CRAFT is a group of businesses and trade organizations concerned with the recent
trend of aggressive actions by state taxing authorities that effectively interfere with the
conduct of interstate commerce.
PROBLEM: The American economy has changed dramatically since the enactment of Public
Law 86-272 in 1959. As a result, Public Law 86-272 must be modernized to address the shift
in the focus of the economy from goods to services and intangibles, the increased burdens
being imposed by local taxing jurisdictions, and the proliferation of non-income based
business activity taxes. Increasingly, State and local taxing officials are attempting to apply
“economic nexus” standards in an aggressive effort to collect business activity taxes from
businesses located in other States – even though such businesses receive no appreciable
benefits from the taxing jurisdiction. This has:
- led to unfairness and uncertainty
- generated contentious, widespread litigation
- hindered business expansion, as businesses shy away from expanding their
presence in other States or construct otherwise inefficient business structures, for fear
of exposure to unfair tax burdens, and
- affected international competitiveness
The efforts by States and localities to expand their taxing jurisdiction to cover activities
conducted in other jurisdictions will constitute an even greater burden on the business
community’s ability to conduct business if current law is not modernized and if clear and
equitable standards that are consistent with constitutional principals are not implemented.
Left unchecked, this taxation without representation and unwarranted expansion of
the States’ and localities’ power to impose business activity taxes will have a chilling effect on
the entire economy as tax burdens, compliance costs, litigation, and uncertainty escalate.
PROPOSED SOLUTION: Businesses believe that they should continue to pay business
activity taxes in those States where they receive direct benefits and protections, such as
police, fire, sanitation, and public schools, from the State government, i.e., where they
have physical presence. Businesses thus support federal legislation, such as H.R. 1083,
the Business Activity Tax Simplification Act of 2009 (“BATSA”), that would modernize current
law and provide definite, specific standards to govern when States may impose a
business activity tax. BATSA’s nexus standard would:
- create the kind of legally certain and stable business climate that encourages
businesses to make business investments, expand interstate commerce, grow the
economy, and create new jobs, and
- ensure a level playing field for taxpayers by using a bright-line standard analogous
to the permanent establishment standard used by the United States in international
H.R. 1083 establishes a threshold that is even lower than that set by the “permanent
establishment” standard used by the federal government in international tax treaties with its
trading partners. H.R. 1083 would modernize current law and establish a clear and equitable
bright line standard by accomplishing the following:
- Modernization of Public Law 86-272. Public Law 86-272 would be amended to apply
to all sales and transactions, not just sales of tangible personal property and to all
business activity taxes, not just net income taxes.
- Physical Presence Nexus. States and localities would be authorized to impose direct
business activity taxes only on those businesses that have a physical presence
(employees, agents, or property) within the taxing jurisdiction.
- Definition of Physical Presence. Under H.R. 1083, a business has physical presence
in a state if it assigns one or more employees to the state, uses an exclusive agent in
the state or leases or owns tangible property or real property in the state.
- Taxes Covered. H.R. 1083 covers those taxes imposed directly on a business such as
corporate income taxes, gross receipt taxes, franchise taxes, single business taxes,
capital stock taxes, and business and occupation taxes. H.R. 1083 does not apply to
personal income taxes, direct or indirect transaction taxes (e.g., sales and use taxes
based on gross receipts) or to State taxes based on gross insurance premiums.
- Taxable Activities. States and localities would be authorized to impose business
activity taxes only on companies that lease or own property, employ employees, or use
the services of an in-state person in a taxing jurisdiction.
- Protected Activities in Addition to Solicitation. In addition to solicitation, H.R. 1083
also protects businesses from taxation that merely furnish information to customers or
affiliates in the state, cover events or gather information in the state, or engage in
business activity directly related to the potential or actual purchase of goods or
services within the state if the final decision to purchase is made outside the state.
- Attribution of Presence. The activities and/or presence of an in-state person may be
attributable to a business only when the in-state person performs activities that
enhance or maintain the market in the state for the out-of-state business on an
- De Minimis Physical Presence. Physical presence does not include presence in a
state for less than 15 days in a taxable year, or presence in a state to conduct limited
or transient business activity.