In the fast paced business environment where transactions are conducted actually and virtually in multiple jurisdictions, taxpayers are often in a quandary when attempting to determine the extent to which their transactions have subjected them to taxes in any or all of those jurisdictions. And, with more states adopting the expanded concept of economic nexus, which includes businesses that have engaged in regular and continuous exploitation of the state economic market, not only those businesses that are physically present in the state, taxpayers are faced with uncertainty in making a determination as to whether they are subject to taxes in a particular jurisdiction, and if so, which taxes. Determining nexus standards affects just about every area of taxation, including income tax, business activities tax, and sales and use taxes.
Although the issue of nexus with respect to net income taxes has remained fairly settled for the past half century as a result of federal law (P.L. 86-272), limiting the extent to which states can tax businesses with only limited activities in a state, the issue becomes murkier when other taxes, such as those based on business activity, are taken into consideration. As a result of this murkiness, once again legislation (this time, H.R. 1439) has been introduced in Congress to expand the protections of P.L. 86-272 to business activity taxes. The legislation, which would prohibit states from imposing business activity taxes on taxpayers who did not have physical presence in the state for at least 15 days during the tax year and would expand protected activities under P.L. 86-272 to include information gathering and dissemination along with protected solicitation activities, could prove costly for many states that have attempted to expand their own definitions of nexus.
Not only is this not the first time that the Business Activities Tax Simplification Act (BATSA) has been introduced; rather, it has been introduced in every legislative session since 2003. With the exception of the addition of a Joyce rule, to provide that the denominator of a combined group's apportionment formula must include the aggregate factors of every member of a combined group, and the numerator includes only those factors of members of the combined group that are subject to tax in the state, the legislation is substantially similar to the earlier introduced pieces of legislation that have been rejected in the past.
Although the legislation seems to make sense in many ways, in that it would provide a definitive standard that would apply across the board in the state tax arena, there are several impediments that stand in the way of its enactment. One of the chief impediments to the BATSA, and a significant factor in the defeat of the legislation in the past, is the vocal opposition that it has generated from the National Governors' Association, which represents the interests of the states (or at least the state executives). While some of the NGA's opposition, which dates back to the legislation that was originally proposed in 2003, is based primarily on state sovereignty, that opposition also includes administrative and practical considerations as well. As state coffers have run down, the imposition of an economic nexus standard has helped refill those coffers with additional revenues from out-of-state businesses. The BATSA would result in a serious loss of revenue for many states that have begun to depend on that additional revenue to try to close budget gaps.
The main argument advanced by proponents of the legislation is that, with the widening reach of the Worldwide Web, and a global economy making it virtually impossible to have a purely "local" business, it has become almost imperative that a new standard be provided to establish some measure of consistency in the area of nexus. Accorded to its supporters, the legislation would go a long way towards protecting multistate taxpayers from overreaching on the part of states with which a business may have only limited connections.
The likelihood of passage of the BATSA once again seems remote. Opposition to the legislation, primarily on behalf of the states, remains strong. Also, while the physical presence standard does provide some measure of certainty, it creates a large number of gaps through which transactions can fall, resulting in even more significant losses of revenue to the states. All in all, however, while the BATSA legislation may be flawed in some respects, it does provide another opportunity for open and honest debate about the issue.
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