Tax Chasers Target Out of State Businesses
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The Fiscal Times
August 14, 2012

Catherine Monson’s Texas-based graphics and visual communications company has 47 franchisees across the country. Each pays state income taxes where they operate. So it came as a surprise to Monson when seven states – none of which had a local franchisee sent stiff corporate income tax bills to her headquarters for the operation of the franchisees.

Although her business, Fastsigns International, has no employees, offices or other physical presence in any of those states, revenue-starved state tax officials used ambiguities in state laws to tax Monson’s business. She ended up paying more than $115,000 to Arizona, California, Missouri, Oregon, Pennsylvania, South Carolina and Wisconsin.

Now she is fending off efforts by other states that have come hunting for revenue. “More and more states are coming at us,” Monson told The Fiscal Times this week. “With this, there is no certainty. Every business needs certainty.” Monson is one of many small business owners who say states are aggressively imposing taxes regardless of whether the business has a physical presence in the state.

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The effort by cash-strapped states to raise revenue from out-of-state companies has sparked a bi-partisan backlash in Washington where Virginia Reps. Bob Goodlatte, R, and Bobby Scott, D, sponsored legislation limiting states’ ability to impose corporate income taxes on companies without a meaningful physical presence in that state. The so-called “standard of nexus” would be uniform for all states.

While the Business Activity Tax Simplification Act (BATSA) cleared the House Judiciary Committee last summer, it never received a vote in the full House. Its authors hope it will be considered along with other tax measures immediately after the November election or next year when Congress considers tax reform.

“The states are exploiting this situation,” said Jack O’Rourke, an attorney for a coalition of more than 100 companies that are pressing for congressional action to prevent these aggressive state tax forays. 

State tax officials say the proposed legislation would allow businesses to continue to take advantage of states and in some cases avoid all tax liability by shifting their income to states with low or no income or other business taxes. “The new Federal framework would allow large, multi-state businesses to engage in tax structuring and planning that would enable them to avoid a significant part, if not all, of their state tax liabilities,” Utah state tax commissioner Bruce Johnson, speaking on behalf of the Federation of Tax Administrators, told the House Judiciary Committee last summer. Johnson said when out-of-state businesses don’t pay their share, small, local businesses bear the burden.

But that makes no sense to businesses that have been hit with state income taxes simply for driving through a state. LTL Service of Wisconsin, Inc., a small trucking company in South Milwaukee operated by Nancy Narr and her family, experienced that four years ago. In 2008, Narr’s business received a questionnaire from the state of Nebraska, asking whether it did business, had inventory, customers, property or income in the state.

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.