[Congressional Record Volume 153, Number 106 (Thursday, June 28, 2007)]
[Senate]
[Pages S8694-S8696]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SCHUMER (for himself and Mr. Crapo):
  S. 1726. A bill to regulate certain State taxation of interstate 
commerce, and for other purposes; to the Committee on Finance.
  Mr. SCHUMER. Mr. President, I want to speak about the bill I am 
introducing today with Senator Crapo, the Business Activity Tax 
Simplification Act of 2007. Our bill tries to address a very important 
question: How should States tax businesses that locate their operations 
in a few States, but have customers and earn income in many States? 
This issue has grown in importance in recent years, and the Supreme 
Court's decision last week not to get involved in the issue raises the 
stakes even further.
  The crux of the issue is this: A majority of States impose corporate 
income and other so-called ``business activity taxes'' only when 
companies have ``physical presence,'' such as employees or property, in 
their States. However, some States contend that the mere presence of a 
business's customers, or an ``economic presence,'' is all that is 
necessary to impose a business activity tax. These companies are facing 
a confusing and costly assortment of State and local tax rules, some 
enacted by legislatures and others imposed upon them by State revenue 
authorities and upheld by State courts.
  Senator Crapo and I introduced similar legislation in the 109th 
Congress to try to address this problem of double taxation and tax 
practices that vary from State to State. That bill came close to 
passing the House, but some last-minute objections were raised. Now, 
the need for legislation and congressional action has taken on new 
urgency, and we have revised the bill to address many of the concerns 
expressed last year.
  Just last week, the U.S. Supreme Court denied certiorari in two cases 
that challenged the constitutionality of State taxation of out-of-State 
companies with no physical presence in a State. The States involved in 
these cases, West Virginia and New Jersey, asserted theories of 
economic nexus to tax out-of-State corporations. They claimed that 
because some customers of such corporations reside in the State, even 
though the corporation is not physically present, they are subject to 
business activity taxes.
  The first case involves a credit card company headquartered in 
Delaware. The bank issued credit cards nationwide, including credit 
cards issued to West Virginia customers. The bank had no property or 
employees, no office or any other physical presence, in the State. The 
second case involves a Delaware holding company that licensed 
intellectual property trademarks and trade names to a customer that 
does business in New Jersey. The holding company itself had no offices, 
employees, or property in New Jersey, and did not otherwise have a 
physical presence in the State. In both cases, the State courts ruled 
that the out-of-State corporation was taxable.
  What is so disappointing about the Supreme Court's silence on this 
issue is the fact that these State court decisions conflict with an 
earlier Supreme Court ruling. In 1992, in Quill Corp. v. North Dakota, 
the Supreme Court prohibited States from forcing out-of-State 
corporations from collecting sales and use tax, unless the corporation 
has a physical presence in the taxing State. However, some State courts 
have held that the physical presence test established by Quill creates 
no such limitations on the imposition of business activity taxes.

  Currently, 19 States take the position that a State has the right to 
tax a business merely because it has a customer within the State, even 
if the business has no physical presence in the State whatsoever.
  These States' actions in pursuing these taxes have caused uncertainty 
and widespread litigation, so much so that it has created a chilling 
effect on foreign and interstate commerce. I have spoken out against 
double taxation on many issues in the past, and the double tax in these 
cases, while not as large, is just as wrong.
  Let me be clear about this: I know that several Governors and State 
revenue commissioners have spoken out against the legislation because 
they don't like the Federal Government telling them what they can and 
cannot tax. They are also concerned about any revenue they might lose 
as a result. But if the States are collecting a tax they shouldn't be 
collecting in the first place, the fact that they might lose a small 
amount of revenue is not the most persuasive argument, in my view.
  I believe Congress has a responsibility to create a uniform nexus 
standard for tax purposes so that goods and services can flow freely 
between the States. Firm guidance on what activities can be conducted 
within a State will provide certainty to tax administrators and 
businesses, reduce multiple taxation or the same income, and will 
reduce compliance and enforcement costs for States and businesses 
alike.
  The last time Congress acted on this issue was in 1959, when Public 
Law 86-272 was enacted to prohibit States from imposing ``income 
taxes'' on sales of ``tangible personal property'' by a business whose 
sole activity within a State

[[Page S8695]]

was soliciting sales. No one can deny that in the almost 50 years 
since, interstate commerce has taken on a whole new character. New 
technologies allow companies headquartered in one State to provide 
services to consumers across the country. The Internet is replacing 
bricks-and-mortar stores. Companies and consumers are increasingly 
linked across State lines.
  The Business Activity Tax Simplification Act of 2007 addresses these 
changes over the last 48 years both modernizing Public Law 86-272 and 
codifying the physical presence standard. Our bill extends the 
protections of the 1959 law to include solicitation activities 
performed in connection with all sales and transactions, not just sales 
of tangible personal property. The bill protects the free flow of 
information, including broadcast signals from outside the State, from 
becoming the basis for taxation of out-of-State businesses.
  BATSA also protects activities where the business is a consumer in 
the State. It makes little sense to impose tax on out-of-State 
businesses that purchases goods or services from an in-State company. 
Obviously, in this very common scenario, the out-of-State business is 
not using these goods or services to generate any revenue in the State. 
Why should they be subject to tax?
  Most importantly, BATSA codifies the physical presence standard. 
States and localities can only impose business activity taxes on 
businesses within their jurisdiction that have employees in the State, 
or real or tangible personal property that is either leased or owned. 
It is consistent with current law and sound tax policy, which holds 
that a tax should not be imposed by a State unless that State provides 
benefits or protections to the taxpayer. Further, the physical presence 
standard is the basis for each and every one of our treaties with 
foreign nations--adoption of a more nebulous standard by the States 
undermines these international treaties.
  We need to act now. Already, State legislatures are interpreting the 
court's denial of cert as an affirmation of their position that they 
are free to enact whatever policies affecting interstate commerce that 
are beneficial to their particular State revenue needs, regardless of 
the national impact. Because the court will not review their nexus 
standard and Congress has not acted, States now have an ideal 
opportunity to raise revenues from out-of-State corporations regardless 
of the national impact.
  Only 3 days after the Supreme Court denied cert, the New Hampshire 
Assembly added an amendment to the State budget at 3:40 a.m. to allow 
the State to collect revenue from out-of-State businesses. The denial 
of cert thereby resulted almost immediately in a $10 million to $100 
million windfall for New Hampshire. No one can deny that this was an 
extremely aggressive action; why else would the legislature have taken 
such drastic measures to tack on this amendment it? the wee hours of 
the morning?
  States are clearly overreaching in their efforts to collect these 
taxes, and it creates a difficult situation for businesses. It is 
laughable to think that a company would decide to cut off all 
transactions with individuals within a certain State to avoid similar 
laws. And so they will have to start paying taxes to States where they 
start generating no revenue, hiring no employees, and contributing 
nothing to the State's economy from their phantom presence aside from 
these taxes. But these companies are not going to stand idly by and be 
double-taxed; they will simply declare less income in their home States 
as a result.
  I know that my legislation with Senator Crapo has raised concerns in 
the past. The States have argued that BAT legislation represents an 
intrusion into their authority to govern. But I believe the contrary: A 
fundamental aspect of American federalism is that Congress has the 
authority and responsibility under the commerce clause to ensure that 
interstate commerce is not burdened by State actions.
  In fact, the exercise of such congressional power is necessary in 
order to prevent excessive burdens from being placed on businesses 
engaged on interstate activity by virtue of their customer's residing 
in a particular State. Congress must act to ensure certainty, 
predictability, and fairness of taxation of multistate corporations. 
The lack of a bright-line physical presence standard encourages each 
State to act in its own self interest by taking action to maximize its 
revenues, regardless of the potential double taxation that results.
  Let me address a few concerns that have been raised about the bill. 
Opponents claim that BATSA includes so many exceptions to the physical 
presence standard that large, multistate companies will utilize the 
legislation to ensure they pay minimum State tax nationwide. But our 
bill explicitly States that it preserves States' authority to adopt or 
continue to use their own tax compliance tools.
  In response to those who say that this legislation will be a huge hit 
to State budgets, the figures just don't add up. There have been a 
number of studies done, but even the highest revenue estimate 
represents only a very small percentage of the total amount of business 
activity taxes collected by the States. The studies leave out one 
important fact, however: Companies affected by double-taxation are 
going to declare less income in their home States, if they have to pay 
taxes on that same income to another State.
  Let me cite just one example from a company in my State. In 2005, 
Citigroup paid 63 percent of all it State and local taxes to New York 
State and New York City, all based on physical presence in the State 
and the city. As more States follow the lead of New Hampshire, the city 
and State of New York will be getting less from Citibank, one way or 
another, as they won't want to be double taxed, once by New York 
because of our physical presence and again in New Hampshire and other 
States because they have customers in those States. This is why any 
revenue loss estimates from any city or State are overblown.
  In short, this is no longer a theoretical discussion. Federal 
legislation is required to stop this food fight.
  I believe that Congress has a duty to prevent some States from 
impeding the free flow and development of interstate commerce and to 
prevent double taxation. That is why I am asking my colleagues on both 
sides of the aisle, including the chairman and ranking member of the 
Finance Committee, to carefully consider this legislation.
  Mr. CRAPO. Mr. President, I would like to thank my colleague from New 
York, Senator Schumer, for the work he has done on this bill. He shares 
my grave concerns about the devastating impact that legal 
interpretations of Public Law 86-272 are having on foreign and 
interstate commerce. I'm pleased that we can work together in a 
bipartisan effort to make changes to a law that is in serious need of 
updating and clarification in view of the more service-oriented economy 
we have today driven in large part by modern technology's profound 
transformation of business transactions. This is why we are introducing 
the Business Activity Tax Simplification Act of 2007, or BATSA, today.
  Congress has a Constitutional responsibility to ensure that 
interstate commerce is not unduly burdened by State actions, including 
unfair and burdensome taxation of such commerce. Public Law 86-272 was 
enacted almost 50 years ago, for just these purposes. Ways of 
conducting multi-state business have changed, and, in the absence of 
any clarifying legislation, some state courts have interpreted taxation 
activity under an ``economic presence'' approach. This approach does 
not reflect the intent or spirit of the Commerce Clause of the 
Constitution; furthermore, it creates a climate of uncertainty that 
inhibits business expansion and innovation. Businesses have to take 
into account the very real possibility that they will be taxed multiple 
times for the same business activity. These ``business activity taxes'' 
are certainly appropriate when a business has a physical presence in a 
State; these taxes are inappropriate when imposed by a State where that 
business's customer happens to reside, but in which the business has no 
physical presence.
  States' efforts to impose improper business activity taxes have been 
furthered by the Supreme Court's recent silence on this issue. Recent 
State court rulings are in conflict with the high Court's ruling in 
Quill Corp. v. North Dakota in 1992. In that ruling,

[[Page S8696]]

the Supreme Court prohibited States from forcing out-of-state 
corporations to collect sales and use taxes unless such corporation had 
a physical presence in the taxing State. As my colleague from New York 
pointed out a few minutes ago, State courts in both New Jersey and West 
Virginia have held that the physical presence test in Quill only 
applies to sales and use taxes, not business activity taxes. I share my 
colleague's deep concern with the fact that the appeals of these two 
cases to the Supreme Court were denied certiorari just last week. This 
denial underscores the urgency of BATSA.
  This effort by a large number of States to impose business activity 
taxes based on economic presence has the potential to open a Pandora's 
Box of negative implications for businesses. Without clarification by 
Congress, States will be free to enact revenue-raising nexus 
legislation and policies that, by definition, will not and cannot take 
into account the national impact of such activities. The eleventh-hour 
enactment of economic nexus legislation by the New Hampshire State 
Legislature just days after the Supreme Court denial of certiorari in 
the New Jersey and West Virginia cases is a sign of things to come. For 
many businesses, this will serve as a death knell for growth and 
expansion.
  BATSA will help clarify the intent of Public Law 86-272. BATSA 
codifies the ``physical presence'' standard and will eliminate 
confusion for State tax administrators and businesses alike. It's 
consistent with current law and the notion that a tax should not be 
imposed by a State unless that State provides benefits or protections 
to the taxpayer. BATSA clarifies that an out-of-state business must 
have nexus under both the Due Process Clause and the Commerce Clause. 
This standard is also consistent with the standards we have in place 
with regard to our trading partners abroad.
  BATSA modernizes Public Law 86-272 by extending the protections under 
that law to include solicitation activities performed in connection 
with all sales and transactions, not just tangible personal property. 
BATSA applies to all business activity taxes, not just net income 
taxes. This includes gross receipts taxes, gross profits taxes, single 
business taxes, franchise taxes, capital stock taxes and business and 
occupation taxes. It does not apply to transaction taxes such as sales 
and use taxes.
  BATSA protects the free flow of information, critical in our modern 
era of Internet business and protects the activities where the business 
is a consumer in that State. And, as my colleague, Senator Schumer, 
rightly pointed out, it is counterintuitive to impose taxes on an out-
of-state company purchasing goods or services from an in-State company, 
since the out-of-state company isn't generating any revenue for the 
State.
  BATSA upholds the approach of disregarding certain de minimus 
activities codified in Public Law 86-272.
  States have argued that BATSA will result in substantial lost State 
tax revenue. In fact, according to the Congressional Budget Office, the 
projected total loss of revenue to states from BATSA in year one of 
enactment represents just 0.2 percent of all State and local taxes paid 
by businesses in 2005. And the CBO cost estimate is actually less than 
the cost claimed by the National Governor's Association in its own 
revenue estimates.
  I will tell you what BATSA does not do. BATSA does not help large 
companies avoid paying their fair share of State taxes, stating 
explicitly that States retain the authority to adopt or continue to use 
anti-tax avoidance compliance tools. It expressly endorses statutory 
and regulatory tools at States' disposal to combat tax abuse. Industry 
and activity-specific safe harbors included in prior bills do not exist 
in this legislation.
  In the glaring absence of Supreme Court clarification on Quill Corp. 
v. North Dakota, and in the presence of confusing state court 
interpretations of that decision and ongoing, and legally-creative 
revenue-raising schemes by States, it's imperative that Congress act 
now to preserve the free flow of commerce between States. The Business 
Activity Tax Simplification Act of 2007 provides that clarification. 
BATSA ensures that one standard of taxation applies for taxing multi-
state companies, so that companies are not unjustly taxed multiple 
times by different States on the same income. I hope that our 
colleagues here in the Senate will support this important legislation 
that will protect the business expansion in our country that keeps our 
economy competitive and thriving.
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