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Business Taxes Tangle The Net Tax Debate
by Teri Rucker
The current ban on Internet taxes applies only to taxes on Internet access and to multiple and discriminatory taxes. Now, as the clock ticks toward the October expiration of that moratorium, and as lawmakers ponder whether to use the opportunity to also address the issue of e-commerce taxation, Congress also is stymied by the lack of a compromise on the business-activity tax (BAT).
Some lawmakers want to link that issue, which includes corporate income taxes, franchise fees, and taxes on business licenses and capital stock, to the debate about the moratorium. They argue that the new economy demands that the laws governing such taxes be updated.
Although Sen. George Allen, R-Va., introduced a bill, S. 777, to simply make the current, limited ban on Internet taxes permanent, he favors addressing the business-activity tax as part of a larger debate about taxing online sales. The BAT goes hand-in-hand with efforts of "those who are trying to tax [Internet sales] without representation," he says, adding that lawmakers should update tax policy to reflect the new economy "rather than going along like a bunch of pack mules," preserving the status quo and "inhibiting innovation."
Addressing the BAT is tremendously important to the technology industry, said Caroline Graves Hurley, the director of tax policy at the electronics trade group AeA, because the digital world allows companies to do business globally without adding to the tax burden for services like roads and schools. "If we have an ephemeral presence, there is no reason why we should have to pay the tax," she says.
But Matt Tomalis, an attorney for the Federation of Tax Administrators, disagrees. "It is not an electronic-commerce question in any substantial way," he says, but rather an attempt by business to "get something codified that would benefit them."
Ties That Bind
Lawmakers and industry groups contend that BAT reform is logically tied to efforts to simplify state sales-tax systems -- an issue that is at the core on the ongoing Internet tax debate.
Mark Nebergall, the president of the Internet Tax Fairness Coalition, which is leading the charge in favor of BAT reform, argues that if states eventually are allowed to tax online sales, the longstanding rule that a firm must have a physical presence, or nexus, before collecting taxes will be eliminated. The Supreme Court imposed that rule in its 1992 Quill vs. North Dakota decision.
"If you go down the simplification path," Nebergall says, "the light at the end of the tunnel is the elimination of the Quill physical standard."
And the rest of the world is watching, says the AeA's Graves Hurley. If a business can be taxed merely by having a Web site accessible in a given state, it opens U.S. firms to also being taxed by other countries, she says.
While Graves Hurley says the Quill decision is limited to sales taxes, she also notes that courts traditionally have interpreted the law to also apply to the BAT. The case relied on the Constitution's Commerce Clause, with the Supreme Court ruling that tax collection is required only in states where there is a physical presence. However, it required only a physical presence and did not specify a "substantial" presence.
Graves Hurley said legislation is necessary "to put bright-line parameters around that which constitutes substantial physical presence for these taxes."
A Substantive Debate
Both House and Senate lawmakers have introduced bills to update BAT guidelines. The most recent bill, H.R. 2526, would extend the access-tax moratorium for three years and also set guidelines for when a company must pay a business-activity tax.
It would require a "substantial physical presence" before a company must pay the BAT. Mere use of an Internet service provider, a Web site or intangible personal property in a state or the shipment of orders into a state would not qualify as a physical presence, and a firm would have to have such a presence for 30 days before being subject to the tax.
Virginia Republican Bob Goodlatte, a sponsor of the House measure, said BAT rules were updated decades ago, long before the Internet existed, so they only apply to tangible property and "they need to be modernized."
A related Senate bill, S. 664, also would require a substantial physical presence for a business activity tax.
"Physical presence should be standard," Nebergall argued. States and localities use the BAT to pay for local services, so "how can it be said you are consuming the services if you're not in the state?"
But the use of the word "substantial" in the proposed legislation gives states pause, Tomalis said. Currently, the standard is just that firms have a "physical presence," which could be a small presence, before they are subject to the BAT. "Business is saying that all these things do is clarify a physical standard. What they amount to are carve-outs in certain industries," he said.
Neal Osten, the director of the National Conference of State Legislatures' Commerce and Communications Committee, also takes issue with the 30-day rule proposed in the House legislation. He says it is "draconian" and likely would strip states of revenue.
Graves Hurley says the 30-day rule was offered as a starting place for negotiations.
Alone or Together?
So far, the BAT has remained a side issue in the Internet tax debate. Last week, the House Judiciary Commercial and Administrative Law Subcommittee approved, by voice vote, a bill that would simply extend the current moratorium on Internet access taxes. The panel thwarted an effort to expand the bill to also address sales-tax simplification.
But Goodlatte said subcommittee Chairman Bob Barr, R-Ga., had expressed an interest in the BAT issue, and Goodlatte intends to push Congress to act on it, whether as part of the moratorium legislation or separately.
Senate negotiations on extending the moratorium, meanwhile, have stalled both over whether to address the BAT and whether to require states to set one sales-tax rate. One of the leading bills, S. 288, notes that "the law provides clear standards for determining the nexus of business activity ... that limit [it] to sellers that have continuous and systematic contacts" in a state. The other leading measure, S. 512, is silent on the BAT.
Osten said discussions are centered on compromise language that would specify that the moratorium and state tax-simplification efforts would have no impact on the BAT and that current laws on that issue would remain in place.
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