With all the focus on the Marketplace Fairness Act, another state-tax-related federal bill seems to be flying under the radar. Late last week, the U.S. House Judiciary Subcommittee announced it would hold a hearing on the Business Activity Simplification Act of 2013 (BATSA, H.R. 2992) on February 26. While BATSA has been on the table in Congress since 2003, it has never received a full House vote. Perhaps this will be the year.
BATSA has three basic features. The legislation would:
- Establish a physical presence nexus requirement before a state could impose or collect net income tax or other business activity taxes on a multistate business. Physical presence would also not be established unless a business was in a state for longer than 14 days.
- Update P.L. 86-272, which prohibits states from imposing an income tax on businesses whose activities in the taxing state are limited to the solicitation of sales of tangible personal property (provided the order is approved and filled outside the taxing state). BATSA would extend that protection to sales of intangibles and services.
- Limit the apportionment of income of a unitary group of affiliated businesses to only that portion of the business activity conducted by physically present businesses.
Businesses are generally in favor of BATSA because they want to know what activities will trigger nexus. They badly need that certainty. States, on the other hand, have expressed concern about BATSA. Multistate Tax Commission Executive Director Joe Huddleston and Federation of Tax Administrators Executive Director Gale Garriott have agreed that BATSA is one of the “worst pieces of federal legislation” they have seen.
While BATSA may not be the perfect solution, there can be little disagreement that the state corporate income tax system, at a nationwide level, is inefficient. The lack of any uniformity in the method by which a multistate business’s income will be apportioned has created significant problems for both businesses and states. Businesses suffer from increased compliance burdens and the risk that more than 100 percent of their income will be subject to tax. States suffer from increased enforcement burdens and the risk that they are missing income that should be properly sourced to the state.
As more and more businesses feel the burden of attempting to comply with multiple state tax laws, there will be increased pressure on Congress to do something to simplify multistate taxation. While the legislation has not gained traction in previous years, perhaps BATSA’s time has finally come.