Weekly Round-Up: Congress Considers Income Tax Nexus Bill in the ‘Shadow of Ground Hog Day’

In the movie “Ground Hog Day,” an arrogant weatherman must repeat the same day over and over until he re-examines his life and adopts a different outlook.   

Ground Hog Day fell on February 2nd this year, but the first half of the movie plot seemed to be playing out at a recent hearing on the proposed federal Business Activity Tax Simplification Act of 2013 (H.R. 2992) (“BATSA”). There were few signs of anyone re-examining their position though.

The bill aims to create a predictable standard for nexus-causing activity in interstate commerce. The legislation would also expand the safe harbor protection against income tax nexus for certain activities relating to the interstate sales.

Similar bills have been introduced in previous sessions. House Judiciary Committee Chairman Bob Goodlatte (R-Va.) introduced versions in 2011 and 2006, and he is co-sponsor of the current legislation, noted Casey Wooten in her story about the current proposal for Bloomberg BNA’s Daily Tax Report .

Testimony for and against the BATSA bill was heard by the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on February 26.

Among those testifying for the measure was the Tax Foundation’s Joseph Henchman, who submitted a prepared statement explaining that BATSA legislation was necessary because the states do not provide taxpayers with clear nexus rules. To illustrate his point, he referred to the following findings in Bloomberg BNA’s 2013 Survey of State Tax Departments, and noted that when each state was asked if:

  • attending a trade show creates nexus, 10 states said yes, 28 states said no, 5 states declined to answer, and 5 states said that it “depends.” 
  • having one non-sales employee telecommuting from the state creates nexus, 33 states said yes, 7 states said no, and 8 states declined to answer.    
  • a catalog mailing to residents of a state creates nexus, despite the similarity  to the scenario of Pub. L. No. 86-272, 7 states said yes and 2 states said “it depends.”

One result of the varied state positions is that the tax consequences of interstate transactions can be difficult to determine. Proponents of the bill say that the modern digital economy means that small businesses can perform interstate commerce more easily, and they shouldn't be hindered by vastly differing state tax regimes, Wooten’s story noted.

But state governments generally oppose the legislation, Wooten’s story explains, because they believe they would lose revenue from the ban on collecting net income tax and on imposing state-specific business activity taxes. “We have to oppose this bill,” said David Quam, deputy director of the National Governors Association, at the hearing.  “We have to oppose it because it does tread on state sovereignty and at the end of the day it does do harm and it does harm the states.”

Additional information on the hearing can be found in a new alert by PwC .

In other developments…

Inside the New York Budget Bill Part Two: Tax Base and Income Classification , a new report by McDermott Will & Emery

Most States Have No Rules for Independent Tax Preparers , according to Stateline, The Daily News Service of The Pew Charitable Trusts

Summaries of Governors' State of the State Addresses , by The National Association of State Budget Officers

By Steven Roll
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