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Out-of-state business taxes on the block

John Dimsdale Jul 25, 2006

KAI RYSSDAL: Large companies with multistate business operations have long complained they get unfairly taxed by some state and local governments, merely because they have customers in those local jurisdictions. Businesses are looking for tax relief in states where they have no stores and no employees.

Instead of taking their case to state capitals, the business community has gone to Washington. The US House of Representatives is expected to vote today to limit states’ ability to tax out-of-state businesses. Marketplace’s Washington bureau chief John Dimsdale reports the bill has states crying foul.

JOHN DIMSDALE: Companies say in the past several years state revenue departments have raised income taxes on non-resident businesses. Maureen Riehl of the National Retail Federation says overlapping state tax laws sometimes hit companies with double taxation.

MAUREEN RIEHL: In most states the rule for any sort of state taking income taxes from a business has been that you had to have a physical presence. Those rules are being kind of tweaked by some states that are now looking at something they call an economic presence test.

States say they’re just trying to keep up with changes in technology.

DAVID QUAM: It’s a new economy where physical presence is not necessary to do business or earn income in a state.

The National Governors’ Association’s David Quam says out-of-state businesses are using electronic commerce and advertising to compete against local companies, and therefore should be subject to state income taxes. The NGA figures the Congressional bill will cost states more than $6 billion a year in lost revenue. And since state taxes are deductible from federal taxes, the bill means a boon for federal income at state expense.

QUAM: This is a federal corporate tax cut using state tax dollars. Those decisions need to be made by state elected officials. We’d encourage companies to come work with states to make this more uniform and address some of their concerns rather than try to eliminate taxation by running to Congress.

An identical bill in the Senate is still in subcommittee. Passage there, this year, is less likely.

In Washington, I’m John Dimsdale for Marketplace.

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