[Congressional Record (Bound Edition), Volume 154 (2008), Part 2]
[Extensions of Remarks]
[Pages 1798-1799]
[From the U.S. Government Publishing Office, www.gpo.gov]




  INTRODUCTION OF THE BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2008

                                 ______
                                 

                           HON. RICK BOUCHER

                              of virginia

                    in the house of representatives

                       Thursday, February 7, 2008

  Mr. BOUCHER. Madam Speaker, I rise to introduce the Business Activity 
Tax Simplification Act of 2008, a measure that will bring much needed 
clarification to the circumstances under which states may impose taxes 
on out of state businesses. This is a bi-partisan measure in the 
principal sponsorship of which I am pleased to be joined by my Virginia 
colleague Bob Goodlatte. We are joined in sponsorship of the measure by 
Mr. Chabot, Mr. Artur Davis, Mr. Feeney, Mr. Gallegly, Ms. Herseth 
Sandlin, Ms. Jackson-Lee, Mr. Hank Johnson, Ms. Lofgren, Mr. Pence, Mr. 
Bobby Scott, and Mr. Wexler, many with whom we are pleased to serve on 
the House Judiciary Committee.
  Traditionally, states and localities have levied corporate income, 
franchise and other taxes only on those businesses that have a physical 
presence in the taxing jurisdiction. The growth of the Internet and 
other forms of advanced communications has made it possible for 
businesses to conduct a broad range of transactions without the 
constraints of geopolitical boundaries. As a result, some states have 
attempted to expand their tax base by assessing business activity taxes 
against out-of-state companies that have customers but no property or 
employees in the taxing state. Both large and small companies are 
facing an increasingly unpredictable tax environment, which hinders 
business expansion and threatens the continued development of e-
commerce.
  The measure we are introducing today will bring certainty to the 
increasingly chaotic tax environment for businesses by clarifying that 
the states cannot attempt to tax the income of a company that has no 
physical presence within the taxing state's borders. Our legislation 
sets forth clear, specific standards to govern when businesses should 
be obliged to pay business activity taxes to a state. Generally, a 
business must use employees or services in a state for 15 days or more 
in a calendar year before it is liable to pay business activity taxes 
to that jurisdiction.
  The Business Activity Tax Simplification Act also modernizes a law 
which Congress enacted forty-nine years ago that set clear, uniform 
standards for when states could tax out-of-state businesses based upon 
the solicitation of orders for specified kinds of sales. Reflecting the 
economy of its time, the scope of Public Law 86-272 was limited to 
income taxes on the sale of tangible personal property. Our nation's 
economy has changed dramatically over the past half-century, and the 
statute must be modernized to apply equally to the sale of intangible 
property and services, and to other business activity taxes.
  I want to emphasize that the Business Activity Tax Simplification Act 
does not diminish the ability of states and localities to collect tax 
revenue. Rather, it rationalizes and makes more predictable the process 
of doing so.
  The lack of clarity in current law has led to sometimes absurd 
results. A collection agent with the New Jersey Department of Taxation 
stopped a refrigerated truck loaded with product belonging to 
Smithfield Foods, a company headquartered in my state of Virginia, on 
the New Jersey turnpike. The agent held the truck and its driver for 
several hours and demanded that, to release the truck, Smithfield had 
to wire $150,000 immediately to the New Jersey Department of Taxation. 
The agent claimed that he had the right to hold the truck and its 
contents because Smithfield had failed properly to file New Jersey tax 
returns.
  Smithfield informed the New Jersey agent that his claim was 
unfounded. It explained that Public Law 86-272 protected it from New 
Jersey income taxation because it only engaged in solicitation by 
advertising in New Jersey and had no physical operations in the state. 
The agent refused to accept this explanation; however, he finally 
agreed to release the truck and its driver in return for $8,000.
  Smithfield appealed this aggressive and incorrect application of 
Public Law 86-272 to the New Jersey State tax commissioner. Ultimately, 
New Jersey accepted Smithfield's contention that it has no physical 
presence in the state and is, therefore, not subject to New Jersey 
income tax. It issued Smithfield a refund and an apology for its 
roadside justice system, but not before Smithfield had invested much 
time and expense in resolving a situation which should not have arisen. 
Our measure will help avoid such scenarios in the future by clarifying 
the physical presence standard embodied in Public Law 86-272.
  New Jersey has used similar tactics against out-of-state companies 
selling intangible goods to its residents, a situation not covered by 
Public Law 86-272. It has argued that a mom-and-pop South Carolina 
software company, with no physical presence in any states besides South 
Carolina and Georgia, owes a minimum of $600 per year in corporate 
income taxes and fees based only on the sale of licensed software to a 
New Jersey entity, and that the company would owe such tax every year 
that its software was in use in the state, even for those years in 
which the company had no income from any customer in New Jersey.
  The Louisiana Department of Revenue has threatened to assess business 
activity taxes on several out-of-state companies based merely on the 
fact that they broadcast programming into the state, arguing that the 
companies are exploiting the Louisiana market because the programming 
is seen or heard by individuals in Louisiana.
  Several states attempt to assess business activity taxes on out-of-
state credit card companies based solely on the fact that people use 
the companies' credit cards in the taxing jurisdiction and enjoy the 
``substantial privilege of carrying on business'' in the state.
  Some localities have attempted to impose personal property taxes on 
property orbiting in space. For example, Los Angeles County attempted 
to impose a property tax on a county-based company which owned eight 
communications satellites permanently orbiting in space. The city of 
Virginia Beach, Virginia, also attempted to impose personal property 
taxes on three transponders attached to satellites orbiting in space 
which were owned by a city-based cable company. If states were to use 
the same approach to impose business activity taxes, on the basis that 
a satellite orbiting above the state creates a physical presence there 
or because a business generates income in a state because its satellite 
passes over the state, there would be significant consequences for many 
industries.
  The Business Activity Tax Simplification Act offers Members the 
opportunity to put an end to nonsensical situations like these. In 
doing so, we will provide certainty to both U.S. businesses and to 
states, thereby fostering economic growth and development. I thank Mr. 
Goodlatte and the original cosponsors of the Business Activity Tax 
Simplification Act for their support, and I urge each of our colleagues 
to join with us in passing this bi-partisan measure.

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