The federal-state tax relationship takes many forms. Sometimes states want Congress to take action to help states impose and collect taxes. Other times, states work to stop Congress from imposing restraints on their taxing authority. The current mix of bills in the 111th Congress that deal in some way with Congress telling state and local governments what they can and cannot do regarding their taxing power are of both varieties and cover a range of topics. This article summarizes the state and local taxation bills in the 111th Congress. The proposed legislation is grouped into the following areas: tax administration, nexus, general prohibitions and mobile workforce.
H.R. 2303, the State Tax Administration Assistance Act, would help states collect taxes from nonresidents. This bill would modify IRC §6402(e) to allow the federal government to reduce a taxpayer's federal tax refund if the taxpayer has outstanding tax obligations as an out-of-state resident and the state has a reciprocal agreement with the Internal Revenue Service (IRS). Presently, an offset is only allowed if the taxpayer's address on the federal return is in the state that is seeking all or part of the taxpayer's federal refund.
H.R. 1956, the Crime Victim Restitution and Court Fee Intercept Act, expands IRC §6402 to allow states to obtain payment from federal refunds of outstanding, legally enforceable State judicial debt, such as fines.
Two bills involve modifications to a state's authority to impose business activity taxes and sales tax collection obligations on multistate taxpayers. These bills have been introduced in prior Congresses as well and hearings have been held, but nothing has been enacted.
H.R. 1083, the Business Activity Tax Simplification Act, would modernize P.L. 86-272, written in 1959. P.L. 86-272 provides the rule for when a state may impose income tax obligations on a business where the only activity in the state is the solicitation of sales of tangible personal property that are approved and shipped from outside of the state. This law is outdated because it only applies to sales of tangible personal property and only for net income taxes.
H.R. 1083 would expand P.L. 86-272 to also apply to services and intangibles. The list of possible activities that would not lead to imposition of state income taxes would be expanded to include:
- Furnishing information to customers that is used or disseminated from a point outside the State and
- Activities directly related to a customer's purchase if the final decision to buy is made outside of the state.
The taxing prohibition would also apply to business activity taxes (BAT) defined as "any tax in the nature of a net income tax or tax measured by the amount of or economic results of, business or related activity conducted in the State." A BAT does not include a sales or similar transaction tax.
In addition, physical presence would be required for a business to be subject to a state's net income tax or BAT on its activities in interstate commerce. Physical presence includes employees, an exclusive agent or tangible property. Presence of less than 15 days or to conduct limited or transient business activity would be ignored.
In introducing an earlier version of this bill (H.R. 5267 (110th Congress), Congressman Rick Boucher (D-Va.) said that it would "bring certainty to the increasingly chaotic tax environment for businesses by clarifying that the states cannot attempt to tax the income of a company that has no physical presence within the taxing state’s borders." (Cong. Rec. February 7, 2008,
In contrast, state governments tend oppose a physical presence standard for income and business activity taxes. They are concerned that the H.R. 1083 approach will reduce state tax collections due to tax planning. Also, as expressed by R. Bruce Johnson, Commissioner of the Utah State Tax Commission in testimony before the House Judiciary Committee, "the physical presence standard is a relic of a bygone era and should be rejected." (State Taxation: The Role of Congress in Defining Nexus (PDF), February 4, 2010, page 86.)
H.R. 5660, the Main Street Fairness Act, is the other nexus bill before Congress. It addresses when a state may impose sales and use tax collection obligations on a remote (non-present) seller. H.R. 5660 would allow any state that has adopted the Streamlined Sales and Use Tax Agreement (SSUTA) to collect sales and use taxes from remote sellers other than small sellers. States that have adopted the SSUTA have uniform provisions in their sales tax law and utilize the simplifying conventions of the SSUTA, such as third party collectors and a single registration system.
As with H.R. 1083, there is tension between businesses and state governments on H.R. 5660. State governments tend to support it while many businesses oppose it. However, some businesses support H.R. 5660 because they believe it will level the playing field between Internet vendors and Main Street vendors in terms of a requirement to collect sales or use tax from customers.
H.R. 1521, the Cell Tax Fairness Act, creates a five-year moratorium on a state and local governments' ability to impose any new discriminatory tax on mobile services, mobile service providers or mobile service property. The rationale is to allow "the telecommunications industry and the State and local governments the opportunity to come together and work on reforming the current communications tax structure. Doing so will maintain a steady stream of revenue for State and local governments while ensuring a fair tax burden among communications mediums, including wireless services." (Testimony (PDF) of Congressman Cohen at a House Judiciary Committee hearing held on June 9, 2009, page 2.)
H.R. 1019, the State Video Tax Fairness Act, prevents any state from imposing a "discriminatory tax on any means of providing multichannel video programming distribution services, including Internet protocol technology (or any successor protocol), direct broadcast satellite delivery and cable television services." A discriminatory tax is defined as one where "the net tax rate imposed on one means of providing multichannel video service is higher than the net tax rate imposed on another."
H.R. 1560, the Permanent Internet Tax Freedom Act (ITFA), would remove the November 2014 expiration date for this Act making its moratorium on state and local governments permanent. Basically, the moratorium prohibits taxation of Internet access fees and multiple discriminatory taxes on electronic commerce.
H.R. 5649, the Digital Goods and Services Tax Fairness Act, aims to prevent confusion, as well as multiple taxation by state and local governments with respect to taxation of digital goods and services. H.R. 5649 provides a uniform sourcing rule for the taxation of digital items. Generally, tax may only be imposed on digital goods and services by the jurisdiction in which the customer's "tax address" is located. In addition, H.R. 5649 prohibits taxes on the "sale or use of digital medical services, digital education services or digital energy management services."
Two different bills address complexity and possible multiple taxation of mobile employees. Issues arise in that state rules vary as to how much work an employee must do in a state before they are subject to income tax there and it might not be possible to determine an employee's total salary until year end, making withholding difficult.
H.R. 2110, the Mobile Workforce State Income Tax Fairness and Simplification Act, prevents a state from imposing income taxes on the wages of an employee who works in more than one state unless the employee's residence is in the state or the employee was present and working in the state for more than 30 days in the calendar year in which the income was earned. Professional athletes and entertainers, as well as certain public figures are not treated as employees under the Act.
H.R. 2600, the Telecommuter Tax Fairness Act, addresses a related issue that arises in states that use the "convenience of the employer" test in determining where an employees wages are taxable. Under H.R. 2600, a State may treat a nonresident individual as present in or working in the State "only if such nonresident individual is physically present in such State for such period and such State may not impose nonresident income taxes on such compensation with respect to any period of time when such nonresident individual is physically present in another State." (For more information on these issues, see State Taxation and the Modern Workforce.)
The 10 multistate bills summarized in this article involve important issues facing state and local governments and taxpayers. Several of the bills have been introduced in prior Congresses as well. Reasons for delay in addressing these issues include other demands on lawmakers' time and the challenge of determining the best approach to solve the problems, particularly where state governments and businesses disagree. The result is continued uncertainty and costs for taxpayers since the problems are unlikely to resolve on their own.