September 14, 2012

Revenue-hungry states target out-of-state businesses

September 12, 2012 | 6:00 pm
The Washington Examiner, Editorial

With Congress seemingly paralyzed by partisan gridlock, it’s good to see a Republican and a Democrat from a battleground state working together to promote the common good. That’s what Virginia Reps. Bob Goodlatte, R, and Bobby Scott, D, did last year when they co-sponsored the Business Activity Tax Simplification Act. The purpose of the bill is to prohibit states from imposing corporate income taxes on companies with no physical presence within their borders. It is intended to protect businesses from tax grabs by 30 revenue-hungry states.

Corey Schroeder, CFO of Outdoor Living Brands — a small Richmond design firm that licenses intellectual property to franchisees — told The Washington Examiner that even though all 30 employees and all physical assets of his company are located in Virginia, he is forced to file corporate income tax returns in Arizona, Minnesota, North Carolina, Ohio, South Carolina, Texas and Wisconsin, at a cost exceeding $40,000 annually. Most small companies cannot afford the extensive legal costs needed to challenge this particularly brazen form of taxation without representation.

More and more state officials are targeting out-of-state businesses because it is less politically damaging than raising taxes on actual constituents, says Maggi Lazarus, an attorney representing the Coalition for Interstate Tax Fairness and Job Growth. But the practice has led to many abuses.

For example, a small graphics company in Texas was forced to pay $115,000 in corporate income taxes to seven states in which it has no physical presence. New Jersey regularly impounds trucks traveling along its interstates until their out-of-state owners pay up. And a Florida boat manufacturer with no property, employees or bank accounts in Michigan was assessed $376,000 in gross receipts taxes on just $100,000 of annual sales in that state. This kind of interference in interstate commerce is exactly what the Commerce Clause was intended to prevent.

In his April 2011 testimony before a House subcommittee, Goodlatte noted the bill would “provide a ‘bright line’ test to clarify state and local authority to collect business activity taxes from out-of-state entities” without affecting states’ rights to impose taxes or go after companies that try to use shell subsidiaries or other tricks to avoid paying their fair share. The only difference is that their enforcement activity would be confined to companies that have an actual physical presence within their borders.