Timeline

Rep. Goodlatte (R-Va.) introduces H.R. 1439. Reintroduces bill dealing with nexus required for state business activity taxes on non-resident companies. In July 2011, Judiciary Committee approves measure and sends it to full House, where it awaits action.

Rep. Rick Boucher (D-Va.) introduces H.R. 1083, the Business Activity Tax Simplification Act. Reintroduction of bill dealing with nexus required for state business activity taxes on non-resident companies.

July – November 2008 – Discussions, organized and moderated by the House Judiciary Committee, occur between the business community and the states toward a compromise solution to the business activity tax physical presence issue.

The parties meet four times. After the fourth meeting, the states refuse to participate in any further talks, saying that they prefer the status quo to federal legislation.

Rep. Rick Boucher (D-Va.) introduces H.R. 5267, the Business Activity Tax Simplification Act that reintroduces the bill dealing with nexus required for state business activity taxes on non-resident companies.

Sen. Charles Schumer (D-N.Y.) introduces S. 1726, the Business Activity Tax Simplification Act. The legislation reintroduces the bill dealing with nexus required for state business activity taxes on non-resident companies.

Report concludes, among other things, that enactment of the legislation would increase federal revenue by $106 million in the first year after enactment, by $1.2 billion over a five-year period and by $3.1 billion over a ten-year period.

Sen. Charles Schumer (D-N.Y.) introduces S. 2721, the Business Activity Tax Simplification Act. The legislation requires an out-of-state company to have a physical presence in a state before the state can impose income taxes, franchise taxes, business license taxes, and other business activity taxes. Defines physical presence. Expands the protections of P.L. 86-272, which prohibits states from imposing a net income tax on businesses whose activities in their jurisdiction are limited to soliciting sales of tangible personal property, to include intangible property and services; also extends the prohibition to other business activity taxes. Referred to the Senate Finance Committee.

Representatives of the states and the business community and congressional staffers meet to discuss a possible compromise on the business activity tax nexus issue. No compromise is reached because representatives from various state groups announced that they would not discuss any proposal that included the concept of physical presence.

Rep. Bob Goodlatte (R-Va.) introduces H.R. 1956, the Business Activity Tax Simplification Act. Reintroduces bill dealing with nexus required for state business activity taxes on non-resident companies. House Rules Committee reports bill to the full House for consideration in 2006.

The National Conference of State Legislatures and other state government organizations establish a Working Group consisting of state government and business representatives to work on legislation to resolve the business activity tax nexus issue. The states stopped participating in the meetings before the parties reached any resolution on the issues.

Rep. Bob Goodlatte (R-Va.) introduces H.R. 3220, the Business Activity Tax Simplification Act. The legislation requires an out-of-state company to have a physical presence in a state before the state can impose income taxes, franchise taxes, business license taxes, and other business activity taxes. Defines physical presence. Expands the protections of P.L. 86-272, which prohibits states from imposing a net income tax on businesses whose activities in their jurisdiction are limited to soliciting sales of tangible personal property, to include intangible property and services; also extends the prohibition to other business activity taxes. Referred to House Judiciary Committee; hearing held in Subcommittee on Commercial and Administrative Law in 2004.

Rep. Bob Goodlatte (R-Va.) introduces H.R. 2526, the Internet Tax Fairness Act, that prohibits, as a general rule, a state or locality from imposing a business activity tax on any person unless such person has a substantial physical presence in the taxing jurisdiction. Defines substantial physical presence. Referred to the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law. The bill is reported to the full Committee.

Sen. Mike Enzi (R-Wyo.) introduces S. 1542, the Internet Tax Moratorium and Equity Act. The legislation includes a Sense of the Congress resolution that before the conclusion of the 107th Congress, legislation should be enacted to determine the appropriate factors for establishing whether nexus exists for state business activity tax purposes. Measure is referred to the Senate Commerce, Science and Transportation Committee.

Sen. Judd Gregg (R-N.H.) introduces S. 664, the NET FAIR Act, that reintroduces measure to prohibit a state from imposing any business activity tax or sales and use tax unless the taxpayer has a physical presence in such state. Measure is referred to the Senate Finance Committee.

Federal Advisory Commission on Electronic Commerce (ACEC) delivers report to Congress. The ACEC was created by Congress to recommend a solution to sales and business activity tax issues relating to electronic commerce. The Commission’s members included three governors, heads of several major information technology corporations and other government and business leaders from across the nation. Virginia Governor James S. Gilmore, III, chaired the Commission. The ACEC “majority report” concluded that a company should have some level of physical presence before a state could impose business activity taxes and income tax reporting and payment obligations. The ACEC determined that certain activities would not be considered physical presence for this purpose, and specifically carved out certain activities from the nexus consideration.

Sen. Judd Gregg (R-N.H.) introduces S. 2401, the New Economy Tax Simplification Act. The legislation prohibits a state from imposing business activity taxes and sales and use taxes unless the taxpayer has a substantial physical presence in the state, defines physical presence. The measure is referred to the Senate Finance Committee.

Pursuant to recommendations made during the 1996 Boston Conference, the business community and the states held a series of meetings to try to resolve issues relating to state taxation of electronic commerce. The business community wanted to couple any discussion about sales tax nexus with a discussion about a business activity tax nexus (clarifying that BAT nexus requires substantial physical presence), but government participants refused. During the final meeting in July 1999, the group failed to approve any part of the draft of its final report.

Several state organizations, including the Federation of Tax Administrators, National Conference of State Legislatures, Multistate Tax Commission and National Tax Association sponsored a conference on the Taxation of Telecommunications and Electronic Commerce. They agreed that taxation of electronic commerce at the state and local levels raises a number of significant problems that require a uniform, equitable and administrable solution on a nationwide basis. Participants agreed to work together to try to resolve such issues through the drafting of a uniform state statute.

The Court applied the four-part test it articulated in Complete Auto Transit in the context of sales and use taxes, holding that a taxpayer must have a “substantial nexus” with the state for purposes of state taxation. It found that for sales and use taxes, the standard could only be met when the corporation has a “physical presence” in the taxing state.

The Court synthesized decades of jurisprudence to craft a four-part test to determine whether a state tax imposed on transactions in interstate commerce violates the Commerce Clause. It decided, in part, that in the absence of congressional action, the Commerce Clause permits taxation of out-of-state businesses only when, among other things, the tax is applied to an activity that has a substantial connection to the taxing state.

The Court held that a state imposes an unconstitutional burden on interstate commerce when it attempts to force tax collection or remittance responsibilities on an out-of-state entity that lacks a physical presence in the taxing state.

In response to a U.S. Supreme Court ruling issued earlier the same year, Congress enacts P.L. 86-272 to prohibit state and local governments from imposing income taxes on businesses whose activities within the state are limited to soliciting sales of tangible personal property, provided that such orders are accepted outside the state and the goods are shipped or delivered into the state from elsewhere. Despite the stated intention of Congress that the law was to serve as a temporary solution, and the shift in the U.S. economy since 1959 from the production of tangible goods to services and intangibles, the law remains on the books to this day.