House Judiciary Committee Passes Three State Tax Bills
On June 17, the House of Representatives Judiciary Committee approved the markup of three bills dealing with interstate tax rules in the United States on individual income tax, business activity taxes, and sales tax on digital goods.
The Mobile Workforce State Income Tax Simplification Act is a bipartisan measure that would provide a uniform framework for when states may tax nonresident employees who travel to the taxing state to perform work.
States currently have widely varying and inconsistent requirements on the withholding of income tax and filing of personal income tax returns when employees traveling to another state temporarily. Employees may be legally required to file an income tax return in every state in which they have conducted business, even if they were there for only one day.
The legislation provides that an employee’s earnings remain subject to full tax in the state of his or her residence. An employee would only be subject to another state’s taxes if he or she works there more than 30 days per calendar year.
A second bill, the Business Activity Tax Simplification Act (BATSA), would similarly stop states from imposing corporate income taxes and gross receipts taxes on any business with a physical presence in a state for only a short period.
It has been noted that states have begun shifting to an “economic nexus” standard, imposing taxes on businesses with no connection to the state except that they have sales there. This is said to add complexity, litigation, compliance costs, and uncertainty. It also imposes taxes on companies who had no expectation of owing taxes in that state because they have no property or employees resident there.
The BATSA therefore codifies “physical nexus,” defined as presence in a state for more than 14 days, as a prerequisite to a state imposing business activity taxes on out-of-state companies.
The prospect raised by this bill has been contested, as states overall could lose some five percent of their corporate tax revenue. However, Committee Chairman Bob Goodlatte (R – Virginia) commented that the BATSA “will provide fairness, minimize litigation, and create the kind of legal certainty and stable business climate that frees up funds for businesses of all sizes to make investments, expand interstate commerce, grow the economy and create new jobs.”
Finally, the Digital Goods and Services Tax Fairness Act would prevent the multiple taxation of digital goods by setting sourcing rules for the purchase of digital goods and services. The object is to avoid cases where states could try to tax transactions on various bases – for example, where the purchaser lives, where the selling business is located, or where its warehouse is located.
The bill provides that only the state where a customer is located and primarily used the good or service can tax a transaction. If that is unknown, the delivery location is to be used, and if that is unknown, the location of the seller is used.
Goodlatte pointed out that “in today’s growing digital economy it is critical that there be clear rules of the road to protect consumers from multiple taxation. The passage of this bill would ensure this important sector of our economy can continue to grow unimpeded by the specter of unfair multiple-taxation.”
The Committee has now passed all three bills for consideration by the full House.
