On Wednesday, the House Subcommittee on Regulatory Reform, Commercial and Antitrust Law heard testimony in regards to the H.R. 2992, or the “Business Activity Tax Simplification Act of 2013.”
The proposed law would set up federal “nexus” standards, whereby businesses would have to meet a minimum threshold of activity in a state to be subject to taxation in that state. Currently, each state has different regulations to determine if an out-of-state business will be taxed, making compliance a nightmare for companies who do business in more than one state. This is particularly a problem for online businesses that potentially interact with all fifty states while only having a physical presence in one.
Taxing out-of-state companies is very convenient for states. They can collect revenue without having to tax their own constituents. And the best part for states is that out-of-state companies have limited redress. Owners and employees cannot vote in any other state than their own, and lawsuits are incredibly costly, making it oftentimes cheaper to pay the illegitimate taxes and penalties than it is to go to court. It’s unfair regulation without representation.
Many states set bare minimum thresholds to determine if an out-of-state business created a nexus, allowing them to collect as much revenue from out-of-state companies as possible. Testimony by Joseph Henchman of the Tax Foundation illustrated how ridiculous some of these thresholds were. Visiting a trade show in another state, having an employee telecommute from another state, or even contracting with a third party that has a presence in another state could all be constituted as having established a nexus.
Witness Pete Vegas, Founder and CEO of Sage V Foods, knows all too well about the cumbersome and unfair tax law in other states. The California-based company was fined $180,000 by the state of Washington for having made one delivery in seven years to a small business there, and then was forced to continue paying a $20,000 per year “Business and Occupation Tax.” After three appeals, a Superior Court in Washington settled the matter, finding that Sage did not have a substantial nexus in Washington. Although the taxes and penalties paid by Sage were returned, it was hardly enough to cover the time and money expended on the lawsuit.
Likewise, Tony Simmons, President and CEO of the Louisiana company that produces Tabasco sauce, testified to the injustices his company faced by a city in Washington. Although the company had no employees or inventory located in the city, one of their independent sales brokers had an office in the city, which was enough to establish a nexus. The city then levied a tax assessment under Washington’s Business and Occupation Tax of $32,000.
Washington is just one state. This egregious extortion of out-of-state companies happens nationwide, albeit Washington is a large culprit. If states are allowed to continue their shake downs, companies based in other states will choose not to expand and cost our economy growth. Or worse yet, companies will pack up and take their productions overseas. The Business Activity Tax Simplification Act would truly level the playing field and combat “Marketplace Fairness” type legislation. The rules for determining if a business has set up a nexus in a state will be uniform nationwide, and prevent states from unfairly taking advantage of out-of-state businesses. As witness Pete Vegas summed up, “This situation is getting out of control. Congress needs to set things right.”