May 17, 2012

Unfair tax hurts small businesses

by: Catherine Monson, Special Contributor

Austin-American Statesman, Published: 10:46 a.m. Thursday, May 17, 2012

States are getting desperate for revenue, a fact I know firsthand. They hunt down out-of-state businesses like mine and slap them with massive tax assessments.

My company, Fastsigns, is a 27-year-old graphics and visual communications franchisor based in Carrollton. It’s a small business with 109 employees. So when a state unexpectedly sends us a tax bill for thousands of dollars — a state in which we don’t have any employees, offices or even a stick of inventory — it’s a very big deal and an expensive problem.

Seven states — Arizona, California, Missouri, Oregon, Pennsylvania, South Carolina and Wisconsin — have come after us in the last few years. We ended up writing more than $115,000 in checks to those states. And as I write this, an auditor from Washington state is sitting in our offices looking for more money to force us to hand over. It’s outrageous. We have almost nothing to do with those states. We have no direct sales there. As a franchisor, we collect royalties and fees from our franchisees across the country; we have no real assets in most states.

Yet these days, states are increasingly trying to tax our franchise licenses. We can’t plan for these taxes. We don’t know whether a state is going to send us a bill. And when one does, it’s often an unhappy surprise.

Fastsigns has paid these tax assessments because doing so is less expensive than than filing legal challenges. Litigation would require man hours and lawyers we don’t have.

But if the problem continues to get worse — and I think it will — we soon might not be able to write a check to every state that comes knocking. With the taxes we paid last year, we could easily have hired another employee. In this economy, shouldn’t we be encouraging businesses to grow rather than stripping them of funds for expansion?

We know we aren’t alone. There are more than 825,000 franchise businesses in the U.S., and I am sure that many of them are the targets of state tax collectors. Combined, these franchisors generate $2.1 trillion in revenue and employ nearly 18 million people. That’s significant.

Fastsigns has 470 franchised locations across the country; each of these dutifully pays federal and state income taxes to the states where they are located. And that should be enough. Can you imagine if we — as the franchisor — were subject to income taxation by every state in which we have a franchisee? I’m not sure we would survive.

Luckily, Congress has a solution. The bipartisan Business Activity Tax Simplification Act would stop states from imposing unfair, unjustified corporate income taxes on U.S. businesses. It would make clear that states can only impose corporate income and similar taxes on companies that have a meaningful physical presence in that state. It would set a uniform standard for all states so businesses wouldn’t have to wonder year to year what their tax liability might be.

The act, cosponsored by U.S. Reps. from Virginia Bob Goodlatte, a Republican, and Bobby Scott, a Democrat, cleared the House Judiciary Committee last summer and awaits a vote in the full House. The Supreme Court has made plain that a physical presence — not an economic presence — is needed for a state to impose corporate income taxes on companies like ours. Now Congress can put that into law.

Fastsigns is a small but growing company. We pay the appropriate taxes to the states where we have employees and property. We aren’t trying to avoid paying our fair share. But we believe we are being asked to pay more than our fair share.

Congress keeps talking about fixing the economy. Enacting the Business Activity Tax Simplifcation Act would be a good start.

Monson is the chief executive officer of Fastsigns.