States, cities finding ways to tax businesses outside their borders

While American companies expect to pay taxes to Uncle Sam and the states where they operate, they weren’t exactly ready to face levies from states where they aren’t physically located.

But thinning budgets and a weak economy have prompted about 30 states and many more local communities to begin imposing “cross-border” taxes and fees designed to raise revenues from firms that don’t locate or regularly operate in their jurisdictions.

These new taxes are taking aim at everything from trucks crossing state borders to sales and communications from out-of-state firms. And that long arm of taxation is creating a howl in the business community.

“It’s always easier, politically speaking, to raise taxes from people who don’t vote in your jurisdiction,” said Maggi Lazarus, a lawyer representing the Coalition for Interstate Tax Fairness and Job Growth, an association of businesses that is fighting the trend and trying to force rulings that impose borders for tax jurisdictions.

“Essentially this impacts any company that does business across state lines into a jurisdiction where they are not physically present,” she said.  “Unfortunately, more and more of them are becoming familiar with it.”

States that have taken the novel approach to new taxes are defending their tactics, arguing the new levies are needed to offset increasing tax shelters and breaks used by companies to avoid paying taxes.

“While no taxation without representation is a catchy slogan, the Supreme Court has long upheld the right of states to impose taxes on nonresidents doing business in a state,” Bruce Johnson, Utah’s state tax commissioner, told lawmakers a couple of years ago when Congress first started delving into the issue.

Johnson was among the state officials to appear in 2011 before the House Judiciary Committee to object to federal legislation that would clarify and limit when states and localities could impose taxes on out-of-state companies. He raised concerns that companies would simply use the new laws to avoid paying taxes they owed.

“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,” he said.

Companies that are targeted for cross-border taxes say they don’t have an easy solution.  They can either pay the taxes, or shell out for expensive legal costs as they try to fight in court.

Some recent examples:

A Florida boat company was hit with a $376,000 tax bill from Michigan, despite the fact the company doesn’t have any offices in that state.  And the tax bill was even $100,000 higher than the total business that company did in Michigan.A Wisconsin trucking company was billed $1,300 - later reduced to $980 - by Nebraska just because its trucks drove through the state.New Jersey stopped a truck from Virginia and refused to release it unless the company paid $150,000.A California-based food company faced $180,000 from seven years of back taxes in Washington state, despite the fact it only had a single truck visit that state over the years.

And as far back as 1991, Alabama tried to tax Chase Manhattan Bank because the Delaware company sent advertisements to people in Alabama advising them to apply for a credit card.

The disagreements come down to what authorizes a state or city to tax businesses.  Must the business have a physical presence in the state?  Or is an economic connection between the business and customers in that state enough to justify the added fees?  

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