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States, cities finding ways to tax businesses outside their borders

- Washington Guardian - Monday, January 14, 2013

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?  

Rules surrounding sales tax have clearly defined boundaries: the sale must take place within the state.  But state governments are finding more room to maneuver when assessing corporate income taxes to businesses outside their domain.

The Coalition's website is replete with examples.  It's an organization comprised of a host of businesses trying to put a stop to the cross-state taxes.  Members are some of the largest and most prominent companies in America like Apple, Disney, General Electric, and Johnson & Johnson.

And they've attracted the attention of Congress.  A bill was introduced last session that would stop states from taxing companies that don't have a physical presence within  their borders.  

"No taxing authority of a State shall have power to impose, assess, or collect a net income tax or other business activity tax on any person relating to such person's activities in interstate commerce unless such person has a physical presence in the State during the taxable period with respect to which the tax is imposed," the bill said.

The "Business Activity Tax Simplification Act" garnered bi-partisan support and passed the House Judiciary Committee, but was never taken up by the broader chamber before Congress ended its session.

Its champion, Rep. Bob Goodlatte, R-Va., has often been critical of the many intricacies of the U.S. tax code. 

"All taxpayers are well aware of the frustrations caused by our current tax code," he said in a statement.  "Clocking in at approximately 3.8 million words, the U.S. tax code is extremely complex and difficult to navigate. The King James Bible is only 783,137 words. The U.S. Constitution is 4,447 words. It is clear that we need a simpler and fairer code that will help make America more competitive."

There's been a push to have a case heard at the Supreme Court, but Lazarus said the justices have indicated the matter should be settled by Congress.  In the meantime, the question is usually being settled in the state courts, with differing and sometimes conflicting rulings.

"The state supreme courts that have heard the issue are split on whether or not its constitutional," Lazarus said.

But court rulings usually have narrow implications and are focused on a single case, failing to address the broader implications.

"It doesn’t mean that the revenue department can’t go back and tweak things a little and try again," Lazarus said.

The Washington Guardian reached out to several states involved in the disputes, but most did not return repeated calls seeking comment.  A representative from Michigan said the state cannot comment on specific tax cases.  

Some states have actually agreed with the businesses that certain actions have been wrong.  The truck held up by New Jersey for $150,000?  The state refunded the money and issued an apology.

Most local governments have argued they have the right to tax business transactions that take place in their state.  Some advocates have argued that new laws could be used by companies to get out of paying taxes, robbing communities of much needed income.

It's difficult to get an exact amount of money that businesses have had to forfeit, Lazarus said, partially because the Coalition is only aware of cases when approached by business owners or those that are brought to litigation.

"A lot of small businesses that get an assessment from a state where they’re not physically present, it’s not economically viable for them to hire an attorney and fight it.  So they typically negotiate a payment," Lazarus said.

Large corporations are more likely to litigate and fight the taxes.  Although there's been no formal study, Lazarus fears states are increasingly going after small businesses.

"Small companies can certainly be devastated by a tax bill," she said.  "There’s no statute of limitations on this, so when a state assesses a tax, it can go back to the day that the company first started having any business in that jurisdiction."

As fiscal woes continue to plague the country, it's an issue that's likely to keep surfacing.