[House Report 112-257]
[From the U.S. Government Publishing Office]


112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    112-257

======================================================================



 
            BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2011

                                _______
                                

October 21, 2011.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

       Mr. Smith of Texas, from the Committee on the Judiciary, 
                        submitted the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 1439]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 1439) to regulate certain State taxation of 
interstate commerce, and for other purposes, having considered 
the same, reports favorably thereon without amendment and 
recommends that the bill do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     2
Background and Need for the Legislation..........................     3
Hearings.........................................................     8
Committee Consideration..........................................     8
Committee Votes..................................................     8
Committee Oversight Findings.....................................     9
New Budget Authority and Tax Expenditures........................     9
Congressional Budget Office Cost Estimate........................    10
Performance Goals and Objectives.................................    13
Advisory on Earmarks.............................................    13
Section-by-Section Analysis......................................    13
Changes in Existing Law Made by the Bill, as Reported............    15
Dissenting Views.................................................    17

                          Purpose and Summary

    The Constitution prohibits a state from imposing any tax on 
a taxpayer that lacks a ``substantial nexus'' with the 
state.\1\ What constitutes a ``substantial nexus'' with respect 
to a state's ability to impose net income or other business 
activity taxes (collectively, ``BATs'') upon a business, 
however, is unclear.\2\ If read narrowly, the Supreme Court's 
1992 decision in Quill Corp. v. North Dakota, which requires 
physical presence in the state to satisfy a substantial nexus, 
applies only to a state's imposition of sales and use tax 
collection and remittance requirements upon taxpayers.\3\ Many 
states do read Quill narrowly and impose net income and other 
BATs on businesses that lack a physical presence and have a 
mere ``economic presence'' in the state.
---------------------------------------------------------------------------
    \1\See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 277-78 
(1977) (requiring a ``substantial nexus'' for constitutional state 
taxation of interstate commerce).
    \2\See generally Business Activity Tax Simplification Act of 2011: 
Hearing on H.R. 1439 Before the Subcomm. on Courts, Commercial and 
Admin. Law of the H. Comm. on the Judiciary, 112th Cong. (2011) 
[hereinafter 2011 Hearing]; State Taxation: The Role of Congress in 
Defining Nexus: Hearing Before the Subcomm. on Commercial and Admin. 
Law of the H. Comm. on the Judiciary, 111th Cong. (2010); Business 
Activity Tax Simplification Act of 2008: Hearing on H.R. 5267 Before 
the Subcomm. on Commercial and Admin. Law of the H. Comm. on the 
Judiciary, 110th Cong. (2008); Business Activity Tax Simplification Act 
of 2005: Hearing on H.R. 1956 Before the Subcomm. on Commercial and 
Admin. Law of the H. Comm. on the Judiciary, 109th Cong. (2005); 
Business Activity Tax Simplification Act of 2003: Hearing on H.R. 3220 
Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the 
Judiciary, 108th Cong. (2004) [hereinafter 2004 Hearing].
    \3\See Quill Corp. v. North Dakota, 504 U.S. 298, 317-18 (1992).
---------------------------------------------------------------------------
    States lack a uniform definition for ``substantial nexus'' 
for BATs. The patchwork of tests to determine whether a 
business has ``economic presence'' in a state leads to 
considerable uncertainty for businesses attempting to estimate 
and reserve capital for their tax liability.\4\ At the 2011 
Hearing, the Subcommittee on Courts, Commercial and 
Administrative Law heard testimony from a franchisor from 
Richmond, Virginia, who suggested that small businesses face 
the choice of either engaging a tax advisor at great cost to 
determine where the business has a nexus, or waiting until a 
tax questionnaire or tax bill appears on the business's 
doorstep:
---------------------------------------------------------------------------
    \4\See 2011 Hearing, supra note 2, at 26-36 (testimony of Corey 
Schroeder, Vice Pres. and CFO, Outdoor Living Brands, Inc., on behalf 
of Int'l Franchise Ass'n).

        As a franchisor, I have very little visibility on what 
        the nexus rules are in each state and when they change 
        and why they change. . . . For a small business like 
        mine, managing this issue is rife with uncertainty 
        created by this environment. I could proactively engage 
        another tax advisor and have them go seek out all the 
        34 states where I have franchisees and determine which 
        ones would have nexus with me. . . . I could be 
        passive, which is what I think most franchisors in my 
        situation do, where we wait for the next franchise 
        activity questionnaire to come in and we respond to it 
        accordingly.\5\
---------------------------------------------------------------------------
    \5\Id. at 27.

    H.R. 1439, the Business Activity Tax Simplification Act of 
2011 (BATSA), reduces the kind of tax uncertainty Mr. Schroeder 
described by confirming that Quill's bright-line ``physical 
presence'' standard applies to a state's imposition of BATs.\6\
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    \6\See Business Activity Tax Simplification Act of 2011, H.R. 1439, 
111th Cong. (2011).
---------------------------------------------------------------------------
    BATSA has three primary legislative features. First, it 
establishes a bright-line physical presence nexus requirement 
in order for states to impose or collect net income taxes or 
other BATs on multistate enterprises. Second, BATSA updates 
Public Law 86-272, enacted in 1959 to prohibit states from 
imposing taxes on the net income of interstate sellers of 
tangible personal property if the only business activity within 
the state consists of the solicitation of certain sales orders, 
so that the law applies equally to intangible goods and 
services. Finally, it restricts the means by which a state may 
apportion the income of a unitary group of affiliated 
businesses so that only that portion of the business activity 
conducted in a state may be taxed by that state. As secondary 
matters, the bill also lists conditions that a business must 
satisfy in order to be considered physically present for nexus 
purposes and clarifies that each person in a group of 
affiliated businesses has legal separateness so that physical 
presence may not be imputed.

                Background and Need for the Legislation

                            I. INTRODUCTION

    On Friday, April 8, 2011, Mr. Goodlatte (R-VA) introduced, 
along with Mr. Scott (D-VA), Mr. Duncan (R-SC) and Ms. Jackson 
Lee (D-TX), H.R. 1439, the ``Business Activity Tax 
Simplification Act of 2011.'' BATSA is substantially similar to 
its predecessors that were introduced in prior Congresses.\7\
---------------------------------------------------------------------------
    \7\Compare H.R. 1439, with Business Activity Tax Simplification Act 
of 2009, H.R. 1083, 111th Cong. (2009); Business Activity Tax 
Simplification Act of 2008, H.R. 5267, 110th Cong. (2008); Business 
Activity Tax Simplification Act of 2006, H.R. 1956, 109th Cong. (2006); 
Business Activity Tax Simplification Act of 2003, H.R. 3220, 108th 
Cong. (2003).
---------------------------------------------------------------------------
    BATSA expands Public Law 86-272, an existing Federal 
prohibition against certain state taxation of interstate 
commerce, to include taxation of out-of-state transactions 
involving all forms of property, including intangible personal 
property and services.\8\ Currently, that prohibition applies 
only with respect to taxes on sales of tangible personal 
property. BATSA also clarifies that the U.S. Constitution 
prohibits state assessment of BATs on an out-of-state entity 
unless such entity has a physical presence in the taxing state 
and sets forth criteria for determining whether an entity has a 
physical presence in a state.
---------------------------------------------------------------------------
    \8\The Committee takes the position that the holding of Quill 
applies to all taxes imposed by a state, including BATs.
---------------------------------------------------------------------------

               II. LIMITATIONS ON STATE TAXING AUTHORITY

    Most state taxes fall into four broad categories: taxes on 
property; income and other BATs; general and selective sales 
and use taxes; and licenses, fees, and miscellaneous taxes. As 
sovereign governments, states are generally free to use their 
tax codes to collect revenue and encourage or discourage 
certain behaviors. For example, states with robust tourism 
industries, such as Florida and Nevada, impose high sales taxes 
because of the volume of transactions that occur within their 
borders. Other states, like New Hampshire, have decided to 
impose high property taxes relative to other states but, in 
order to attract population and commerce, do not impose taxes 
on earned income or sales.\9\
---------------------------------------------------------------------------
    \9\For a summary of current state tax laws and rates, see Ryan 
Forster and Kail Padgitt, Where Do State and Local Governments Get 
Their Tax Revenue?, The Tax Foundation Fiscal Fact No. 242 (August 
2010), http://www.taxfoundation.org/files/ff242.pdf.
---------------------------------------------------------------------------
    While a state's authority to set its own tax policy is 
broad, it is not plenary. The Supreme Court has inferred from 
the grant of power to Congress in the Commerce Clause that 
state and local laws are unconstitutional if they place an 
undue burden on interstate commerce--a principle commonly known 
as the ``dormant'' commerce clause.\10\ The Due Process Clause 
of the 14th Amendment also constrains a state's taxing 
ability.\11\ An out-of-state business must have a nexus under 
both the Due Process Clause and the Commerce Clause before a 
state may impose a tax on that business. While the Due Process 
Clause requires only a minimum connection between the putative 
taxpayer and the taxing state, the U.S. Supreme Court has 
determined that the Commerce Clause requires the existence of a 
``substantial nexus'' between the two.\12\
---------------------------------------------------------------------------
    \10\See Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) (invalidating 
state's grant of monopoly to steamship operator that prevented holders 
of Federal steamship licenses from navigating state waterways); Erwin 
Chemerinsky, Constitutional Law: Principles and Policies Sec. 5.3 (2d 
ed. 2002).
    \11\U.S. Const. amend. XIV.
    \12\Complete Auto, 430 U.S. at 279.
---------------------------------------------------------------------------
    The modern, generally applicable test for determining 
whether a state tax impermissibly burdens interstate commerce 
was set forth by the Supreme Court in 1977 in Complete Auto 
Transit, Inc. v. Brady.\13\ Prior to that decision, the Court 
employed an approach that scrutinized whether the tax 
``directly'' or ``indirectly'' taxed interstate commerce, a 
rubric that varied from the test applicable to non-tax state 
regulations affecting interstate commerce and that resulted in 
confusing and often conflicting results.\14\ The Complete Auto 
test provides that a state tax violates the dormant commerce 
clause unless it:
---------------------------------------------------------------------------
    \13\Complete Auto, 430 U.S. at 287.
    \14\See generally Chemerinsky, supra note 11, Sec. 5.4.1.

        (1) is applied to an activity with a substantial nexus 
---------------------------------------------------------------------------
        to the taxing state;

        (2) is fairly apportioned so as to tax only the 
        activities connected to the taxing state;

        (3) does not discriminate against out-of-state persons; 
        and

        (4) is fairly related to services provided by the 
        state.\15\
---------------------------------------------------------------------------
    \15\Complete Auto, 430 U.S. at 287.
---------------------------------------------------------------------------

           III. THE QUILL ``PHYSICAL PRESENCE'' STANDARD FOR 
                          CERTAIN STATE TAXES

    While the Complete Auto test is generally applicable to all 
state taxes, the Supreme Court has specifically addressed the 
``substantial nexus'' prong for scrutiny of state transaction 
taxes, such as a sales or use tax. In Quill Corp. v. North 
Dakota, the Supreme Court held that a state tax law 
impermissibly burdens interstate commerce if it compels out-of-
state entities to collect transaction taxes on its behalf, 
unless the out-of-state entity has a physical presence in the 
taxing jurisdiction.\16\ In 1987, North Dakota changed its tax 
code to define ``retailer'' as a ``person who engages in 
regular or systematic solicitation of a consumer market in 
th[e] state,'' and changed its regulations to define ``regular 
or systematic solicitation'' as consisting of three or more 
advertisements within a 12-month period. The state required all 
retailers to collect and remit a use tax to the state. Quill 
Corporation, an office-supply company incorporated in Delaware 
whose only connection to North Dakota was that it sent 
catalogues to residents to solicit business, challenged the law 
on the basis that it violated the dormant commerce clause.
---------------------------------------------------------------------------
    \16\Quill, 504 U.S. at 317-18.
---------------------------------------------------------------------------
    The Supreme Court held that Quill lacked sufficient nexus 
to North Dakota to enable the state to require collection and 
remittance of the use tax. In doing so, the Court reaffirmed 
the ``physical presence'' test for Commerce Clause nexus 
previously announced in National Bellas Hess, Inc. v. 
Department of Revenue of Illinois.\17\ Accordingly, there is a 
bright-line rule that a state may impose a duty to collect and 
remit a use tax only on businesses that are physically present 
in the state.\18\ However, with respect to Quill's separate 
argument that the Due Process Clause of the Fourteenth 
Amendment prohibited North Dakota from taxing it because it 
lacked certain minimum contacts with the state, the Supreme 
Court concluded that Quill ``purposefully directed its 
activities at North Dakota residents, that the magnitude of 
those contacts are more than sufficient for due process 
purposes, and that the use tax is related to the benefits Quill 
receives from access to the State.''\19\
---------------------------------------------------------------------------
    \17\Nat'l Bellas Hess, Inc. v. Dep't of Revenue of Ill., 386 U.S. 
753, 758-59 (1967) (declining to depart from bright-line rule requiring 
physical presence for taxing nexus).
    \18\Quill, 504 U.S. at 317-18.
    \19\Id. at 308.
---------------------------------------------------------------------------
    Quill, if limited to its facts, applies the bright line 
physical presence nexus test only to a state's imposition of 
taxes that consumers are statutorily required to pay for the 
privilege of using or enjoying goods within a state's borders. 
It does not purport to establish a rule clarifying 
``substantial nexus'' for a state's imposition of net income or 
other BATs on businesses that lack physical presence in the 
state.\20\ From early dormant commerce clause cases it might 
appear that physical presence is the touchstone for at least ad 
valorem taxes, but the question of what constitutes physical 
presence for other taxes has been somewhat unclear.\21\ In 
Northwestern States Portland Cement Co. v. Minnesota, the 
Supreme Court found physical presence based on the fact that an 
out-of-state company sent salesman into the taxing state to 
solicit business.\22\ The Court thus allowed imposition of a 
net income tax on the otherwise out-of-state business. This 
ruling prompted Congress to enact Public Law 86-272 to clarify 
that merely sending traveling salesmen into a state does not 
result in physical presence for purposes of satisfying the 
nexus requirement of the dormant commerce clause.\23\
---------------------------------------------------------------------------
    \20\See, e.g., KFC Corp. v. Iowa Dep't of Revenue, 792 N.W.2d 308, 
314 (Iowa 2010) (``While `physical presence' may have been a 
significant feature, if not a requirement, in the Supreme Court's 
Dormant Commerce Clause analysis in early sales and use tax cases, 
`physical presence' in the narrow sense does not appear as an important 
factor in cases involving state income taxation.'') (Emphasis added.)
    \21\See Braniff Airways, Inc. v. Neb. State Bd. of Equalization & 
Assessment, 347 U.S. 590, 597-98 (1954) (upholding state tax on airline 
that made 18 scheduled flights a day to and from Nebraska despite its 
having no other property there).
    \22\See Braniff Airways, Inc. v. Neb. State Bd. of Equalization & 
Assessment, 347 U.S. 590, 597-98 (1954) (upholding state tax on airline 
that made 18 scheduled flights a day to and from Nebraska despite its 
having no other property there).
    \23\See Pub. L. No. 86-272 (codified at 15 U.S.C. Sec. 381 et seq. 
(2006 & Supp. IV)). BATSA amends Public Law 86-272 as described infra.
---------------------------------------------------------------------------

             IV. ``SUBSTANTIAL NEXUS'' FOR NET INCOME AND 
                     OTHER BUSINESS ACTIVITY TAXES

    While Quill defined the boundaries of a state's authority 
to impose sales and use taxes on out-of-state businesses, the 
precise boundaries of what constitutes a ``substantial nexus'' 
for purposes of net income and other BATs and, to the extent it 
might thereby be applicable, ``physical presence'' remain 
unclear. The West Virginia Supreme Court of Appeals recently 
held that ``Quill's physical presence requirement for a showing 
of substantial Commerce Clause nexus applies only to use and 
sales taxes and not to business franchise and corporate net 
income taxes.''\24\ The Iowa Supreme Court recently held that a 
Kentucky-based franchisor had ``substantial nexus'' to Iowa 
because it licensed intellectual property to a franchisee 
pursuant to a contractual relationship and the franchisee 
erected a sign bearing the licensed trademark on its property, 
but did not conclude whether physical presence was required for 
business activity tax nexus:
---------------------------------------------------------------------------
    \24\Tax Comm'r of W. Va. v. MBNA America Bank, N.A., 630 S.E.2d 
226, 232 (W. Va. 2006).

        As a result, we conclude that the Supreme Court would 
        likely find intangibles owned by KFC, but utilized in a 
        fast-food business by its franchisees that are firmly 
        anchored within the state, would be regarded as having 
        a sufficient connection to Iowa to amount to the 
        functional equivalent of ``physical presence'' under 
        Quill. Furthermore, the fact that the transactions that 
        produced the revenue were based upon use of the 
        intangibles in Iowa also provides a sufficient basis to 
        support the tax under the Commerce Clause.\25\
---------------------------------------------------------------------------
    \25\KFC, 792 N.W.2d at 324.

Courts in other states, however, have opined that physical 
presence is required to satisfy the nexus requirement for all 
taxes. For example, in J.C. Penney National Bank v. Johnson, 
the Court of Appeals of Tennessee held that ``[w]hile it is 
true that the Bellas Hess and Quill decisions focused on use 
taxes, we find no basis for concluding that the analysis should 
be different [with respect to franchise and excise 
taxes].''\26\
---------------------------------------------------------------------------
    \26\J.C. Penney Nat'l Bank v. Johnson, 19 S.W.3d 831, 839 (Tenn. 
Ct. App. 1999), appeal denied (May 8, 2000), cert. denied, 531 U.S. 927 
(2000).
---------------------------------------------------------------------------
    Uncertainties in the law and the costs of compliance with 
the numerous and varied state and local tax regimes have 
increasingly become a significant burden on businesses. In 
addition to the high costs of the taxes themselves, businesses 
must also employ accountants to determine whether they are 
liable for various taxes and attorneys to defend themselves 
against enforcement actions. At a hearing in the 108th 
Congress, a representative of Smithfield Foods, Inc., 
testified:

        We incur substantial costs to meet our State tax 
        obligations. On an annual basis we are required to file 
        860 State income tax returns, 450 sales and use tax 
        returns, 3,150 State payroll tax returns and 215 real 
        and personal property returns. This results in various 
        State payment [sic] of almost $60 million. In spite of 
        our efforts to comply with the laws of all the States, 
        we continue to find State interpretations of the 
        business activity tax to be difficult and 
        troublesome.\27\
---------------------------------------------------------------------------
    \27\2004 Hearing, supra note 2, at 36 (2004) (statement of Vernon 
T. Turner, Corporate Tax Director, Smithfield Foods, Inc.).

    The money spent on these administrative and compliance 
costs would be better put to making capital investments, 
growing the business, and hiring new employees, who will 
themselves bolster a state's tax rolls. Even if a business 
reasonably concludes it is not subject to taxation in a state, 
it may have to pay penalties if the state ultimately prevails 
in an enforcement suit. If the business concludes it is subject 
to taxation, it passes along the cost of the tax to consumers. 
In either case, goods and services become more expensive. These 
burdens are especially trying on small businesses which often 
lack the resources to hire specialized tax and legal experts. 
Worse still, some states have used very aggressive methods to 
collect their taxes. At the same hearing in the 108th Congress, 
Smithfield Foods testified that a truck delivering Smithfield 
hams was essentially hijacked on a New Jersey highway by the 
state's Department of Revenue in an effort to force the company 
to pay New Jersey's corporate income tax.\28\
---------------------------------------------------------------------------
    \28\Id. at 37.
---------------------------------------------------------------------------
    Recent governance by the Financial Accounting Standards 
Board has only complicated the issue. As the Council on State 
Taxation, the National Association of Manufacturers, and the 
National Marine Manufacturers Association argued in their joint 
amicus curiae brief filed in 2007 in support of a petition for 
a writ of certiorari from the Supreme Court,

        The problem is made more acute by recent tightening of 
        financial disclosure requirements. In 2006, the 
        Financial Accounting Standards Board (FASB), adopted 
        new rules on accounting for uncertain income tax 
        positions. FASB Increases Relevance and Comparability 
        of Financial Reporting or Income Taxes: Final 
        Interpretation Reduces Widespread Diversity in 
        Practice, News Release (FASB), July 13, 2006 (``FIN 
        48''). FIN 48 provides uniform criteria for the 
        preparation of financial statements and expands the 
        disclosure required regarding uncertainty in income 
        taxes. FIN 48 mandates a ``reserve'' for 100% of tax 
        items unless it is more likely than not that the 
        company will prevail in litigation on those items. This 
        reserve is of indefinite duration, with interest and 
        penalties accruing annually.

        The abandonment of the physical presence rule along 
        with the adoption of varying ``nexus'' or ``economic 
        presence'' standards by different states will create 
        havoc for the financial statements of publicly traded 
        companies. Under FIN 48, a company with customers but 
        no physical presence in a state or locality will be 
        required to decide whether it is ``more likely than 
        not'' that it will be deemed, after the fact, to lack a 
        requisite nexus with that jurisdiction. Otherwise, the 
        company will be required to accrue the full amount of 
        any potential tax liability. The ambiguous and evolving 
        nature of the concept of ``nexus'' makes it extremely 
        difficult to decide, to a 50% certainty, whether a 
        company will be deemed to have a nexus in a given state 
        or locality. Taxpayers in identical circumstances could 
        reasonably reach different conclusions. As a result, 
        one taxpayer may accrue a 100% reserve of the potential 
        tax liability while another identical taxpayer may 
        reserve little or nothing at all.

        The varying and ill-defined ``economic presence'' 
        standards adopted by the states will therefore 
        frustrate the goal of providing investors with a 
        realistic picture of a corporation's financial 
        position. Hence, abandoning the physical presence rule 
        disserves the purposes of the securities laws as well 
        as the Commerce Clause.\29\
---------------------------------------------------------------------------
    \29\Brief for Council on State Taxation et al. as Amici Curiae 
Supporting Petitioners at 18-19, FIA Card Services, N.A. v. West 
Virginia, 551 U.S. 1141 (2007) (denying petition for certiorari).
---------------------------------------------------------------------------

           V. DORMANT COMMERCE CLAUSE LIMITS ON APPORTIONMENT

    If a state is permitted to collect a net income or other 
business activity tax from an out of state entity, it may not 
violate the dormant commerce clause with respect to how it 
apportions the entity's domestic business activities relative 
to the combined group's domestic and foreign business 
activities. The question of constitutional apportionment 
generally arises in states that require combined income or 
business activity reporting for an affiliated group of 
entities. To the extent that a state uses combined reporting, 
BATSA prohibits the state from taxing the income of an 
affiliate that has no physical presence in the taxing 
jurisdiction.

                                Hearings

    On April 13, 2011, the Subcommittee on Courts, Commercial 
and Administrative Law held a legislative hearing on H.R. 1439 
and heard testimony from: Rep. Bob Goodlatte; Rep. Robert C. 
``Bobby'' Scott; Corey Schroeder, Vice President and CFO of 
Outdoor Living Brands, on behalf of the International Franchise 
Association; R. Bruce Johnson, Chairman of the Utah State Tax 
Commission, on behalf of the Federation of Tax Administrators; 
and Joseph Henchman, Tax Counsel and Director of State Projects 
at the Tax Foundation.
    Numerous hearings on BATSA's predecessor bills and on the 
subject of tax nexus generally have been held in several prior 
Congresses.\30\
---------------------------------------------------------------------------
    \30\See supra note 2.
---------------------------------------------------------------------------

                        Committee Consideration

    On July 7, 2011, the Committee met in open session and 
ordered the bill H.R. 1439 favorably reported without 
amendment, by voice vote, a quorum being present.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that there 
was one recorded vote during the Committee's consideration of 
H.R. 1439. Rep. Chu offered an amendment to delay the effective 
date of the bill to the year 2022. By a vote of 7-24, the 
amendment was not agreed to.

                                                 ROLLCALL NO. 1
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Smith, Chairman.............................................                              X
Mr. Sensenbrenner, Jr...........................................                              X
Mr. Coble.......................................................                              X
Mr. Gallegly....................................................                              X
Mr. Goodlatte...................................................                              X
Mr. Lungren.....................................................                              X
Mr. Chabot......................................................                              X
Mr. Issa........................................................                              X
Mr. Pence.......................................................                              X
Mr. Forbes......................................................
Mr. King........................................................                              X
Mr. Franks......................................................                              X
Mr. Gohmert.....................................................
Mr. Jordan......................................................                              X
Mr. Poe.........................................................
Mr. Chaffetz....................................................                              X
Mr. Griffin.....................................................                              X
Mr. Marino......................................................                              X
Mr. Gowdy.......................................................
Mr. Ross........................................................                              X
Ms. Adams.......................................................                              X
Mr. Quayle......................................................                              X
Mr. Conyers, Jr., Ranking Member................................              X
Mr. Berman......................................................
Mr. Nadler......................................................              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................                              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Mr. Pierluisi...................................................              X
Mr. Quigley.....................................................              X
Ms. Chu.........................................................              X
Mr. Deutch......................................................
Ms. Sanchez.....................................................              X
Ms. Wasserman Schultz...........................................
                                                                 -----------------------------------------------
    Total.......................................................              7              24
----------------------------------------------------------------------------------------------------------------

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 1439, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 13, 2011.
Hon. Lamar Smith, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1439, the Business 
Activity Tax Simplification Act of 2011.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Elizabeth 
Cove Delisle, who can be reached at 225-3220.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                  Director.

Enclosure

cc:
        Honorable John Conyers, Jr.
        Ranking Member
H.R. 1439--Business Activity Tax Simplification Act of 2011.

                                SUMMARY

    H.R. 1439 would prohibit State and local governments from 
taxing certain business activities that are taxable under 
current law. Specifically, it would prohibit those governments 
from taxing certain services, intangible goods, and media 
activities unless businesses providing those services have a 
``physical presence''--as defined in the bill--in the taxing 
jurisdiction.

                 ESTIMATED IMPACT ON THE FEDERAL BUDGET

    CBO estimates that enacting H.R. 1439 would have no direct 
impact on the Federal budget. Because the bill would not affect 
direct spending or revenues, pay-as-you-go procedures do not 
apply.

        ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS

    H.R. 1439 would impose an intergovernmental mandate as 
defined in the Unfunded Mandates Reform Act (UMRA) by 
prohibiting State and local governments from taxing certain 
business activities. CBO estimates that the costs--in the form 
of forgone revenues--to State and local governments would be 
about $2 billion in the first full year after enactment and at 
least that amount in subsequent years. The cost would far 
exceed the threshold established in UMRA for intergovernmental 
mandates ($71 million in 2011, adjusted annually for 
inflation).
    Current law (notably, Public Law 86-272 and related Supreme 
Court decisions) prohibits States from levying a tax on the 
corporate (net) income of a company whose only activity in the 
State is pursuing and making sales that would be filled from 
outside the State (e.g., mail order sales). H.R. 1439 would 
expand that prohibition to other types of business activity 
taxes (BATs), including additional corporate income taxes, 
franchise taxes, single business taxes, capital taxes, gross 
receipt taxes, and business and occupation taxes. Corporations 
currently pay these taxes to a State only if the State can 
establish ``nexus'' with the firm. (``Nexus'' is the connection 
between a firm and a State that allows the State to legally 
impose taxes on the firm and is based on some measure of 
physical presence or economic activity in a State.) H.R. 1439 
would redefine ``nexus'' and preempt State laws that are 
different from that definition. Such a preemption would 
constitute a mandate as defined in UMRA and would result in 
forgone revenues to State and local governments.
    Specifically, the bill would:

         LDefine physical presence for firms not based 
        in a State;

         LEstablish a uniform nexus standard 
        nationwide--an entity would need to be physically 
        present in a State for 15 or more days to establish 
        nexus;

         LCreate ``carve outs'' from the 15-day 
        standard that would allow certain industries or 
        activities (such as media) to exceed the standard 
        without establishing nexus with a State;

         LExpand the prohibitions on taxation in Public 
        Law 86-272 to include taxes not based solely on the 
        income of a company (i.e., gross receipts taxes, 
        franchise taxes, and business and occupation taxes);

         LExpand the applicability of Public Law 86-272 
        to services and intangibles (e.g., the trademark for a 
        retail store or the patent for a formula for soda); and

         LProhibit States that require businesses to 
        file group returns from imposing BATs on members of the 
        group that, by themselves, do not meet the standard for 
        physical nexus.

            ESTIMATED DIRECT COSTS OF MANDATES TO STATE AND 
                           LOCAL GOVERNMENTS

    CBO estimates that enacting H.R. 1439 would result in 
revenue losses for States and some local governments and that 
such losses likely would total about $2 billion in the first 
full year after enactment and at least that amount in 
subsequent years. Those forgone revenues would equal about 3 
percent of the total BATs in 2012 and would far exceed the 
threshold established in UMRA for intergovernmental mandates 
($71 million in 2011, adjusted annually for inflation.)\1\
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    \1\In fiscal year 2010, States collected about $700 billion in 
total taxes. In the year following enactment, the revenue losses 
resulting from H.R. 1439 would total about 5 percent of collections 
from corporate income taxes and significantly less than 1 percent of 
total tax collections by States.
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    UMRA includes in its definition of mandate costs any 
amounts that State and local governments would be prohibited 
from raising in revenues as a result of the mandate. The 
mandate costs of H.R. 1439 would include any taxes that State 
and local governments would be precluded from collecting under 
the bill. (UMRA's definition of mandate costs excludes 
increases in revenues that State and local governments might 
raise in reaction to enactment of a mandate.)
    CBO estimates that all States and some local governments 
would see an immediate revenue loss because they are currently 
collecting taxes from firms that, under the bill, would be 
exempt from taxation. Subsequently, corporations likely would 
rearrange their business activities to take advantage of 
beneficial tax treatments that would result from the 
interaction of the new Federal law and certain State taxing 
regimes. Those changes in business activities would likely 
result in additional revenue losses to the States. However, CBO 
has no basis for estimating the extent to which such 
reorganizations would occur.

         BASIS OF ESTIMATE FOR INTERGOVERNMENTAL MANDATES COSTS

    CBO used information from a variety of sources to estimate 
the State revenue losses that would result from enactment of 
this legislation.\2\ Using data from the States, industry, and 
the Census Bureau, CBO estimated potential losses based on 
current tax collections, the industrial and commercial profile 
of State economies, and the structure of State taxing systems.
---------------------------------------------------------------------------
    \2\Although the bill's provisions also would affect collection of 
taxes by some local governments, CBO has not separately estimated the 
potential losses for such governments. Relatively few local governments 
impose significant business activity taxes.
---------------------------------------------------------------------------
    States use a variety of rules to determine whether a 
company is subject to taxation--that is, if it has nexus--and 
if so, how the activities in which that company engages are 
taxed. The differences in State taxing systems affect how much 
revenue each State or local government would likely forgo under 
the provisions of the bill. CBO examined both the 
characteristics of the corporate tax structure of each State 
and data about the economic makeup of each State in order to 
estimate potential revenue losses.
    To estimate the costs of enacting H.R. 1439 to State and 
local governments, CBO first estimated the total amount of BATs 
paid by corporations in each State. Such taxes totaled about 
$65 billion in 2011. Since some industries are significantly 
less likely to be operating from outside the State than others 
(for example mining companies), CBO used information about the 
industrial and commercial makeup of States to calculate the 
portion of BATs that could be at risk if H.R. 1439 is enacted. 
In general, CBO expects that States would lose only a small 
percent of BATs--less than 3 percent in the first year after 
enactment, nationwide. To calculate losses for 2012, CBO 
estimated the likely percentage each State would lose based on 
its current tax system and applied that percentage to the BATs 
potentially at risk.
    The percent of revenues lost by each State would vary 
significantly and would depend on the characteristics of each 
State's tax system and its industrial makeup. A State that 
imposes taxes on companies that make sales in the State--
regardless of whether those companies have property or 
employees in the State--would lose a higher percentage of their 
BATs than would a State that only taxes companies that have a 
physical presence in the State. Similarly, a State that has an 
economy that is concentrated in an industry that does not rely 
on property or employees in the State to carry out business 
activities, such as the information services industry, would 
also lose a higher percentage of their BATs than would a State 
where the economy relies more heavily on agricultural or 
manufacturing industries.
    In the absence of this legislation, it is possible that 
some State and local governments would enact new taxes or 
change the way they tax businesses. Since such changes are 
difficult to predict, for the purposes of estimating the direct 
costs of the mandate, CBO considered only the revenues from 
taxes that are currently in place and actually being collected, 
or estimates for changes that are already in statute and that 
will be implemented over the next five years.

                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

    This bill contains no new private-sector mandates as 
defined in UMRA.

                         ESTIMATE PREPARED BY:

Impact on State, Local, and Tribal Governments: Elizabeth Cove 
    Delisle
Federal Revenue: Kalyani Parthasarathy
Impact on the Private Sector: Paige Piper/Bach

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
1439 regulates certain state taxation of interstate commerce 
and modernizes Public Law 86-272.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 1439 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as defined in clause 9(e), 9(f), or 9(g) of Rule XXI.

                      Section-by-Section Analysis

    Sec. 1. Short Title. Section 1 sets forth the short title 
of the Act as the ``Business Activity Tax Simplification Act of 
2011.''
    Sec. 2. Modernization of Public Law 86-272. Congress 
enacted Public Law 86-272 in 1959 in response to the United 
States Supreme Court's decision in Northwestern States Portland 
Cement.\31\ In that decision, the Court concluded that a state 
has jurisdiction to tax the net income of a foreign corporation 
that maintained an active sales office and sales force within 
the State, even though the only activity that the corporation 
performed in the state was to solicit sales. Public Law 86-272 
prohibits states from imposing a net income tax on businesses 
whose activities in their jurisdiction are limited to 
soliciting sales of tangible personal property, provided that 
the orders for the tangible personal property are approved and 
filled from a point outside the state.
---------------------------------------------------------------------------
    \31\358 U.S. at 465.
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    Services and intangibles were not as vital to the American 
economy at the time Public Law 86-272 was enacted as they are 
now. Also, at that time, almost all states imposed a net income 
tax rather than some other type of business activity tax. As 
enacted, Public Law 86-272 does not apply to persons that 
solicit sales of services or intangibles, and it only applies 
to net income taxes, not to taxes such as gross receipts taxes, 
margin taxes, or commercial activity taxes that states have 
developed to substitute for net income taxes.
    Section 2 modernizes Public Law 86-272 by extending its 
scope to persons that solicit sales of services and/or 
intangibles and by expanding its applicability from net income 
taxes to all BATs. Section 2 also adds language to shield from 
business activity tax liability persons who enter a state 
merely to furnish information to customers or affiliates in the 
state or to cover news or other events or gather information in 
the state, provided that such information is ultimately used 
outside the state.
    Sec. 3. Minimum Jurisdictional Standard for State and Local 
Net Income and Other Business Activity Taxes. Section 3 
clarifies a minimum jurisdictional standard for imposition of 
business activity tax. Under the Bill, a person must have 
``physical presence'' in a state to be subject to business 
activity tax liability there. Under this section, a person has 
physical presence in a state if the person's activities in the 
state include at least one of the following during a taxable 
year: (1) the person is an individual physically in the state, 
or assigns one or more employees to the state; (2) the person 
uses the services of an agent to establish or maintain a market 
in the state, so long as the agent does not perform services in 
the state for any other person during the taxable year; or (3) 
the person leases or owns tangible personal property or real 
property in the state.
    Section 3 also clarifies that a person is not considered to 
have a physical presence in the state if the person's 
activities there are limited to presence in the state (1) for 
fewer than 15 days in a taxable year; or (2) to conduct limited 
or transient business activity there.
    The above protections would not apply to a person that is 
incorporated or formed under the laws of the state in which the 
tax is imposed.
    Section 3 also clarifies that a state retains the right to 
use anti-tax avoidance tools, such as the economic substance 
and sham doctrines, to prosecute persons engaged in unlawful 
tax avoidance. It also clarifies that states retain the ability 
to require combined reporting for affiliates.
    Sec. 4. Group Returns. Section 4 sets forth a rule for 
apportionment that prohibits a state from imputing the net 
income or other business activity of a non-present affiliate to 
an affiliate with nexus for purposes of enlarging the taxable 
portion of the affiliate group's income. In states that 
apportion, Section 4 limits the apportionment numerator to the 
indicia of economic activity physically present in the state, 
while preserving the denominator as the affiliate group's 
aggregated economic indicia, as the case may be in each 
respective state.
    Sec. 5. Definitions and Effective Date. Section 5 sets 
forth definitions used in the Bill and makes the Bill effective 
as of January 1, 2012. Among other things, it requires that 
states treat each person in a group of affiliated persons 
separately for tax purposes.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

                       ACT OF SEPTEMBER 14, 1959

                          (Public Law 86-272)

 AN ACT relating to the power of the States to impose net income taxes 
on income derived from interstate commerce, and authorizing studies by 
        congressional committees of matters pertaining thereto.

                TITLE I--IMPOSITION OF MINIMUM STANDARD



    Sec. 101. (a) No State, or political subdivision thereof, 
shall have power to impose, for any taxable year ending after 
the date of the enactment of this Act, a net income tax on the 
income derived within such State by any person from interstate 
commerce if the only business activities within such State by 
or on behalf of such person during such taxable year are 
[either, or both,] any one or more of the following:
            (1) the solicitation of orders [by such person, or 
        his representative, in such State for sales of tangible 
        personal property, which orders are sent outside the 
        State for approval or rejection, and, if approved, are 
        filled by shipment or delivery from a point outside the 
        State; and] (which are sent outside the State for 
        approval or rejection) or customers by such person, or 
        his representative, in such State for sales or 
        transactions, which are--
                    (A) in the case of tangible personal 
                property, filled by shipment or delivery from a 
                point outside the State; and
                    (B) in the case of all other forms of 
                property, services, and other transactions, 
                fulfilled or distributed from a point outside 
                the State;
            (2) the solicitation of orders by such person, or 
        his representative, in such State in the name of or for 
        the benefit of a prospective customer of such person, 
        if orders by such customer to such person to enable 
        such customer to fill orders resulting from such 
        solicitation are orders described in paragraph (1)[.];
            (3) the furnishing of information to customers or 
        affiliates in such State, or the coverage of events or 
        other gathering of information in such State by such 
        person, or his representative, which information is 
        used or disseminated from a point outside the State; 
        and
            (4) those business activities directly related to 
        such person's potential or actual purchase of goods or 
        services within the State if the final decision to 
        purchase is made outside the State.

           *       *       *       *       *       *       *

    [(c) For purposes of subsection (a), a person shall not be 
considered to have engaged in business activities within a 
State during any taxable year merely by reason of sales in such 
State, or the solicitation of orders for sales in such State, 
of tangible personal property on behalf of such person by one 
or more independent contractors, or by reason of the 
maintenance of an office in such State by one or more 
independent contractors whose activities on behalf of such 
person in such State consist solely of making sales, or 
soliciting orders for sales, of tangible personal property.]
    (c) For purposes of subsection (a) of this section, a 
person shall not be considered to have engaged in business 
activities within a State during any taxable year merely--
            (1) by reason of sales or transactions in such 
        State, the solicitation of orders for sales or 
        transactions in such State, the furnishing of 
        information to customers or affiliates in such State, 
        or the coverage of events or other gathering of 
        information in such State, on behalf of such person by 
        one or more independent contractors;
            (2) by reason of the maintenance of an office in 
        such State by one or more independent contractors whose 
        activities on behalf of such person in such State are 
        limited to making sales or fulfilling transactions, 
        soliciting order for sales or transactions, the 
        furnishing of information to customers or affiliates, 
        and/or the coverage of events or other gathering of 
        information; or
            (3) by reason of the furnishing of information to 
        an independent contractor by such person ancillary to 
        the solicitation of orders or transactions by the 
        independent contractor on behalf of such person.
    (d) For purposes of this section--
            (1) the term ``independent contractor'' means a 
        commission agent, broker, or other independent 
        contractor who is engaged in selling or fulfilling 
        transactions, or soliciting orders for [the sale of, 
        tangible personal property] a sale or transaction, 
        furnishing information, or covering events, or 
        otherwise gathering information for more than one 
        principal and who holds himself out as such in the 
        regular course of his business activities; and

           *       *       *       *       *       *       *

    Sec. 105. For taxable periods beginning on or after January 
1, 2012, the prohibitions of section 101 that apply with 
respect to net income taxes shall also apply with respect to 
each other business activity tax, as defined in section 5(a)(2) 
of the Business Activity Tax Simplification Act of 2011. A 
State or political subdivision thereof may not assess or 
collect any tax which by reason of this section the State or 
political subdivision may not impose.

           *       *       *       *       *       *       *

                            Dissenting Views

                              INTRODUCTION

    H.R. 1439, the ``Business Activity Tax Simplification Act 
of 2011,'' would override state law to impose a problematic 
standard to determine if a state may tax a business 
activity.\1\ This standard, based on whether a business is 
physically present in the state, and the bill's other 
provisions are onerous for several reasons. The legislation 
unfairly favors large, multi-state businesses over smaller 
businesses by creating massive state tax loopholes that large 
businesses will be able to exploit. Rather than clarifying the 
nexus requirement, the bill would engender more uncertainty and 
thereby result in more litigation. H.R. 1439, by preempting 
state law, would overturn well-settled state tax law practices 
and eviscerate state revenues. In essence, H.R. 1439 has a 
single objective: to relieve large multi-state and multi-
national businesses from paying state taxes.\2\ The 
Congressional Budget Office (CBO) estimates that H.R 1439 will 
cost states ``about $2 billion in the first full year after 
enactment and at least that amount in subsequent years.''\3\
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    \1\A business activity tax is a direct tax on a business for doing 
business within the state, and is measured by the amount of such 
business or related activity. Generally, both in-state and out-of-state 
businesses that are ``doing business'' in a state pay business activity 
taxes on the money earned in that state.
    \2\Letter from Oregon Governor John A. Kitzhaber, MD to the Oregon 
Congressional Delegation (Aug. 29, 2011) (on file with the House of 
Representatives Committee on the Judiciary, Democratic Staff).
    \3\Congressional Budget Office Cost Estimate, H.R. 1439: Business 
Activity Tax Simplification Act of 2011, 2 (Sept. 13, 2011) (emphasis 
added).
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    Citing these problems and other concerns presented by the 
bill, the National Governors Association, the Multistate Tax 
Commission, Citizens for Tax Justice, the Commonwealth of 
Massachusetts, the Governor of Oregon, the American Federation 
of State, County and Municipal Employees (AFSCME), the American 
Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO), the Communication Workers of America (CWA), the 
International Federation of Professional and Technical 
Engineers (IFPTE), the National Education Association (NEA), 
the American Federation of Teachers (AFT), the Department for 
Professional Employees (DPE), the International Union, United 
Automobile, Aerospace and Agricultural Implement Workers of 
America (UAW), the International Association of Fire Fighters 
(IAFF), and the Services Employees Union International (SEIU) 
oppose H.R. 1439.\4\
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    \4\Letter from Nebraska Governor Dave Heineman, Chair of the 
National Governors Association, and Delaware Governor Jack Markell, 
Vice Chair of the National Governors Association, to Representative 
Lamar Smith, Chairman of the House Committee on the Judiciary, and 
Representative John Conyers, Jr., Ranking Member of the House Committee 
on the Judiciary (Aug. 4, 2011) (on file with the House of 
Representatives Committee on the Judiciary, Democratic Staff); Letter 
from Oregon Governor John A. Kitzhaber, MD to the Oregon Congressional 
Delegation (Aug. 29, 2011) (on file with the House of Representatives 
Committee on the Judiciary, Democratic Staff); Letter from 
Massachusetts Secretary of Administration and Finance Jay Gonzalez to 
Senator Max Baucus, Senator Orrin Hatch, Representative Lamar Smith, 
Chairman of the House Committee on the Judiciary, and Representative 
John Conyers, Jr., Ranking Member of the House Committee on the 
Judiciary (July 12, 2011) (on file with the House of Representatives 
Committee on the Judiciary, Democratic Staff); Letter from Joe 
Huddleston, Executive Director of the Multistate Tax Commission to 
Representative Lamar Smith, Chairman of the House Committee on the 
Judiciary, and Representative John Conyers, Jr., Ranking Member of the 
House Committee on the Judiciary (July 5, 2011) (on file with the House 
of Representatives Committee on the Judiciary, Democratic Staff); The 
Business Activity Tax Simplification Act of 2011: Hearing on H.R. 1439 
Before the Subcomm. on Courts, Commercial and Admin. Law of the H. 
Comm. on the Judiciary, 112th Cong. 245-247 (2011) (May 4, 2011 Letter 
from Robert S. McIntyre, Director of the Citizens for Tax Justice); Id. 
at 285-286 (May 4, 2011 Letter from the American Federation of State, 
County and Municipal Employees (AFSCME), American Federation of Labor 
and Congress of Industrial Organizations (AFL-CIO), Communication 
Workers of America (CWA), International Federation of Professional and 
Technical Engineers (IFPTE), National Education Association (NEA), 
American Federation of Teachers (AFT), Department for Professional 
Employees (DPE), International Union, United Automobile, Aerospace and 
Agricultural Implement Workers of America (UAW), International 
Association of Fire Fighters (IAFF), and the Services Employees Union 
International (SEIU)).
---------------------------------------------------------------------------
    For these reasons, and those discussed below, we 
respectfully dissent and urge our colleagues to reject this 
seriously flawed legislation.

                DESCRIPTION AND BACKGROUND OF H.R. 1439

    Under current jurisprudence, a state may impose a tax on a 
business if that business has a substantial nexus with the 
state, and the tax has some relation to the level of activity 
of the business within the state.\5\ Whether a state may levy 
and collect a business activity tax on an out-of-state business 
depends upon what constitutes substantial nexus. Proponents of 
H.R. 1439 contend that substantial nexus demands a physical 
presence requirement.\6\ For example, in Geoffrey, Inc. v. 
South Carolina Tax Commission,\7\ the Supreme Court denied 
certiorari in a case where the South Carolina Supreme Court 
found sufficient connection between a Delaware corporation and 
the state of South Carolina to justify a business activity tax. 
The Delaware corporation's contact with the state consisted 
solely of the presence of intangible property.\8\
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    \5\Quill Corp.v. North Dakota, 504 U.S. 298 (1992).
    \6\``Although we have not, in our review of other types of taxes, 
articulated the same physical-presence requirement that Bellas Hess 
established for sales and use taxes . . .'', and, ``In sum, although in 
our cases subsequent to Bellas Hess and concerning other types of taxes 
we have not adopted a similar bright-line, physical-presence 
requirement. . . .'' 504 U.S. at 314, 317.
    \7\313 S.C. 15, 437 S.E.2d 13, cert. denied, 510 U.S. 992 (1993).
    \8\The Supreme Court has denied certiorari in other cases. See, 
e.g., Lanco Inc. v. Director, Division of Taxation, 188 N.J. 380, 980 
A. 2d 176 (2006), cert. denied, 127 S.Ct. 2974 (2007); A&F Trademark, 
et al. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004), review denied 
(N.C. 2005), cert. denied, 126 S.Ct. 353 (2005); Comptroller of the 
Treasury v. SYL, Inc. and Comptroller of the Treasury v. Crown Cork & 
Seal Co. (Delaware), Inc, 825 A.2d 399 (Md. 2003), cert. denied, 124 
S.Ct. 961 (2003). For additional cases, see The Business Activity Tax 
Simplification Act of 2011: Hearing on H.R. 1439 Before the Subcomm. on 
Courts, Commercial and Admin. Law of the H. Comm. on the Judiciary, 
112th Cong. 42-43 (2011) (Written Testimony of R. Bruce Johnson). By 
declining to consider these challenges, the Supreme Court has 
strengthened the argument that a state's ability to tax a business is 
not limited to a physical presence being established.
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    According to Professor Walter Hellerstein, one of the 
Nation's leading constitutional law experts, economic nexus is 
sufficient for purposes of determining whether a state may levy 
and collect a business activity tax on an out-of-state 
business.\9\ The Supreme Court has held that when a state 
levies a tax against a multi-state business operating in its 
state, the state does not need to isolate intrastate income-
producing activities from the entire business, but can tax an 
apportioned share of the total multi-state activities if the 
business is unitary.\10\ To survive a Commerce Clause 
challenge, the tax must pass the four-part test established in 
Complete Auto Transit v. Brady.\11\ In order to be fairly 
apportioned, the tax must be proportional to the business 
activities occurring in that state.\12\
---------------------------------------------------------------------------
    \9\State Taxation: The Role of Congress in Defining Nexus: Hearing 
Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the 
Judiciary, 111th Cong. 67 (2010) (Written Testimony of Walter 
Hellerstein).
    \10\A business is ``unitary'' if the intrastate and extrastate 
activities form ``part of a single unitary business''and the out-of-
state values that the state seeks to tax are not ``derive[d] from 
`unrelated business activity' which constitutes a `discrete business 
enterprise.''' MeadWestvaco Corp., Successor in Interest to The Mead 
Corp. v. Ill. Dep't of Revenue., 553 U.S. 16 (2008).
    \11\430 U.S. 274 (1977).
    \12\To be proportionate, the tax must be both internally and 
externally consistent. The Supreme Court defines internal consistency 
as the following: ``the formula must be such that, if applied by every 
jurisdiction, it would result in no more than all of the unitary 
business's income being taxed.'' External consistency requires that 
``the factor or factors used in the apportionment formula must actually 
reflect a reasonable sense of how income is generated.'' Container 
Corp. of America v. Franchise Tax Board, 463 U.S. 159, 169-170 (1983).
---------------------------------------------------------------------------
    Nonetheless, H.R. 1439, introduced by Representative Bob 
Goodlatte on April 8, 2011, ignores Supreme Court precedent and 
the vast majority of state appellate courts by equating 
physical presence with substantial nexus and imposing such a 
standard. The legislation would preempt state law to provide 
that an out-of-state company must have a physical presence in a 
state before the state can impose a business activity tax. H.R. 
1439 even goes further by amending Public Law 86-272\13\, which 
restricts the ability of states to impose net income taxes on 
interstate commerce.
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    \13\Codified at 15 U.S.C. Sec. Sec. 381-384.
---------------------------------------------------------------------------
    H.R. 1439 contains five principal provisions which would 
shift more of the tax burden to local taxpayers and away from 
out-of-state businesses. Those provisions include:

         Lexpanding the reach of Public Law 86-272 to 
        apply to services and sales of intangible property of 
        all interstate businesses.\14\ Currently, Public Law 
        86-272 prohibits states from imposing a net income tax 
        on businesses whose activities in their jurisdiction 
        are limited to soliciting sales of tangible goods only, 
        provided that the orders for the tangible goods are 
        approved and filled from a point outside the state.
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    \14\H.R. 1439, Sec. 2(a).

         Lexpanding Public Law 86-272 to apply to all 
        business activity taxes.\15\ Currently, Public Law 86-
        272 applies only to state net income taxes.
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    \15\H.R. 1439, Sec. 2(b).

         Lrequiring a 15-day physical presence within a 
        state before that state can impose, assess, or collect 
        a net income tax or business activity tax on the 
        entity.\16\
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    \16\H.R. 1439, Sec. 3.

         Lallowing a business to have agents (which may 
        be subsidiaries of the business) in a state acting on 
        the business' behalf for an unlimited period of time 
        without creating taxing jurisdiction as long as the 
        agents are working for two or more principals.\17\
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    \17\H.R. 1439, Sec. 3(b)(1)(B).

         Lpreventing states from apportioning the 
        income of a business which does not meet the physical 
        presence standard as defined by the legislation.\18\ In 
        an effort to ensure that all income is taxed equitably, 
        many states currently apportion the income of a 
        business for tax calculation purposes to the state in 
        which the income was earned.
---------------------------------------------------------------------------
    \18\H.R. 1439, Sec. 4.

Taken together, these provisions will severely impact the 
collection of state income tax on business activity; create 
loopholes favoring large, multi-state corporations to avoid 
paying taxes; and undermine the ability of states to pay for 
essential services, such as public health and safety, 
education, and maintenance of state highways.
    A more detailed section-by-section analysis of the 
legislation follows:
    Sec. 1. Short Title. Section 1 sets for the short title of 
the bill as the ``Business Activity Tax Simplification Act of 
2011.''
    Sec. 2. Modernization of Public Law 86-272. Section 2 
amends Public Law 86-272 by striking references to ``tangible 
personal property''. The deletion effectively extends the reach 
of Public Law 86-272, which prohibits states from imposing 
business net income taxes where the company's only activity 
within the state is solicitation in connection with sales and 
transactions of tangible personal property. Thus, businesses 
whose sole activity within a state is the sales of tangible and 
intangible personal property and services would be safe from 
state business net income taxes.
    Sec. 3. Minimum Jurisdictional Standard for State and Local 
Net Income Taxes and Other Business Activity Taxes. Subsection 
(a) of section 3 prohibits a state from imposing a business 
activity tax on any person unless such person has a physical 
presence in the state.
    Subsection (b)(1) provides that ``physical presence'' is 
established only if the business activities within the state 
include any of the following: (A) the person has employees in a 
state; (B) the person uses a third party to provide services 
that enhance or maintain the person's market in a state, unless 
the third party performs market-enhancing services for at least 
one other business; or (C) the person leases or owns tangible 
personal property or real property in a state.
    Subsection (b)(2) provides that ``physical presence'' does 
not include de minimis physical presence, defined to include a 
presence in a state for up to 14 days in a taxable year (or a 
greater number of days if provided by state law) or presence in 
a state to conduct limited or transient business activity.
    Subsection (c) provides that the 14-day limitation will be 
prorated if a taxable period is not based on a taxable year.
    Subsection (d) provides that the physical presence standard 
is a minimum standard for state tax jurisdiction and would not 
supersede any law that allows a person to conduct greater 
activities without the imposition of tax jurisdiction.
    Subsection (e) describes the three situations where the 
prohibition of section 3(a) does not apply or does not affect 
current law. These situations include when a business is 
incorporated or formed under the laws of the state, when an 
individual is a resident of the state, or when a business is 
engaged in an illegal activity.
    Sec. 4. Group Returns. Section 4 limits a state's 
apportionment calculation to determine a net income or other 
business activity tax liability. Where net income of affiliated 
persons are considered, the amount of combined net income 
subject to tax shall be computed using generally applicable 
methodologies, but if the methodology employs an apportionment 
formula, then the denominator shall include aggregate factors 
of all persons included in such combined net income and the 
numerator shall include factors attributable to the state of 
only those persons with physical presence in the state. In 
other words, section 4 would ensure that a state would not be 
allowed to include income from affiliates of a business which 
do not have physical presence in the state when calculating the 
income of that business for tax purposes.
    Sec. 5. Definitions and Effective Date. Section 5 defines 
certain terms used in the Act.
    This section also provides that the legislation becomes 
effective for taxable years beginning on or after January 1, 
2012.

                        CONCERNS WITH H.R. 1439

               I. H.R. 1439 WILL DEVASTATE STATE REVENUES

    H.R. 1439 will severely impact state revenues in the short 
term and progressively in the long term. The CBO estimates that 
H.R 1439 will cost states ``about $2 billion in the first full 
year after enactment and at least that amount in subsequent 
years.''\19\ This impact would far exceed the Unfunded Mandates 
Reform Act threshold of $71 million in 2011.\20\ For 
perspective, $2 billion would pay the salaries for more than 
36,000 public school teachers.\21\ And, this amount in lost 
state revenues would likely increase substantially over the 
years. As the CBO explained, corporations ``would rearrange 
their business activities to take advantage of beneficial tax 
treatments that would result from the interaction of the new 
Federal law and certain state taxing regimes. Those changes in 
business activities would likely result in additional revenue 
losses to the states.''\22\ Separately, Oregon has predicted 
that H.R. 1439 would lead to between $90 and $116 million in 
lost revenue per year, which is about 19% of the state's 
corporate income tax revenue.\23\
---------------------------------------------------------------------------
    \19\Congressional Budget Office Cost Estimate, H.R. 1439: Business 
Activity Tax Simplification Act of 2011, 2 (Sept. 13, 2011) (emphasis 
added).
    \20\The Unfunded Mandates Reform Act is intended to curb the 
practice of imposing Federal mandates on state and local governments 
without adequate funding. Unfunded Mandates Reform Act of 1995, Pub. L. 
No. 104-4, 109 Stat. 48 (1995).
    \21\$2 billion is more than sufficient to finance the annual 
salaries of 36,230 teachers paid at the national average salary of 
$55,202, as calculated by the National Education Association. 
National Education Association, Rankings of the States 2010 and 
Estimates of School Statis-
tics 2011, at 17, 19, available at http://www.nea.org/assets/docs/HE/
NEA_Rankings_and_
Estimates010711.pdf.
    \22\Congressional Budget Office Cost Estimate, at 3.
    \23\Letter from Oregon Governor John A. Kitzhaber, MD to the Oregon 
Congressional Delegation (Aug. 29, 2011) (on file with the House of 
Representatives Committee on the Judiciary, Democratic Staff).
---------------------------------------------------------------------------
    In 2006, the CBO estimated that legislation similar to H.R. 
1439 would have led to ``virtually all states [losing] 
revenues, [and] about 70 percent of the estimated losses would 
come from ten states: California, Florida, Illinois, Michigan, 
New Jersey, New York, Pennsylvania, Tennessee, Texas, and 
Washington.''\24\ One would expect a similar present impact.
---------------------------------------------------------------------------
    \24\H.R. Rep. No. 109-575, at 11 (2006).
---------------------------------------------------------------------------

      II. H.R. 1439 WILL EFFECTIVELY ELIMINATE THE TAX BURDEN FOR 
                         OUT-OF-STATE COMPANIES

    H.R. 1439 is ``another example of large, multi-state 
corporations trying to shirk their tax responsibilities.''\25\ 
Simply, it will substantially diminish the ability of states to 
tax business activity within their borders, thus favoring 
multi-state corporations at the expense of local businesses and 
taxpayers. The bill does so in several respects.
---------------------------------------------------------------------------
    \25\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 247 (2011) (May 4, 2011 
Letter from Robert S. McIntyre, Director of the Citizens for Tax 
Justice).
---------------------------------------------------------------------------
A. LThe Bill's Expanding Public Law 86-272 Will Favor Out-of-State 
        Businesses
    H.R. 1439 expands the prohibition in Public Law 86-272 to 
apply to services and sales of intangible property of all 
interstate businesses, rather than just the current sales of 
tangible property.\26\ Public Law 86-272 already ``allows 
corporations to have an unlimited number of salespeople in a 
state at all times yet remain exempt from income tax if the 
salespeople work out of home offices or visit from out of 
state.''\27\ By expanding the reach of Public Law 86-272, H.R. 
1439 would exempt from income tax business sectors which focus 
on selling intangible goods and services. As a result, tax 
revenues for states would be further reduced.
---------------------------------------------------------------------------
    \26\H.R. 1439, Sec. 2.
    \27\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 234 (2011) (Prepared 
Statement of Michael Mazerov).
---------------------------------------------------------------------------
B. LThe Bill's Physical Presence Test Will Encourage Tax Evasion
    H.R. 1439 requires a business entity to have a 15-day 
physical presence within a state before that state can impose, 
assess, or collect a net income tax or business activity tax on 
such entity.\28\ The bill's physical presence standard, 
however, includes several safe harbors for businesses, thereby 
making the tax system more arbitrary, inconsistent, and 
complex. The standard favors businesses with limited physical 
presence but that may actually have major economic activity 
within the state, while shifting the state corporate income tax 
burden to local, small businesses and manufacturers, and 
natural resource and service industries, that is, businesses 
that pay local property and payroll taxes.
---------------------------------------------------------------------------
    \28\H.R. 1439, Sec. 3.
---------------------------------------------------------------------------
    Nebraska Governor Dave Heineman and Delaware Governor Jack 
Markell have stated that H.R. 1439 would create ``opportunities 
for companies to structure corporate affiliates and 
transactions to avoid paying state taxes.''\29\ The bill would 
shield business income from taxation regardless of how much 
income businesses derive from the state seeking to impose a tax 
on them. For example, H.R. 1439's 15-day physical presence 
test\30\ effectively creates a 14-day safe harbor. According to 
noted state and local taxation expert Michael Mazerov,
---------------------------------------------------------------------------
    \29\Letter from Nebraska Governor Dave Heineman, Chair of the 
National Governors Association, and Delaware Governor Jack Markell, 
Vice Chair of the National Governors Association, to Representative 
Lamar Smith, Chairman of the House Committee on the Judiciary, and 
Representative John Conyers, Jr., Ranking Member of the House Committee 
on the Judiciary (Aug. 4, 2011) (on file with the House of 
Representatives Committee on the Judiciary, Democratic Staff).
    \30\H.R. 1439, Sec. 3(b)(2)(A).

        In short, BATSA's 14-day safe harbor would allow many 
        sophisticated multi-state corporations to avoid having 
        a business activity tax liability in many or all states 
        in which they have customers. Firms could maintain 
        substantial numbers of employees and substantial 
        amounts of equipment in a state on a continuously 
        rotating basis without creating BAT nexus.\31\
---------------------------------------------------------------------------
    \31\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 238 (2011) (Prepared 
Statement of Michael Mazerov).

Meanwhile, in-state based companies would easily exceed the 14-
day safe harbor and be subject to business activity taxes. 
Thus, the legislation's physical presence standard would favor 
businesses with limited physical presence but often with major 
economic activity within the state, while shifting the state 
corporate income tax burden to local businesses.
    By encouraging tax evasion through the creation of tax 
shelter opportunities for nonresident businesses--which would 
be primarily businesses with ample resources--the bill makes 
the tax system more arbitrary, inconsistent, and complex.\32\ 
As the nonpartisan Congressional Research Service explained, 
``[T]he 15-day rule and the safe harbor for limited or 
transient activity . . . would increase opportunities for tax 
planning and thus tax avoidance and possibly evasion.''\33\ As 
a result, a business could avoid paying taxes in a state that 
apportions income based solely on sales (single sales factor 
apportionment formula) by locating its physical assets in that 
state, while directing its sales in that state through an out-
of-state company.\34\ For these reasons, at the markup, 
Representative Judy Chu offered an amendment to strike the 
provision providing for these carve-outs, but the amendment was 
defeated by voice vote.\35\
---------------------------------------------------------------------------
    \32\The Business Activity Tax Simplification Act of 2008: Hearing 
on H.R. 5267 Before the Subcomm. on Commercial and Admin. Law of the H. 
Comm. on the Judiciary, 110th Cong. 52 (2008) (Written Testimony of 
David Quam).
    \33\Congressional Research Service Report for Congress, State 
Corporate Income Taxes: A Description and Analysis, RL32297 (June 23, 
2008).
    \34\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 45 (2011) (Written 
Testimony of R. Bruce Johnson).
    \35\The Business Activity Tax Simplification Act of 2011: Markup of 
H.R. 1439 Before the H. Comm. on the Judiciary, 112th Cong. (July 7, 
2011) (Amendment #3 of Representative Judy Chu).
---------------------------------------------------------------------------
    H.R. 1439 will allow out-of-state businesses to reap the 
benefits of state-provided services without having to pay for 
them. Supporters of this legislation argue that out-of-state 
businesses should not have to pay business activity taxes 
because they assert they do not benefit from state provided 
services.\36\ ``Although this point of view may have some 
political cache, it is factually unsupportable.''\37\ Such 
businesses often benefit substantially from state public 
services such as fire and police protection.\38\ Out-of-state 
companies compete with in-state mom-and-pop stores for 
customers and, like every other company doing business within 
the state, benefit from the transportation services the state 
provides.\39\ Also, when an out-of-state bank makes mortgage 
loans in a state, the value of the houses that serve as 
collateral depends on the quality of local schools and the 
safety of the community. Furthermore, that same out-of-state 
bank would use the local court system if legal action is 
necessary for non-payment of mortgage loans. Each of these 
services is provided by the state notwithstanding a company's 
lack of physical presence in that state.
---------------------------------------------------------------------------
    \36\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 34 (2011) (Written 
Testimony of Corey Schroeder); see also John A. Swain, State Income Tax 
Jurisdiction: A Jurisprudential and Policy Perspective, 45 Wm. & Mary 
L. Rev. 319, 378 (Oct. 2003).
    \37\Swain, supra note 36, at 379.
    \38\Charles McClure and Walter Hellerstein, ``Congressional 
Intervention in State Taxation: A Normative Analysis of Three 
Proposals,'' State Tax Notes, 721-735, 734-735, March 1, 2004.
    \39\The Business Activity Tax Simplification Act of 2008: Hearing 
on H.R. 5267 Before the Subcomm. on Commercial and Admin. Law of the H. 
Comm. on the Judiciary, 110th Cong. 50 (2008) (Testimony of David 
Quam); see also The Business Activity Tax Simplification Act of 2003: 
Hearing on H.R. 3220 Before the Subcomm. on Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 108th Cong. 125 (2004) (Prepared 
Statement of the Multistate Tax Commission).
---------------------------------------------------------------------------
C. LThe Bill Severely Restricts the Ability of States To Apportion Tax 
        Liability
    H.R. 1439 would severely restrict the ability of states to 
apportion the income of a business that does not meet the 
physical presence standard as defined by the legislation.\40\ 
Currently, some states include in their tax calculations the 
income of all entities of a business enterprise if one of those 
entities has a physical presence within the state.\41\ 
Combining the income ensures that a parent company does not 
avoid paying state business activity taxes by merely creating 
holding companies or affiliates to avoid establishing a 
physical presence. H.R. 1439, however, would favor businesses 
that have not established physical presence, as defined by the 
bill, by excluding from net income tax calculations holding 
companies and other entities.\42\ Thus, large multistate 
businesses will have less tax liability.
---------------------------------------------------------------------------
    \40\H.R. 1439, Sec. 4.
    \41\For a thorough discussion on apportionment, see State Taxation: 
The Role of Congress in Developing Apportionment Standards: Hearing 
Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the 
Judiciary, 111th Cong. (2010), and particularly the written testimony 
of Daniel B. De Jong, at 37-39, for a dissection of the Joyce and 
Finnigan approaches, which this provision in the legislation addresses.
    \42\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 64 (2011) (Testimony of 
R. Bruce Johnson).
---------------------------------------------------------------------------

    III. H.R. 1439 WILL FORCE STATES TO CUT ESSENTIAL SERVICES AND 
                   INCREASE TAXES ON LOCAL TAXPAYERS

    As a policy matter, we note that state and local 
governments work closely with the Federal Government to provide 
essential government services such as educating our children, 
maintaining needed transportation infrastructure, and 
protecting us from domestic and foreign terrorism. State and 
local governments pay for these services through tax revenues. 
States, however, would be severely hampered in their ability to 
provide these essential services if Congress restricts their 
ability to collect much needed revenues as proposed by H.R. 
1439, which, in turn, would adversely impact revenues local 
governments receive from their state counterparts.
    H.R. 1439 will eviscerate state revenues by excluding from 
possible state taxation billions of dollars in current business 
income. Thus, to balance their budgets, states will be forced 
to cut services and shift most of the tax burden onto local 
taxpayers through increased property, income, and sales taxes.
    H.R. 1439 will restrain the states' ability to cope with 
economic downturns in several respects. First, the legislation 
will deny states the flexibility to raise revenue.\43\ Second, 
H.R. 1439's inflexible effective date (January 1, 2012) fails 
to take into consideration that it is midway through most 
states' fiscal years, and may not give states sufficient time 
to adjust their budgetary commitments to take into 
consideration the expected revenue losses.\44\ At the markup, 
Representative Judy Chu offered an amendment to change the 
effective date to January 1, 2022, which would provide 
sufficient time for state governments to plan accordingly.\45\ 
This amendment, however, was defeated.\46\ Third, H.R. 1439 
will hinder the states' ability to balance their budgets. Most 
states are required, either statutorily or constitutionally, to 
balance their state budgets.\47\ Budgets are based on 
anticipated revenue and spending for the fiscal cycle. When 
revenue declines or spending increases during the fiscal cycle, 
states begin to run a deficit. States must then account for the 
deficit by cutting spending or raising taxes.
---------------------------------------------------------------------------
    \43\State Taxation: The Impact of Congressional Legislation on 
State and Local Government Revenues: Hearing Before the Subcomm. on 
Commercial and Admin. Law of the H. Comm. on the Judiciary, 111th Cong. 
27-28 (2010) (Testimony of Vermont Governor Jim Douglas).
    \44\H.R. 1439, Sec. 5(b).
    \45\The Business Activity Tax Simplification Act of 2011: Markup of 
H.R. 1439 Before the H. Comm. on the Judiciary, 112th Cong. (July 7, 
2011) (Amendment #2 of Representative Judy Chu).
    \46\The amendment failed by a roll call vote of 7-24. Id.
    \47\National Association of State Budget Officers, Budget Processes 
in the States 40 (Summer 2008).
---------------------------------------------------------------------------
    During the current economic climate, the state tax revenue 
base has declined as a result of higher unemployment, lower 
real estate property taxes, and less sales tax revenue. The 
need for state and local government services, however, has not 
correspondingly declined. In fact, demand for many of these 
essential services, such as unemployment payments and other 
social programs, has increased during the current economic 
downturn.\48\
---------------------------------------------------------------------------
    \48\Donald J. Boyd, Nelson A. Rockefeller Institute of Government, 
Recession, Recovery, and State-Local Finances, Presentation before the 
Forecasters Club of New York 2, Jan. 28, 2010.
---------------------------------------------------------------------------
    The Center on Budget and Policy Priorities estimates that 
the states will face combined budget shortfalls of $103 billion 
for fiscal year 2012.\49\ To balance their budgets, state and 
local governments already have had to respond through measures 
which heavily impact working families. For example, 44 states 
have cut more than 400,000 public sector jobs since August 
2008; California, Michigan, and Delaware have slashed benefits 
to families living below the poverty line; and Texas cut about 
$1 billion in education funding over the past 2 years from its 
already well below-average education budget and another $1 
billion from its higher education budget.\50\ Additionally, 
some states have reduced their aid to local governments for 
fiscal 2012.\51\ The lost aid may lead to fewer police officers 
on the street, which could result in more crime, or less 
funding for hiring teachers, which could further depress our 
educational system. ``By depriving states of business activity 
tax revenues they currently are collecting, the legislation 
could further impair their ability to provide services that are 
a critical foundation of a healthy national economy--such as 
high-quality K-12 and university education and transportation 
infrastructure.''\52\ Labor organizations fear that the 
``annual loss [in revenue] would worsen state and local budget 
problems and force cuts to education, health care, job creation 
and other vital services.''\53\ Enactment of H.R. 1439 would 
force states to cut essential services.
---------------------------------------------------------------------------
    \49\Center on Budget and Policy Priorities, New Fiscal Year Brings 
Further Budget Cut to Most States, Slowing Economic Recovery, June 28, 
2011.
    \50\Instead of Signs of Recovery, a Sucker Punch for State Budgets, 
Wash. Post, May 29, 2011, at G7.
    \51\National Governors Association and National Association of 
State Budget Officers, The Fiscal Survey of States, Spring 2011, at 8, 
available at http://www.nasbo.org/LinkClick.aspx?file
ticket=yNV8Jv3X7Is%3d&tabid=38.
    \52\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 226 (2011) (Prepared 
Statement of Michael Mazerov).
    \53\Id. at 285-286.
---------------------------------------------------------------------------
    Instead of spending less on essential services, states 
could choose to increase taxes to cover the revenue losses 
expected after enactment of H.R. 1439. According to Utah State 
Tax Commissioner R. Bruce Johnson, the expected revenue loss by 
H.R. 1439 ``is not revenue that is going to go away, . . . That 
tax is going to be shifted to our local businesses and our 
local taxpayers. It is going to have a devastating impact on 
small business.''\54\ In sum, H.R. 1439 will burden local 
taxpayers while excusing out-of-state businesses from paying 
their fair share of taxes.
---------------------------------------------------------------------------
    \54\The Business Activity Tax Simplification Act of 2011: Hearing 
on H.R. 1439 Before the Subcomm. on Courts, Commercial and Admin. Law 
of the H. Comm. on the Judiciary, 112th Cong. 37 (2011) (Statement of 
R. Bruce Johnson).
---------------------------------------------------------------------------

 IV. H.R. 1439 WILL INCREASE LITIGATION COSTS FOR SMALL BUSINESSES AND 
                           STATE GOVERNMENTS

    H.R. 1439 will not minimize litigation, as its supporters 
contend.\55\ Instead of providing a clear physical presence 
standard that will decrease litigation, H.R. 1439 ``contains 
numerous undefined terms that will generate considerable 
litigation''.\56\
---------------------------------------------------------------------------
    \55\Id. at 3 (Statement of Representative Bob Goodlatte).
    \56\Id. at 212.
---------------------------------------------------------------------------
    Two simple examples highlight the many uncertainties that 
H.R. 1439 creates. First, H.R. 1439 describes ``physical 
presence'' as ``[u]sing the services of an agent (excluding an 
employee) to establish or maintain the market in the State, if 
such agent does not perform business services in the State for 
any other person during such taxable year.''\57\ The 
legislation leaves to the courts to interpret the vague terms 
``establish or maintain,'' ``perform business,'' and 
``services.'' Second, H.R. 1439 allows a business to ``conduct 
limited or transient business activity'' within a state without 
establishing a physical presence.\58\ According to an analysis 
of the Business Activity Tax Simplification Act by the 
Federation of Tax Administrators, a court will likely have to 
interpret the terms ``limited'' and ``transient'' because they 
are undefined in the legislation:
---------------------------------------------------------------------------
    \57\H.R. 1439, Sec. 3(b)(1)(B).
    \58\H.R. 1439, Sec. 3(b)(2)(B).

        [A] company's activity could be permanent but limited 
        in scope, or unlimited in scope but not permanent, and 
        still be protected from taxation. . . . For example, a 
        corporation whose charter or application to conduct 
        business in the state indicates that it will engage 
        only in banking activities and nothing else (so that 
        its activities are ``limited,'' as ``restricted in . . 
        . scope'') could be protected from taxation even if in 
        the state permanently, as could a corporation whose 
        charter or application indicates that it will engage in 
        every activity in the state that a corporation may 
        legally perform, but will do so only for 10 years (so 
        that its activities are ``transient,'' as ``not 
        permanent'').\59\
---------------------------------------------------------------------------
    \59\Matt Tomalis, Some Fatal Flaws of S. 1726, H.R. 5267 and All 
BAT Nexus Bills, State Tax Notes, Mar. 3, 2008, at 691-703, 695.

    Given these and other substantial new limitations on their 
ability to raise revenue, states undoubtedly will litigate to 
establish the narrowest interpretations of the terms within 
H.R. 1439.\60\ This increased litigation will lead to more 
legal costs for states and multi-state businesses, contrary to 
proponents of the bill.
---------------------------------------------------------------------------
    \60\For example, according to Oregon Governor Kitzhaber, 
``enactment of H.R. 1439 would result in substantial litigation and 
uncertainty as the new boundaries it would create are refined in the 
courts.'' Letter from Oregon Governor John A. Kitzhaber, MD to the 
Oregon Congressional Delegation (Aug. 29, 2011) (on file with the House 
of Representatives Committee on the Judiciary, Democratic Staff).
---------------------------------------------------------------------------

                               CONCLUSION

    H.R. 1439 is irresponsible legislation that will have a 
devastating impact on state revenues, force state governments 
to eliminate essential governmental programs and services, 
burden local taxpayers, and favor large multi-state businesses 
over local businesses. For all of these reasons, we 
respectfully dissent.

                                   John Conyers, Jr.
                                   Jerrold Nadler.
                                   Melvin L. Watt.
                                   Steve Cohen.
                                   Judy Chu.

                                  
