EXAMPLES OF ACTUAL & POTENTIAL AGGRESSIVE STATE ACTIONS AND
POSITIONS AGAINST OUT-OF-STATE COMPANIES
· A small South Carolina software company owned by a husband and wife (annual sales
of approximately $100,000) sells software out of their home to customers located in many
states throughout the U.S. The software sales include a license agreement between the
company and the purchaser. However, the company has no physical presence in any state
except South Carolina and Georgia. Recently, New Jersey revenue authorities asserted that
the software licenses created sufficient contacts with the state to justify imposing business
activity taxes on the company.
Despite the fact that the company’s annual revenues from customers in New Jersey over the
past few years have been as low as $49, New Jersey’s claim against the company would
require that the company pay a $500 per year minimum corporate tax and a $100 per year
corporate registration fee for as long as its software is being used in the state. One can only
imagine the result if each state imposed similar taxes on this mom and pop operation.
· The city of Houston, Texas attempted to impose tax on offshore oil rigs located outside
territorial waters or in foreign jurisdictions merely because they were owned by oil companies
that were located in the city. The adoption of this approach by states for business activity tax
purposes would have significant consequences for the business community and would raise
serious constitutional issues.
· Certain localities have attempted to impose local personal property taxes on property
orbiting in space. For example, the County of Los Angeles, California attempted to impose a
property tax on a county-based company that owned eight communications satellites
permanently orbiting in space. In addition, the city of Virginia Beach, Virginia also attempted
to impose local personal property tax on three transponders attached to satellites orbiting in
space that were owned by a city-based cable company. If states used the same approach to
try to impose business activity tax, on the basis that the satellite creates a “physical
presence” or because a business generates income in the state by passing over the state,
there would be significant consequences for many industries.
· In Louisiana, the revenue department has threatened to assess business activity taxes
on several out-of-state companies based on the fact that those companies broadcast
programming into the state. The rationale is that these out-of-state companies are exploiting
the Louisiana market because the programming is seen and/or heard by individuals in
· In Alabama, the revenue department attempted to impose tax on an out-of-state bank
because the bank issued credit cards to Alabama persons and leased two MRI machines in
· In Tennessee, the revenue department attempted to tax an out-of-state company
engaging in credit card solicitation activities through direct mailings. The department based
their authority solely on the presence of the credit cards and the “substantial privilege of
carrying on business” in Tennessee. It has been reported that Tennessee, despite having
lost this issue in the Tennessee courts, continues to assert this position. In addition,
according to a recent survey of top state taxing officials, nineteen other states assert that a
business could be subject to tax in the state merely for issuing credit cards to in-state
· A Minnesota law would have declared that a sufficient connection with the state exists
when out-of-state health care providers provide care to 20 or more Minnesotans or when
they solicit business from potential customers in Minnesota, regardless of whether the health
care was provided outside of Minnesota.
· In California, the tax department responsible for sales and use taxes attempted to
impose use tax collection obligations on an out-of-state company whose only contacts with
California consisted of entering into advertising contracts with California broadcast and cable
television companies on the basis that the contracts “converted” the broadcast and cable
companies into representatives of the out-of-state business. The same “logic” could be
applied by states to try to impose business activity tax on businesses that merely advertise in
· In Florida, the tax department attempted to impose sales tax on an out-of-state
business that provided financial news and information using high-speed electronic
transmission to a subscriber’s video display terminals on the grounds that a sale of tangible
personal property occurred because the images were perceptible to the senses. States
could apply similar “logic” to try to impose tax on businesses delivering electronic information
into the state.
· In Missouri, the tax department attempted to impose sales tax on an out-of-state
restaurant franchisor because it placed orders for equipment on behalf of its Missouri
franchisees, even though the franchisor never acquired title to or ownership of the
equipment. States could apply similar “logic” to try to impose business activity tax on the out-
· The Multistate Tax Commission has endorsed and is actively promoting the adoption of
its factor-based nexus proposal (as well as the repeal of P.L. 86-272). Under such standard,
a state would be able to impose a business activity tax on any business whose factors
exceed certain thresholds; the thresholds are $50,000 in property, $50,000 in payroll, or
$500,000 in sales. Under the current physical presence standard, a state may tax
companies with property and payroll in a jurisdiction but the MTC would go further by
allowing states to tax businesses that only have customers in a jurisdiction.
· A recent Oregon regulation takes the position that the presence of intangible property
creates a sufficient connection with the state to justify Oregon imposing taxes on out-of-state
companies. The regulation would mean that simply maintaining intangible property or
receiving franchise fees or royalties from Oregon sources would subject an out-of-state
company to taxation, even if services are performed outside of Oregon.
· A 2004 survey of top state taxing officials shows that eight states take the position that
a business whose trucks merely pass through the state six or fewer times in a year – without
picking up or delivering goods – have sufficient connections with the state to justify imposing
business activity taxes on that company.
· According the 2004 survey, thirteen states assert that an out-of-state company merely
having a website on someone else’s server in the state creates a sufficient connection to
justify imposing business activity taxes on that out-of-state company.
· According the 2004 survey, four states believe that merely registering to do business in
a state is a sufficient connection to justify taxation on an out-of-state business.
· The 2004 survey indicates that twelve states believe that an out-of-state company
listing a telephone number in a local phone book located in the state is a sufficient
connection with the state to justify taxation.
· The 2004 survey indicates that five states believe that an out-of-state company having
a bank account with an in-state bank is sufficient connection with the state to justify taxation.
· The 2004 survey indicates that six states believe that an out-of-state company
negotiating and/or obtaining a bank loan from an in-state bank is (or could be) a sufficient
connection with the state to justify taxation.
· Over half of the states in the 2004 survey stated that they believed that when an out-of-
state corporation licenses trademarks to an unrelated entity within the state, the out-of-state
company would be subject to taxation by the state.
Coalition to Protect Interstate Commerce