Congress Considering Elimination of State Taxes on Interstate Commerce

Last week, a subcommittee of the House Judiciary Committee advanced a bill to the full committee that included a clause that would enable certain corporations engaged in interstate commerce to avoid state and local taxes on income from such activities.

The Subcommittee on Commercial and Administrative Law advanced H.R. 2526, the Internet Fairness Act of 2001, which is described as a bill to make permanent the moratorium on Internet access taxes. But read past the section on the Internet access taxes and one finds a lengthy section of the bill devoted to restricting the authority of states to assess business activity taxes on businesses without a physical presence in the state.

A business activity tax is defined as "a tax imposed on, or measured by, net income, a business license tax, a business and occupation tax, a franchise tax, a single business tax or a capital stock tax, or any similar tax or fee imposed by a State or subdivision thereof on a business for the right to do business within the State or subdivision or which is measured by the amount of such business or related activity."

Lobbyists from several national corporations, including American Express, Walt Disney, Viacom, Cisco Systems, Eastman Kodak, Johnson & Johnson, the Limited, Lowe's, and Microsoft have been in Washington showing support for the bill.

The Multistate Tax Commission, an organization of state governments that works with taxpayers to administer tax laws that apply to multistate and multinational enterprises, has suggested that states could lose as much as $9 billion in annual revenue in the first few years of enactment. Those who support the bill claim states will not lose revenue, there will simply be a shift in where taxes are paid. More taxes will be paid in the state of incorporation instead of the states where sales are conducted. "There need be not one penny less of state tax revenue collected," said Arthur R. Rosen, an attorney representing the companies supporting the bill. "The states have all the authority they need to stop profit shifting."

The bill was approved by the subcommittee last Tuesday, July 16, in a hearing. The full House Judiciary Committee is expected to vote on the bill in the near future.

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