Uncertainty and unpredictability in state corporate income taxes

Dozens of states — desperate for revenue without political consequences — have been trying for years to collect taxes from businesses that aren’t located within their borders. They regularly assess millions of dollars a year in corporate income and similar taxes on companies simply because those companies have an “economic presence” in their borders. This includes customers with credit cards, bank loans, software or intangibles such as trademarks, trade names or advertising. 

{mosads}These states complain that companies are exploiting their markets and should pay for benefits the states provide. But such benefits only go to people and their property inside the state. So it makes eminent sense to levy business taxes in the same manner — based on the physical presence of a company’s people and property. 

Why does this aggression and uncertainty continue unchecked? The Supreme Court has consistently declined to review the controversy, noting that the issue is better suited for Congress to resolve. After all, the Constitution’s Commerce Clause gives Congress the ability to regulate interstate commerce.

Thankfully, Congress is trying to do just that. Legislation is pending in the House of Representatives that would clarify that a state can only impose corporate income or similar taxes on businesses if those businesses have a meaningful physical presence in the state. The Business Activity Tax Simplification Act (BATSA), a bipartisan measure sponsored by Reps. Bob Goodlatte (R-Va.) and Bobby Scott (D-Va.), was approved by the House Judiciary Committee last summer and awaits a vote in the full House.

BATSA would at long last establish a single, uniform standard for all states so that businesses no longer will have to wonder about their tax liability, nor would they have to wrestle with unjustified, unexpected and unreasonable tax assessments.

BATSA does not affect the collection or remittance of state sales or property taxes, nor would it undermine a state’s ability to impose taxes on companies operating within that state. It would merely clarify what the Supreme Court decided nearly two decades ago in the sales tax arena: that a state can only tax out-of-state companies if they have a “substantial” connection with that state. BATSA would finally bring the U.S. into the 21st Century when it comes to corporate income taxation at the state level. If signed into law, BATSA would encourage business development and job growth and put a stop to decades of unnecessary and expensive litigation.

Fair, clear and uniform state business tax practices are vital to the future of a business. BATSA will provide long overdue and much-needed certainty for imposing state corporate income taxes. Businesses, workers and our economy overall can no longer afford to wait. America should lead the world when it comes to tax policy. We will continue to fall short until BATSA becomes law.

Douglas L. Lindholm is the president and executive director of the Council On State Taxation (COST), a non-profit association comprising nearly 600 of the nation’s largest employers.