H.R. 1956, Business Activity Tax Simplification Act of 2005

Section-By-Section Analysis

SEC. 1  Short Title

This section entitles the bill as the “Business Activity Tax Simplification Act of 2005.”

SEC. 2 removal of certain limitations on the application of public law 86-272

(a)  Solicitations with Respect to Sales and Transactions of Other Than Tangible Personal
Property.  This subsection removes the term “tangible personal property” from current Public
Law 86-272 and adds the concept of “fulfilled” for sales that are not “shipped or delivered.”

Purpose:  This section modernizes the application of Public Law 86-272 to include solicitation
in connection with all sales and transactions, not just sales of tangible personal property.  
This ensures that the protections of Public Law 86-272 fit with today’s economy.

(b)  Application of Prohibitions to Other Business Activity Taxes.  This subsection extends the
application of Public Law 86-272 to all business activity taxes.

Purpose:  This section ensures that Public Law 86-272 extends to taxes like New Jersey’s
Business Corporation Tax and Michigan’s Single Business Tax, but not to personal income
taxes, gross premium taxes imposed on insurance companies, or transaction taxes measured
by gross receipts, such as the New Mexico Gross Receipts and Compensating Tax Act.

(c)  Effective Date of Subsection (a) Amendments.  This subsection provides that the
modernization provisions of subsection (a) become effective for taxable years beginning on
or after January 1 following the date of enactment.

SEC. 3 Jurisdictional standard for State and local net income taxes and other business
activity taxes

(a)  In General.  This subsection prohibits a State from imposing a business activity tax on
any person unless such person has a physical presence in the State.

Purpose: This subsection establishes the physical presence nexus standard for business
activity taxes.

(b)  Requirements for Physical Presence.  This subsection establishes the situations in which
a person has a physical presence in the state.  A person will have physical presence if, for a
period of more than 21 days:

Purpose: This subsection provides the 21-day quantitative de minimis standard, during which
time a person may have property or employees in a State without being subject to business
activity taxes.

(1) The person has employees in a State.  Excluded from the 21-day determination are
employees engaged in purchasing, news gathering, or charitable activities, attending
conferences, or meeting with government officials.

Purpose: This paragraph establishes a qualitative de minimis standard whereby a business
may have employees physically present within a State for purposes of patronizing the State’s
markets and, thus, helping the State’s economy, i.e., not exploiting the State’s market for the
business’ own sales benefit.   

(2) The person uses a third party to provide services that enhance or maintain the person’s
market in a State, unless the third party performs market-enhancing services for at least one
other business.  

Purpose: This paragraph clarifies that attribution of physical presence (i.e., when the
physical presence of a third party [non-employee] may be attributed to an out-of-state
business) is only appropriate if the third party performs market-enhancement activities in the
State solely on behalf of the out-of-state business.  

(3) The person leases or owns tangible personal property or real property in a State.  
Excluded from the 21-day determination is property being assembled, manufactured, or
tested in the state, marketing materials distributed by mail or common carrier, and property
ancillary to any activities excluded under Sec. 3(b)(1).

Purpose:  This paragraph establishes a qualitative de minimis standard whereby a person
may maintain certain property in a State to conduct certain activities related to patronizing
the State’s market (i.e., being a customer there) without regard to the 21-day standard.  

(c)  Taxable Periods Not Consisting of a Year.  This subsection provides that the 21-day
limitation will be prorated if a taxable period is not based on a taxable year.

Purpose:  This subsection ensures that the duration of a taxable period cannot be
manipulated to circumvent the intent of the 21-day quantitative de minimis standard.

(d)  Exceptions.  This subsection describes those situations where the prohibition of Sec. 3
(a) does not apply or does not affect current law.

(1)  Domestic Business Entities and Individuals Domiciled in the State.  This paragraph
ensures that the Act does not affect the ability of the State to impose tax on domestic
business entities and individuals domiciled in the State.

Purpose: This paragraph clarifies that the Act will not affect current law regarding the
taxation of business entities formed under a State’s laws or commercially domiciled in the
State, or of individual domiciliaries of the State.

(2)  Taxation of Partners and Similar Persons.  This subsection provides that the Act does
not affect the tax liability of the members or beneficiaries of a pass-through entity that has a
physical presence in a State or locality.

Purpose.  This paragraph clarifies that the Act will not affect current law regarding the
taxation of limited partners or pass-through entities.

(3)  Certain Activities.  This paragraph ensures that a business that has employees or
agents who make sales or perform services that physically affect real property in a State on
more than one day in a taxable year have a physical presence in the State for business
activity tax purposes.

Purpose.  This paragraph ensures that sales of tangible personal property made by or
services performed to real property by traveling employees of a business, e.g., a business
whose employees hold “tent sales” or “off the truck sales” or that sends roofers or workers
into a State, are subject to State and local business activity taxes.

(4)  Exception Relating to Certain Performances and Sporting Events.  This paragraph
clarifies that the protections of the legislation will have no effect on the current taxation of
athletes and entertainers that perform in a State.

Purpose.  This paragraph clarifies that the protections of the legislation will have no effect on
the current taxation of athletes and entertainers that perform in a State.

(e)  Rule of Construction.  This subsection provides that the limitations of Sec. 3 do not
modify, affect, or supersede the operation Public Law 86-272.

Purpose.  This subsection clarifies that the physical presence nexus standard provisions do
not override the protections of P.L. 86-272.

SEC. 4 DEFINITIONS

This section provides definitions for terms used.

(1)  The term “net income tax” has the same meaning as under P.L. 86-272.

(2)  The term “other business activity tax,” which is used in conjunction with the term “net
income tax,” is defined to encompass those State taxes that are imposed directly on a
business and that are measured by the amount of business activity of the business or that
are conditioned on the right to do business within the State.  The definition clarifies that this
term does not include transaction taxes (e.g., sales and use taxes) measured by gross
receipts.

(3)  The term “State” is defined to include States, political subdivisions, U.S. territories and
possessions, and the District of Columbia.

SEC. 5 EFFECTIVE DATE

The Act becomes effective for taxable years beginning on or after January 1 following the
date of enactment.

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As introduced April 28, 2005
Coalition to Protect Interstate Commerce