Federal Tax Nexus Legislation Introduced


On April 8, 2011, the latest attempt to enact federal nexus legislation, the Business Activity Tax Simplification Act of 2011 (BATSA) (H.R. 1439) was introduced by Rep. Robert C. Scott (D-VA) and Rep. Bob Goodlatte (R-VA).  A hearing on the bill was held on April 13th before the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee.

Existing law (Public Law 86-272) prohibits a state from imposing a net income tax if a company’s only in-state activities are solicitation of orders for sales of tangible personal property which are sent outside the state for approval or rejection and are filled outside the state. BATSA would extend Public Law 86-272 to include solicitation of sales of intangible property and services.

Section 4 of H.R. 1439 codifies the approach to apportioning income in a combined report, where only sales by those individual group members that are individually subject to taxation are included in the apportionment formula. This combined report method would replace the existing approach which requires all members of a unitary group to include sales in the apportionment formula, regardless of whether the individual members have nexus.

The two sponsors of BATSA emphasized the importance of clarity for businesses selling goods and services in multiple states and the need for a “bright line rule” regarding a state’s ability to assess income tax on out-of-state companies. Rep. Goodlatte was especially focused on small businesses that cannot afford “teams of lawyers” to comply with the multitude of nexus standards among the states.

H.R. 1439 is the latest attempt to standardize state nexus rules. Undefined nexus rules place businesses at risk of multiple tax filings under different tax rules, increased tax liabilities, compliance costs and audit and penalty assessments. Action by Congress or the U.S. Supreme Court is needed to clarify states’ taxation authority and the rights of out-of-state companies to avoid greatly increased tax compliance costs and liabilities.

Clients with questions regarding this Advisory should contact Charles H. Helein at 703-714-1301 or chh@commlawgroup.com.

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