June 26, 2008
PROPONENTS' CASE FOR A FEDERALLY-IMPOSED BUSINESS ACTIVITY TAX NEXUS THRESHOLD HAS LITTLE MERIT
By Michael Mazerov
A bill under consideration in both houses of Congress would take away from the states authority they currently have to tax a fair share of the profits of many corporations that are based out-of-state but do business within their borders. The House version of the “Business Activity Tax Simplification Act,” (“BATSA”, H.R. 5267) was the subject of a hearing held by the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee on June 24, 2008.[i] The Senate version of the bill is S. 1726.
BATSA 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 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 Texas Franchise Tax (a tax on businesses’ “gross margins”), and the Washington Business and Occupations Tax (a state tax on businesses’ gross sales). 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 business tax laws will 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 is owed. Federal statutes can override state nexus laws, however, and BATSA proposes to do just that. BATSA would create a number of new nexus “safe harbors” — categories and quantities of activities conducted by corporations in states that would be deemed no longer sufficient to establish BAT nexus for the corporation.
A previously-published Center on Budget and Policy Priorities report provides an overview and analysis of the proposed legislation. (See: Proposed ‘Business Activity Tax Nexus’ Legislation Would Seriously Undermine State Taxes on Corporate Profits and Harm the Economy, revised June 24, 2008, www.cbpp.org/6-24-08sfp.pdf. Hereafter referred to as the “Center’s analysis of BATSA.”) That report focused on the adverse impact of BATSA on the revenue-raising capacity and fairness of state corporate income taxes.
This report has a different objective: to rebut the key claims made by the proponents of BATSA as to why its enactment is necessary. (Readers unfamiliar with the business activity tax nexus issue may find this report more useful if they have already read the previous Center analysis of BATSA.) This report will demonstrate that the sometimes reasonable-sounding arguments offered in support of the legislation actually have little merit and are mainly a smokescreen to obscure the corporations’ straightforward goal of cutting their state tax payments.
The following are the key arguments offered in support of the enactment of BATSA, paired with rebuttals.
Click here to read the full-text PDF of this report (14pp.)
[i] The House version of BATSA was reintroduced in the 110th Congress on February 7, 2008 by Representatives Bob Goodlatte and Rick Boucher. The Senate version, S. 1726, was reintroduced on June 28, 2007, by Senators Charles Schumer and Mike Crapo.