Some states – starved for revenue and reluctant to impose higher taxes on their residents – have made a practice of imposing corporate income taxes on businesses that aren’t even located there. Companies that fall victim to such unfair taxation are either forced to pay up or engage in costly and time-consuming lawsuits. The practice is outrageous: it’s bad for the economy and job growth, it’s confusing and costly for employers and it clogs the courts with unnecessary litigation.
Here are few examples:
- Michigan recently came after Florida boat manufacturer Monterey Boats with a $376,000 tax assessment even though the company has no property, sales offices, bank accounts or employees there. In fact, the company’s sales in the state for the year in question were $100,000 less than the surprise tax assessment. The state issued a 2010 gross receipts tax notice for that amount – a crushing tax bill for a small company of 250 employees. Read more.
- Rice ingredients producer Sage V Foods was slapped with a $180,000 tax assessment from the state of Washington for merely crossing that state’s borders. The state sent the company a seemingly innocuous questionnaire about its business dealings there, and afterward began an extensive, seven-year audit. The end result was a massive tax bill – with interest and penalties. Sage V Foods President Pete Vegas is now on his second appeal of the assessment. Read more.
- FASTSIGNS, a graphics and communications franchisor based in Carrollton, Texas, has been fighting off tax assessments from numerous money hungry states in recent years including Arizona, California, Missouri, Oregon, Pennsylvania, South Carolina and Wisconsin. FASTSIGNS has no direct sales, no property, no employees or even any inventory in those states, yet the tax bills keep coming. Last year, in fact, FASTSIGNS ended up writing more than $115,000 in checks to those states. As a franchisor, FASTSIGNS collects royalties and fees from franchisees across the country but has no real assets in most states. Read more.
- Outdoor Living Brands, based in Richmond, Virginia, has been whacked recently by eight states for tax payments, even thought it doesn’t have any substantial physical connection to any of those states. There’s no clear standard for these types of business activity taxes across the country so it’s unclear when or if a tax bill is coming. Outdoor Living Brands is a franchisor of outdoor products and services with 195 franchisees in 34 states, most of whom work out of their home offices. Although the total tax assessments on Outdoor Living Brands have only been a few hundred dollars so far, they are only going to grow with time as states become increasingly starved for revenue. Read More.
- For nearly a quarter of a century, the Narr family has owned and operated LTL Service of Wisconsin, Inc., a trucking company in South Milwaukee. In 2008, the firm received a questionnaire from Nebraska. It answered the questionnaire honestly that it did no business in the state and had no inventory, customers, property or income there. But it did admit that its trucks from time to time traveled through the state. That was a mistake. The company was assessed for back taxes of $1,321.29, including penalties and interest, for 2008, 2009 and 2010. Nebraska eventually waived the penalties and interest, but the $979 payment still hurt. “It is so crazy that Nebraska, or any other state, can force a Wisconsin company to pay corporate income tax when we don’t even earn a penny in that state,” said Nancy Narr. “At least this small, family business cannot afford to waste money and time on such nonsense.”
- New Jersey assessed $150,000 in taxes against Smithfield Foods when one of its refrigerator trucks was stopped as it was driving through the state. Smithfield Foods was ordered to pay up immediately to get back its truck. Read more.
- Prohelp Systems, Inc., a small South Carolina software company owned and operated by a husband and wife (annual sales of approximately $100,000) sells software out of their home to customers located in many states throughout the U.S. The company has a physical presence only in South Carolina and Georgia. But the state of New Jersey asserted that a one-time sale of software to a New Jersey customer created sufficient contacts with the state to justify imposing business-activity taxes on the company. The state assessed a minimum of $500 per year in corporate taxes on the company and a $100 per year corporate registration fee for as long as the company’s software continues to be used in the state. Read more.
- In Louisiana, the revenue department has threatened to assess business activity taxes on several out-of-state companies because they broadcast programming in the state. Louisiana argues that those out-of-state companies are exploiting the state’s market because the programming is seen and/or heard by individuals in Louisiana. By way of contrast, a federal court previously concluded that a Mexican broadcaster that broadcast programming into the U.S. but was located entirely in Mexico would not be subject to federal corporate income tax. Read more about the case.
- In Alabama, the revenue department attempted to tax the income of Chase Manhattan Bank based merely on the fact that it solicited applications from residents of Alabama for credit cards, even though the bank had no office, branch or employee in Alabama. Read more about the case.
- In Tennessee, the revenue department attempted to tax J.C. Penney National Bank based on its solicitation of new credit card customers in Tennessee through direct mailings. Tennessee based its authority solely on the presence of the credit cards and the “substantial privilege of carrying on business” in Tennessee. The Tennessee Court of Appeals found that the imposition of those taxes was unconstitutional because the bank did not have a physical presence in the state. Read more about the case.
- Texas tried to tax the income of an Iowa company that licensed patents for use in the state but which had no property or employees in Texas, did not distribute goods or services in Texas and did not transact any business in Texas. The Texas Court of Appeals, however, ruled against such tax since the Iowa company had no physical presence in the state. Read more about the case.
- The West Virginia Supreme Court has ruled that West Virginia may tax the income of a bank that has no physical presence in the state but does earn income from some customers located there. Read more about the case.
- A recent Oregon law says that even “intangible” property, such as intellectual property, creates a sufficient connection to the state to justify taxing out-of-state companies. The law asserts that maintaining intangible property or receiving franchise fees or royalties from Oregon sources would subject an out-of-state company to taxation, even if services are performed outside of Oregon.
- Maine has asserted that it can tax an out-of-state manufacturer with no physical presence in the state simply based on the fact that the company pays an independent dealer for warranty work performed on its products in Maine.
- Washington State has asserted that it can tax the income of an out-of-state company based on its participation in a regional trade association, arguing that such membership demonstrates that the company maintains a market in the state, which constitutes a “significant activity” there.
- New Jersey, Washington and other states claim that they can impose business-activity taxes on out-of-state companies based solely on the fact that an independent dealer keeps and then resells the company’s products in those states.
Has your business been a victim of unfair state taxation? If so, contact us.
Read more on the extent of the problem.