” facility there.
Safe Harbor for Hiring Firms to Do In-State Work
In its 1960 Scripto decision, the U.S. Supreme Court ruled that allowing a corporation to avoid nexus in a state by hiring an independent in-state business to solicit business there, rather than using its own employees, would “open the gates to a stampede of tax avoidance.” In its 1987 Tyler Pipe decision, the Court held that a state had the right to impose a business activity tax on an out-of-state corporation that had contracted with an independent contractor to conduct activities that were “significantly associated with the [out-of-state corporate] taxpayer’s ability to establish and maintain a market in [the] state for [its] sales.”
When, under the authority of these decisions, states impose a tax on an out-of-state corporation based on in-state activities that another business conducts on its behalf, this is often referred to as “attributional nexus.” If states did not have this authority, corporations would have virtual free rein to avoid nexus in every state except the one in which they are headquartered. This is because a corporation can contract with an individual, an unrelated business, or one of its own subsidiaries to carry out almost any business function rather than have its own employees perform it.
In three different ways, BATSA would make it significantly harder for states to assert attributional nexus. The likely result, as the Supreme Court predicted, would be massive corporate tax avoidance — above and beyond that resulting from the bill’s other provisions.
The “Two Clients Loophole”
The most far-reaching of these provisions — and the one likely to do the most damage to state and local BAT revenues — decrees that a state may not subject an out-of-state corporation to a BAT on the basis of activities another business conducts on its behalf so long as the in-state business performs services on behalf of at least one additional client during the tax year. The provision, which applies to activities designed to “establish or maintain the market in the State” for sales by the out-of-state company, is effectively aimed at reversing the Tyler Pipe decision discussed above.
This provision’s enormous potential for harm arises from the fact that it applies even if all of the parties are related. A corporation can form two out-of-state subsidiaries that then “hire” a third subsidiary to conduct activity on their behalf in the state in which they wish to avoid nexus. For example:
To maximize its ability to make sales throughout the United States, a Texas-based manufacturer of personal and network server computers needs to provide on-site repairs and set up local area networks for customers. Ordinarily, these tasks would establish BAT nexus for the firm, even if it hired another firm (or one of its subsidiaries) to perform them, since they help establish and maintain the company’s market in that state. The corporation, however, wants to avoid establishing BAT nexus outside of Texas, a state that doesn’t levy its franchise tax on services delivered outside the state. If the corporation can avoid establishing nexus outside of its home state, none of the profits it earns on non-Texas sales of its computers will be taxable anywhere.
Under BATSA, this would be easy to accomplish. The corporation would simply reorganize itself into three legal entities: one to provide the on-site repair and networking services, one to sell desktop computers, and one to sell server computers. Since the repair/networking subsidiary provides these services to more than one business (that is, to both the subsidiary that sells desktop computers and the subsidiary that sells servers), under BATSA those services no longer would create BAT nexus outside of Texas for the computer manufacturer. The states in which the customers are located could tax any profits earned by the repair/networking subsidiary but not the profits earned on the actual sale of the computers.
Most major retail chain stores have transformed themselves into “bricks and clicks” businesses by setting up subsidiaries to sell the same merchandise over the Internet that they sell in stores. These businesses are looking for ways to integrate their operations so that the stores facilitate greater purchases from the website, such as selling gift cards in stores that can be redeemed online and allowing in-store pickup of items purchased online. Under the Tyler Pipe decision, such activities create BAT nexus for the web subsidiary because they help the subsidiary establish and maintain a market in the state(s) where the stores are located.
Under BATSA, however, the retail chain could split its web operation into two separate corporations and have each one sell a portion of the company’s product lines. Under such a structure, the stores’ activities would help establish and maintain the market in the state for more than one business (i.e., the two web subsidiaries), thereby bringing themselves under this nexus safe harbor in BATSA. The web subsidiaries, meanwhile, could contract with each other to share a common website, warehouses, and other operational requirements, so the corporation’s out-of-pocket costs would not be substantial.
Of course, this provision of BATSA also would enable out-of-state corporations to use independent in-state corporations to help them establish and maintain a market within a particular state without creating BAT nexus:
- In some states, consumers can purchase electricity from independent power producers (sometimes located out of state) that own their own generating plants but contract with local utility companies to deliver electricity into customers’ homes, read customers’ meters, and bill customers. The activities performed by the local utility create nexus in the state for the out-of-state power generator because they are critical to its ability to establish and maintain a market in the state. Under BATSA, however, the power generators would no longer have BAT nexus in their customers’ state(s) because local utilities typically deliver power for several independent generators. Even if a utility delivered power for only a single independent generator, the latter could easily avoid nexus by dividing itself into two legal entities, for example, one to sell power to businesses and one to sell power to residential customers.
In sum, by effectively overruling the Tyler Pipe decision, BATSA would open enormous opportunities for corporations to shelter substantial shares of their profits from taxation by the states in which their customers are located.
Agents Not Involved in Selling Don’t Establish Nexus
BATSA would also change current law by declaring that contracting with another company to conduct activities not related to selling or interacting with customers would never create nexus. Under current law, it is not entirely clear when non-customer-related activities performed by another party would create BAT nexus. Most experts likely would agree, however, that if the contract made the second party the actual legal agent of the company contracting for its services, such a contract would create nexus.
For example, imagine that a California manufacturer hires an unrelated Oregon business to continuously perform quality control checks on its behalf at an Oregon plant run by a third company that assembles a key component of the California manufacturer’s products. The Oregon quality-control business has the authority to sign off that the components meet the California manufacturer’s specifications and to stop shipment of the products if they do not. Under this scenario, the presence of the quality-control business in Oregon would likely be sufficient to create BAT nexus there for the California manufacturer.
Under BATSA, however, the California manufacturer would avoid nexus in Oregon because the activities conducted by the quality-control subcontractor do not involve “establishing and maintaining the market” for sales by the manufacturer. In short, any purchasing-related activities (as opposed to selling-related activities) conducted in a state by a third party would no longer be nexus-creating under BATSA — even where the very same activities would be nexus-creating if the corporation’s own employees conducted them.
In-State Presence of Agents Also Qualifies for the 14-Day Safe Harbor
Finally, BATSA allows an in-state business to conduct any activity on behalf an out-of-state corporation in a state for 14 days per year without creating BAT nexus for the latter. This provision is consistent with the BATSA provision allowing a company to have its own employees and property in a state for up to 14 days for any purpose without creating nexus. Nevertheless, it also inherently creates a new nexus safe harbor.
New Safe Harbor for In-State Storage of Inventory
P.L. 86-272 contains the following provision:
[A] person shall not be considered to have engaged in business activities within a State . . . by reason of the maintenance of an office in such State by one or more independent contractors whose activities on behalf of such person in such State consist solely of making sales, or soliciting orders for sales, of tangible personal property.
This provision appears primarily intended to ensure that no state could assert attributional nexus over an out-of-state manufacturer based on its having engaged the services of an independent “manufacturers’ rep” firm to solicit sales on its behalf. (This is a common mechanism by which manufacturers solicit business throughout the country.) The nexus protection applies even if the manufacturers’ rep firm maintains an actual physical office within the state.
BATSA would expand this safe harbor, allowing an independent contractor to use an in-state office for the purpose of “fulfilling transactions” on behalf of an out-of-state corporation without establishing nexus for the latter.
Manufacturers, Internet retailers, and other sellers of goods commonly store inventories of finished products at “fulfillment” or “logistics” warehouses operated by independent companies. The warehouses ship the products to the sellers’ customers on demand. Under current law, this activity unquestionably establishes BAT nexus for the sellers in a state in which a warehouse is located because the sellers continue to own the inventory and thus have a “physical presence” there.
BATSA, however, states that the use of a third-party “office” to “fulfill transactions” would not establish nexus, and this strongly implies that inventory storage at a third party fulfillment warehouse would not establish nexus either. As noted above, BATSA’s attributional nexus language would already bar a state from asserting nexus over an out-of-state manufacturer that hired an in-state agent to fulfill orders if the agent did so on behalf of at least two separate businesses. Third-party-operated warehouses virtually always have multiple customers. Thus, if the language were not intended to provide nexus protection for the actual storage of the inventory, it would not be needed.
At least one highly-credentialed state tax practitioner has interpreted this provision as expanding P.L. 86-272 to exempt “storage of inventory with independent contractors. . .” This provision may also explain, in part, why UPS, which has a fulfillment arm, supports BATSA.
In sum, it appears that this BATSA provision is designed to allow an out-of-state corporation to store an unlimited amount of inventory for delivery to its customers at a third-party-operated warehouse without thereby establishing BAT nexus in the state where the warehouse is located.
The “Limited or Transient Business Activity” Safe Harbor
Finally, BATSA states that a corporation’s physical “presence in State to conduct limited or transient business activity” does not create BAT nexus. Since BATSA does not define “limited” or “transient,” it is impossible to know what activities the sponsors intend this safe harbor to cover.
One legal analyst fears that this provision could become a “black hole” swallowing state and local BAT revenues. He points out that the dictionary definitions of these terms would provide strong grounds for exempting from business activity taxes any corporation that either enters a state on a temporary basis or that does not engage in the state in the full set of activities comprising its business:
With the terms “limited” and “transient” neither defined in the bill nor possessed of any accepted meanings in tax law, courts would look to dictionary definitions for their meaning. “Limited” is defined in Black’s Law Dictionary as “restricted; bounded; prescribed. Confined within positive bounds; restricted in duration, extent, or scope.” “Transient” is defined in Black’s as “Passing across, as from one thing or person to another; passing with time of short duration; not permanent; not lasting.”
. . . [A] company’s activity could be permanent but limited in scope, or unlimited in scope but not permanent, and still be protected from taxation. . . . For example, a corporation whose charter or application to conduct business in the state indicates that it will engage only in banking activities and nothing else (so that its activities are “limited,” as “restricted in . . . scope”) could be protected from taxation even if in the state permanently, as could a corporation whose charter or application indicates that it will engage in every activity in the state that a corporation may legally perform, but will do so only for 10 years (so that its activities are “transient,” as “not permanent”). 
At the very least, since BATSA already contains a separate, across-the-board safe harbor for any level of activity conducted in a state for 14 days, it is logical to assume that this provision is intended to provide corporations with an opportunity to enter a state temporarily to engage in business activities for longer periods of time than that.
It is also easy to foresee this provision being used as a catch-all “insurance policy” against any adverse court interpretations of other vague provisions of the legislation. For example, a company storing inventory at a third-party fulfillment warehouse in a state would likely claim that such storage is a protected “limited” activity just in case a judge were inclined to interpret the vague “fulfilling transactions” language discussed in the previous section as not providing a safe harbor from nexus.
Enacting BATSA with this provision intact would spur both continuous litigation and divergent decisions in the state courts that would hear the cases. It is simply inconceivable that BATSA proponents can continue to describe the bill as establishing a “bright line,” nationally uniform nexus standard after having included this safe harbor in recent versions of the legislation.
BATSA would stimulate a wave of new corporate tax sheltering activity by making it much harder for states and localities to tax out-of-state corporations that have a substantial physical presence within their borders and benefit from state and local services — like police and fire protection for their property and employees. By exploiting the numerous safe harbors outlined above, out-of-state corporations could avoid paying their fair share of taxes, significantly weakening state and local revenue systems.
 Multistate Tax Commission, “Factor Presence Nexus Standard for Business Activity Taxes,” October 17, 2002, http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Uniformity/Uniformity_Projects/A_-_Z/FactorPresenceNexusStandardBusinessActTaxes.pdf.
 Corporate income taxes are levied by 44 states, the District of Columbia, and New York City. In 2012 these taxes supplied $49 billion to state and local treasuries.
 “CRAFT believes that the bright-line, quantifiable physical presence nexus standard, as provided in the Business Activity Tax Simplification Act of 2015 (BATSA), is the appropriate standard for state and local taxes imposed directly on out-of-state businesses.” Statement of Arthur R. Rosen before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the Committee on the Judiciary, U.S. House of Representatives on BATSA and other bills, June 2, 2015.
 Like the majority of states levying corporate income taxes, Maryland taxes the profits of multistate manufacturers only in proportion to their sales to Maryland customers. Accordingly, a Maryland-based manufacturer with no customers in Maryland would pay no corporate income tax to the state. Moreover, like roughly half the states, Maryland has not enacted a “throwback rule” to subject to taxation the profits earned by a Maryland manufacturer in other states in which the manufacturer has not established nexus. As a result of the combination of these two corporate income tax “apportionment” policies, the lion’s share of the nationwide profit of a Maryland manufacturer that was protected from taxation in other states by BATSA would be “nowhere income” — profit that would not be taxed by any state. The interaction between BATSA and rules like those of Maryland that base corporate income tax liability on in-state sales alone are discussed in a separate Center report. 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 May 13, 2011, https://www.cbpp.org/research/federal-business-activity-tax-nexus-legislation-half-of-a-two-pronged-strategy-to-gut-state.
 CBO Cost Estimate for H.R. 1439, September 13, 2011, http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr1439_2.pdf .
 Like approximately a dozen states, Massachusetts has enacted a special corporate income tax apportionment law for financial institutions that provides for the “throwback” of non-Massachusetts receipts to Massachusetts when a bank headquartered in the state is not taxable in the state in which its customers are located. See Chapter 63 of the Massachusetts statutes.
 An article written a number of years ago by an investigative reporter revealed just how little economic substance many of these “Delaware Holding Companies” have:
For a glimpse into this quiet and lucrative world, head up to the 13th floor of 1105 N. Market St. Through smoked‑glass windows, a visitor can view the high‑rise headquarters surrounding Wilmington’s prestigious Rodney Square: DuPont and Hercules, Wilmington Trust, and MBNA. But turn back, and look inside this slender office tower. Tucked within the building’s stark, upper floors, is another, hidden corporate center. Here, more than 700 corporate headquarters make up a vast and quiet business district of their own. The lobby computer lists their names: Shell and Seagram and Sumitomo, Colgate‑Palmolive and Columbia Hospitals and Comcast, British Airways and Ikea, Pepsico and Nabisco, General Electric and the Hard Rock Cafe. How do 700 corporate headquarters squeeze into five narrow floors? How do 500 fit on the 13th floor alone? “Frankly, it’s none of your business,” said Sonja Allen, part of the staff that runs this corporate center for Wilmington Trust Corp. . . . “Some of my clients are saving over $1 million a month, and all they’ve done is bought the Delaware address,” said Nancy Descano, holding company chief of CSC Networks outside Wilmington.
Joseph N. DiStefano, “In the War Between the States, Delaware is Stealing the Spoils,” Gannett News Service, January 25, 1996.
 John C. Healy and Michael S. Schadewald, 2015 Multistate Corporate Tax Guide, “Economic Nexus (Part 1),” Wolters Kluwer, Volume 1, pp. 2089-2093.
 The Maryland case upheld the state’s authority to require the intangible holding company of the Syms clothing chain to pay Maryland corporate income tax on the royalties it earned by licensing use of the Syms trademark to Maryland Syms stores. The analogous cases in the other states named involved Kmart, The Limited, The Gap, and Toys R Us. In addition, the West Virginia Supreme Court upheld the authority of that state to impose its corporate income tax on an out-of-state bank issuing credit cards by mail to state residents.
 Bills to implement one major anti-IHC mechanism, “combined reporting,” have been introduced since 2000 in the District of Columbia and at least 22 states: Alabama, Arkansas, Connecticut, Florida, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Missouri, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont, Virginia, West Virginia and Wisconsin. Combined reporting was enacted in the District and in eight of the 22 states: Massachusetts, Michigan, New York, Texas, Vermont, West Virginia, and Wisconsin. Bills denying an income tax deduction for royalty payments to IHCs have been introduced since 2000 in at least 15 states that have not enacted combined reporting: Alabama, Arkansas, Connecticut, Georgia, Indiana, Kentucky, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, Rhode Island, Tennessee, and Virginia. They were not enacted in two: Missouri and Tennessee. In most of the other 13 states the bills were so watered down with numerous exceptions after intense business lobbying that they arguably will be largely ineffectual against IHCs. (See: Charles F. Barnwell, Jr., “Addback: It’s Payback Time,” State Tax Notes, November 17, 2008.) In short, despite the serious fiscal problems of the states in the recent years, the business community has had a decent track record in blocking the two approaches to shutting down the IHC tax shelter that require state legislative action.
Moreover, H.R. 2584 contains a provision that will substantially undermine the ability of combined reporting to nullify IHCs. The language will bar combined reporting states from assigning royalties received by IHCs to the states in which the trademark is used. This will result in a substantial revenue loss for many combined reporting states.
 Steven Maguire, State Corporate Income Taxes: A Description and Analysis, Congressional Research Service, updated June 23, 2008.
 The holding in Quill reaffirmed the physical presence requirement for sales tax collection established by the Court’s 1967 National Bellas Hess decision. Technically, the tax at issue in both cases was a use tax, not a sales tax. See: Michael Mazerov and Iris J. Lav, “A Federal “Moratorium” on Internet Commerce Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-Income Households,”Center on Budget and Policy Priorities, May 1998, Appendix A.
 The U.S. Supreme Court’s stated goal in its 1992 Quill decision was to establish a “bright line” physical presence nexus threshold for state imposition of sales taxes. Surveying the widespread sales tax nexus litigation that had occurred in just the first few years subsequent to Quill, a leading expert on Internet tax-related issues stated flatly: “The current physical-presence standard for sales and use tax nexus has not created a bright-line test but instead has resulted in jurisdictional rules that are frequently ambiguous and inconsistent.” (Karl Frieden, Cybertaxation (Arthur Anderson/CCH, Inc.), 2000, p. 356.) A leading law firm that litigates nexus cases for corporations concurred: “While . . . [Quill’s] ‘bright line’ [physical presence] rule was intended to bring clarity to the boundaries of legitimate state authority to impose an obligation to collect sales and use taxes, and to ‘encourage settled expectations,’ it has not produced the hoped-for certainty.” (Troy M. Van Dongen, “Internet Retailers under Fire: Borders Online Exemplifies the Predicament.” Online newsletter of the Morrison & Foerster law firm, July 2002.) There have been numerous sales tax nexus cases in recent years. Amazon.com and Overstock.com, for example, recently lost challenges to an expanded nexus law in New York that they had pursued for more than five years.
 Statement of Elizabeth Harchenko before the Senate Committee on Commerce, Science, and Transportation, March 14, 2001.
 In a 1996 interview in Fast Company magazine, Bezos was asked: “You moved from New York to Seattle to start this business. Why?” He replied:
It sounds counterintuitive, but physical location is very important for the success of a virtual business. We could have started Amazon.com anywhere. We chose Seattle because it met a rigorous set of criteria. It had to be a place with lots of technical talent. It had to be near a place with large numbers of books. It had to be a nice place to live — great people won’t work in places they don’t want to live. Finally, it had to be in a small state. In the mail-order business, you have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York.
Obviously Seattle has a great programming culture. And it’s close to Roseburg, Oregon, which has one of the biggest book warehouses in the world. We thought about the Bay Area, which is the single best source for technical talent. But it didn't pass the small-state test. I even investigated whether we could set up Amazon.com on an Indian reservation near San Francisco. This way we could have access to talent without all the tax consequences. Unfortunately, the government thought of that first.
William C. Taylor, “Who’s Writing the Book on Web Business,” Fast Company, October/November 1996.
 BATSA provides that “using the services of an agent (excluding an employee)” in a state on more than 14 days “to establish or maintain the market in the State” creates nexus for the out-of-state business using the in-state agent, but only if “such agent does not perform business services in the State for any other person during such taxable year.” There is nothing in the legislation that requires the “other person” to be an independent third party. The Web-based bookselling operation could easily bring itself under this safe harbor by incorporating two nominally distinct subsidiaries, for example, one selling books and the other selling all other types of merchandise (greeting cards and calendars, for example). Because the store personnel (who are not employees of the website) would be helping “to establish or maintain the market” for two “other persons” — the subsidiary that sells books and the subsidiary selling other items — nexus would not be created for the Internet operation by the activity of the stores’ employees. As long as customers of the Internet operation are nominally buying books and other goods from two different companies, the Internet operation can avoid creating nexus in the states where the retail stores are located. The two Internet stores could easily contract to share the same website and warehouses; no change in physical operations would be necessary.
 For example, the Council on State Taxation and the National Retail Federation are active supporters of proposed federal legislation reversing Quill.
 “The underlying principle of this legislation is that only states and localities that provide meaningful benefits and protections to a business — like education, roads, fire and police protection, water, sewers, etc. — should be the ones who receive the benefit of that business’ taxes, rather than a remote state that provides no services to the business. Statement of Arthur R. Rosen before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the Committee on the Judiciary, U.S. House of Representatives on BATSA and other bills, June 2, 2015.
 The membership of the Coalition for Interstate Tax Fairness and Job Growth, which was organized to lobby for BATSA’s enactment, is available at http://www.interstatetaxfairness.com/who-we-are/. All of the corporations listed in the following bullets are listed as current members of the Coalition as of June 15, 2015.
 Recall again that a corporation can use a subsidiary to conduct activities on its behalf in another state for an unlimited number of days in a year without thereby establishing nexus so long as the subsidiary works for at least one other subsidiary. See Note 16.
 Michael Mazerov, “Proponents’ Case for a Federally Imposed Business Activity Tax Nexus Threshold Has Little Merit,” Center on Budget and Policy Priorities, February 26, 2014, https://www.cbpp.org/files/6-26-08sfp.pdf .
 See the source cited in Note 1.
 Another coalition lobbying in support of BATSA is the “Coalition for Rational and Fair Taxation” (CRAFT). See: Statement of Arthur R. Rosen before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the Committee on the Judiciary, U.S. House of Representatives on BATSA and other bills, June 2, 2015.
 Like BATSA itself, P.L. 86-272 applies to all income taxes imposed on all types of businesses and individual “sole proprietors.” For the sake of readability (and because BATSA’s most significant revenue impact would be on corporate tax payments), this report generally refers to corporate income or profits taxes.
 A company-owned office, even if used just for solicitation of orders, is not protected by P.L. 86-272, so a state is free to impose a corporate income tax on an out-of-state corporation with such an office within its borders.
 Despite continuous litigation, more than 30 years elapsed after the enactment of P.L. 86-272 before the U.S. Supreme Court gave any guidance as to what activities were encompassed in the law’s safe harbor for “solicitation” — the key term in the law that Congress nonetheless had not seen fit to define. In its 1992 decision in Wrigley v. Wisconsin, the Court made clear that activities “entirely ancillary to solicitation” (such as the presence of property used by salesmen) were also protected by P.L. 86-272.
 Arguably these loan officers also would be free to solicit deposits from the Maryland businesses, since another safe harbor in the bill states that the presence of employees to negotiate the purchase of goods and services for the business also does not establish nexus. Deposits could be characterized as intangible goods or services purchased by banks through the payment of interest.
 A franchisor would argue that inspecting franchisee compliance with a franchise agreement is a form of “gathering information” that would be “used” at its out-of-state headquarters to formulate remedial action. A franchisor would similarly argue that conducting on-state training of franchisee employees (another common activity) would not be nexus-creating because it satisfies BATSA’s safe harbor for “furnishing of information to customers or affiliates in a state.”
 A bank would argue that in-state investigation of the credit-worthiness of a borrower would be protected by BATSA’s safe harbor for the “gathering of information.”
 That would be true even of a seller of services newly covered by BATSA’s expanded version of P.L. 86-272, since both performing services in a state and engaging in almost any kind of post-sales interaction with a customer are beyond P.L. 86-272’s nexus safe harbor for “solicitation of orders.”
 Secretary of Revenue of North Carolina v. A&F Trademark, Inc., et al., North Carolina Tax Review Board, May 7, 2002.
 Robert T. Garrett, “Business Lobbyists Thwarting Efforts to Close Tax Loophole,” Dallas Morning News, May 12, 2003. In a 2003 letter to members of the National Conference of State Legislatures, a business coalition supporting BATSA questioned the relevance of this Texas experience to BAT nexus legislation, since the legislation itself would not have prevented Texas from shutting down this tax shelter. To reiterate, Texas’ experience demonstrates that if artificial restrictions on taxing jurisdiction are created by either federal or state legislation, corporations will go to great lengths to restructure their operations to take advantage of any tax sheltering opportunities thereby created. As documented in this Appendix, the enactment of BATSA would create numerous such opportunities. The Texas Franchise Tax law was substantially overhauled in 2006 to forestall the use of limited partnerships as a mechanism of tax avoidance.
 U.S. General Accountability Office, Unemployment Insurance: Survey of State Administrators and Contacts with Companies Promoting Tax Avoidance Policies, GAO-03-819T, June 19, 2003.
 H.R. 3463, the “SUTA Dumping Prevention Act of 2004,” signed into law by President Bush on August 9, 2004.
 Gary Perilloux, “Program Nabs More Tax Cheats,” The Advocate (Baton Rouge), June 19, 2007. See also: “Two Employers Settle SUTA Dumping,” October 13, 2010 press release from the Michigan Unemployment Insurance Agency. The release notes: “The first case involves a Michigan employer in the construction industry. The employer set up a ‘captive’ leasing arrangement, forming its own employee-leasing companies from which it leased its employees.”
 Amy Martinez, “Amazon.com Fights Sales Taxes after Getting Other Breaks,” Seattle Times, January 24, 2011.
 Statement of Arthur R. Rosen before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the Committee on the Judiciary, U.S. House of Representatives on BATSA and other bills, June 2, 2015.
 In Tyler Pipe, the Court held that hiring an independent representative in a state to solicit sales and conduct other activities that helped an out-of-state corporation create and maintain a market for its products was no different from having an employee in a state engaged in the same activities and did indeed establish BAT nexus for the out-of-state corporation. There was no suggestion whatsoever in the case that the holding would have been any different if the in-state representative had solicited sales on behalf of more than one out-of-state company; in fact, the evidence strongly suggests that it did. The Tyler Pipe decision of the Washington State Supreme Court, which the U.S. Supreme Court reviewed, states that the Washington representative of Tyler Pipe was Ashe and Jones, Inc. of Seattle. Ashe and Jones was characterized by Tyler Pipe as an independent contractor, suggesting that it solicited Washington sales on behalf of multiple out-of-state businesses. Ashe and Jones appears to have been at that time a typical “manufacturers’ representative” firm with multiple clients. The company certainly has multiple clients today, including Tyler Pipe. See: http://www.sdajnw.com/manufacturers/.
 This scenario would not necessarily fall into the previously discussed safe harbor for “activities directly related to. . . [the] potential or actual purchase of goods or services” because it involves quality control on goods that arguably have already been purchased.
 Deborah K. Rood, “State Filing Obligations for Businesses Increase,” Tax Alert, Blackman Kallick CPAs and Consultants, 2007, www.hlbusa.com/documents/state%20filing%20obligations.pdf (emphasis added). Rood is a former member of the State and Local Tax Technical Resources Panel of the Tax Division of the American Institute of Certified Public Accountants.
 Matt Tomalis, “Some Fatal Flaws of S. 1726, H.R. 5267, and All BAT Nexus Bills,” State Tax Notes, March 3, 2008, pp. 691-704. At the time he wrote this, Tomalis was a staff attorney with the Federation of Tax Administrators.
 Tomalis, p. 695.