Business Activity Taxes: Legislation Would Provide Certainty

The House introduced a new version of Business Activity tax legislation this week, H.R. 1439, the Business Activity Tax Simplification Act of 2011.  During the last Congress, CompTIA urged passage of similar legislation, which would have provided distinct physical presence requirements as a prerequisite for the taxation of interstate business activities.  On Wednesday, April 13, the House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on this new legislation for which CompTIA submitted supporting testimony.  

While the new legislation was introduced on a bi-partisan basis (Goodlatte R-Va. and Scott D-Va.), today’s questioning of witnesses by subcommittee members generally fell into two general camps.  The Republican members see the potential overreaching by states to be detrimental to businesses, while the Democrats’ questioning showed concern for lost state revenues.  Each of these views has its merits.  However, speaking for small businesses the problem is simply the creeping costs of tax compliance, and without legislation, this problem will continue to grow.

In a posting made last fall, we noted the rationale for the physical nexus requirement is that it is principally unfair for a state to require a business to collect sales and use taxes when that business has no physical presence in the taxing state.  The same fairness also should apply to other forms of taxation.  The bottom line here for most small businesses is compliance costs.   

Small businesses have enough tax compliance burdens already; requiring a business to submit to the taxing requirements of multiple states – when that business has no presence in that state – would make it economically impossible for a small business to grow and prosper in our online world.  Any business activity conducted from the home state of the business could be subject to taxation by other states, even though that business has no office, employees or other physical presence; a connection from one computer to another could be enough to for an out of state taxing authority to seek tax returns and tax dollars.

Small businesses do not oppose paying their fair shares of taxes.  However, the mounting costs of tax compliance will certainly hinder many small businesses – especially VARs – from providing online services.  This legislation simply provides certainty so that both states and businesses do not have to incur unreasonable compliance costs to determine the amount of taxes that are collectible.